September is Life Insurance Awareness Month!
What Is Term Life Insurance?
Term insurance is life insurance coverage that is in eff ect for a specified period (or term), after which the insured typically has the option to renew the policy (up to a maximum age). Term policies are said to provide “pure” insurance protection since they provide a death benefi t only—no cash values accumulate in the policy, as they do with permanent insurance.
How Does It Work?
The insured chooses the term of the policy—typically ten years, fifteen years, twenty years or longer. When the specifi ed term ends, the insured can usually choose to renew the coverage up to some maximum age without proof of insurability. The premium for the new term is adjusted upward, reflecting the insured’s age at renewal. For younger insureds, the premium cost of term insurance is less than the premium cost for the same amount of permanent insurance, since permanent policies build cash values with the additional premium paid. Term life insurance premiums rise at each renewal, and the increase can be quite dramatic as the years go by. To alleviate the eff ect of rising premiums, insurers off er level premium term policies. The premium for level term remains constant for the term the policy is in eff ect. And while the premium at the beginning is higher than the insured would pay for a term policy that doesn’t have this feature, the insured isn’t subject to increases in the later years of the policy term.
What Are the Different Types of Term Insurance?
Level term insurance maintains the same amount of insurance coverage for a level annual premium over a period of years.
Decreasing term insurance gradually reduces the amount of insurance over the policy period.
Increasing term insurance gradually raises the amount of insurance over the policy period.
What Are the Disadvantages of Term Coverage?
Unlike permanent life insurance, term insurance doesn’t build cash values. There is no “savings” element that can be available for future needs, emergencies or retirement. Term insurance premiums increase each time the policy is renewed. They can climb sharply as an insured ages.
What Are the Benefits?
Term life insurance coverage provides needed protection at a lower initial cost, and may be renewed without proof of insurability.
What is Whole Life Insurance?
Whole life is cash value insurance that stays in effect as long as premiums are paid. This sets it apart from term insurance, which is for a specified term only and must be renewed at the end of each term. Premiums are paid for the whole of the insured person’s life or until the insured reaches a specifi ed maximum age. A variation of whole life offered by some insurance companies is limited-pay life, where premiums aren’t paid over the insured’s lifetime, but for a limited period of time. When that period is over, the insurance remains in effect with no further premium payments. Typical limited-pay types are 10-pay, 20-pay, 30-pay and life paid up at 65. A 10-pay policy means premiums are paid for 10 years, 20-pay for 20 years, and so forth. The payment period for a life paid up at 65 policy is the number of years between policy’s inception and the insured’s age 65. How Does Cash Value Insurance Work?
Whether whole life or limited-pay life, cash value life insurance has several characteristics that
differentiate it from term insurance:
Protection continues for a lifetime as long as the premiums are paid. Premiums—except for limited-pay policies—are paid for as long as the insured lives.
Premiums remain level throughout the payment period.
Part of each premium goes toward a cash value that gradually increases over the life of the policy. The net cash values are available to the policyowner in the form of policy loans and surrender value.
If a policy is “participating,” the insurance company pays dividends whenever possible. Dividends aren’t guaranteed, but are paid when the company has good results from claim experience, investment income and/or expense management. When dividends are paid, the policyowner has the option to receive them in one of several ways.
Cash value insurance policies also have nonforfeiture options that ensure the policyowner won’t lose—or forfeit—all of the money paid into the policy if unable to continue paying premiums. What Are the Benefi ts? Whole life insurance never has to be renewed as long as scheduled premiums are paid on time. The policyowner is assured a predictable, level premium. A savings element is a feature of the policy in the form of the accumulating cash values. Some policies include the potential to receive dividends as a return of premium.