Types Of Life Insurance: Term and Permanent Life Insurance.
Life Insurance may be divided into two primary classes – Term (temporary) and Permanent Life Insurance.
Term Life Insurance provides coverage for a defined number of years paid for by a regular premium. This type of policy is considered “pure insurance” where the premium buys protection for a specified event (the passing of the insured) and nothing else. When the term of the policy expires coverage ends - unless the policy is renewed. This type of policy does not accumulate a cash value.
The three most important factors to consider in term insurance are:
- Face amount (death benefit)
- Premium to be paid
- Length of coverage
Permanent Life Insurance
Permanent Life Insurance provides coverage until the death of the insured, with the exception of cancellation if the insured fails to pay the premium. The insurer does not have the right to cancel the policy for any reason aside from fraud and even fraud must be contested within the Incontestability Period – the time, by law, which the insurance company has to contest any fraudulent entries on an application.
Permanent Insurance builds cash value over time as a portion of the premium is stored or invested. The owner of the policy can either withdraw the cash value, or surrender the policy and receive the “surrender value” – the amount of the cash value minus penalties.
The four primary forms of Permanent Life Insurance are Whole Life, Universal Life, Limited-Pay, and Endowment.
Whole Life Insurance
Whole life Insurance provides coverage at a level premium and includes a cash value table that is guaranteed by the insurance company. The advantages of Whole Life Insurance are fixed premiums, guaranteed death benefits, and guaranteed cash value. The disadvantages of Whole Life Insurance are premium inflexibility and that the internal rate of return guaranteed in the policy may be lower than alternative savings plans.
Universal Life Insurance
Universal Life Insurance is a relatively new insurance product which provides the permanent insurance coverage of Whole Life with greater flexibility in premium payment as well as the potential for greater growth of cash values. Cash values and the internal rate of return can be higher than in Whole Life policies based on the investments chosen by the insured. However these policies also include some risk as cash values are not guaranteed by the insurance company.
Limited-Pay is a form of life insurance in which the premiums are paid over a set period of time (such as 10 or 20 years) after which the policy remains in force without the need for the policy owner to pay any additional premiums.
Endowments are a form of life insurance where the death benefit can be paid while the insured is still living. Endowments are the most expensive form of insurance because the endowment date (the date the policy pays) is earlier than in other policies. Endowments have generally been used as tax shelters and have become less common over time as the Technical Corrections Act of 1988 tightened the rules on such policies and they now follow the same tax rules as annuities and IRA’s.