Term vs. Permanent
All life insurance falls under two basic categories, term life and permanent life. Term life covers you for a set period of time, while permanent life, covers you regardless of when you die. Both kinds have several subclassifications.
When you throw in customized riders -- additional a la carte benefits at additional cost -- and standard individual policy features that differ from company to company, you get a dizzying array of possibilities.
Term Life Insurance
Term life covers you for a predetermined period of time -- commonly 10, 20 or 30 years. As such, of the two main types of insurance, term is less expensive premium wise. This type of life insurance is specifically geared toward providing for your loved ones in the event of an untimely death.
People who buy term life usually select a timespan that will cover the family until such time as the children are out of school and financially independent. Other considerations may include mortgage payments, debts, and income replacement.
Term is further divided into level term and decreasing term. Level term pays out the same amount regardless of when the insured dies, within the confines of the term. Decreasing term’s death payout decreases as the policy ages.
Some term policies are renewable, and some are able to convert into permanent. Some offer a 'return of premium' option, which will return the invested funds at the conclusion of the term. Unfortunately, these types of policies have higher premiums.
A policy's monthly premium is calculated at purchase, and is dependent upon one's age and health at that time. Generally speaking, however, companies will not insure a term that lasts beyond the policy holder's eightieth birthday.
Whole Life Insurance
Whole life, or permanent life, pays out no matter what age you live to. Monthly premiums are fixed, and are usually a lot higher. To ensure premiums remain in place, companies generally inflate the premium costs in earlier years. This is done in order to compensate for the possibility of a long-lived policyholder. As your cash value increases, you have the option to borrow against it, surrender the policy for a payout, or collect dividends on it.
There are several types of whole life:
- Universal Life
- Guaranteed Acceptance
With universal life insurance, a policyholder can transfer money between the insurance and savings components. It allows the flexibility of being able to use savings to pay the premium in the event the return on the savings is small at a given time, or the insured has run into financial difficulty.
There are two variants of universal life:
- Indexed Universal
- Variable Universal
Indexed Universal policies allow the insured to divert funds into equity index accounts. Put simply, this allows policyholders to allocate a portion of their policy dollars for investments. The money earned is not taxed until payout.
Variable Universal life insurance policies generate a cash value that increases over time, which is meant to be invested. Through this investment component, this type of permanent life insurance functions similarly to mutual fund.
As opposed to other life insurance variants, survivorship policies cover two individuals within one monthly premium payment. Upon the death of the first policyholder, however, no benefit is paid. It will not be disseminated until such time as the second policyholder is deceased. This option is geared toward married couples.
Guaranteed Acceptance life insurance is a policy type that helps those to cover their final expenses without requiring a medical exam. With such a guarantee, this variant of permanent life insurance is great for those with pre-existing conditions.