Term life insurance provides death benefit protection for a term of one or more years. Death benefits are paid only if the insured dies within the specified term of years. Term life insurance typically provides the largest immediate death benefit for each premium dollar.
Most term life insurance policies are renewable for one or more additional years even if the insured’s health has changed. Each time the policy is renewed for a new term, premiums increase.
Term life policies generally contain a conversion feature. This enables the policyowner, prior to the final conversion date, to exchange the term life policy for a permanent plan of life insurance such as whole life or universal life, without evidence of insurability. Premiums for the new policy will be higher than what the policyowner had been paying for the term life insurance.
Whole Life Insurance
Whole life insurance provides death protection, as its name suggests, for the whole of life. Typically the policyowner would pay the same premium for as long as the insured should live. Premiums can be several times higher than premiums you would pay initially for the same amount of term life insurance, but they are smaller than the premiums you would eventually pay if you were to keep renewing the term life insurance policy until the insured’s later years.
Although you pay a higher premium initially for whole life than for term life insurance, whole life policies develop cash values which may be available to the policyowner.
Additionally, the policy’s cash value can be used as collateral for a loan. If the policyowner borrows from the policy, interest is charged at the rate specified in the policy. Any money owed on a policy loan is deducted from the benefits upon the insured’s death, or from the cash value if the policyowner surrenders the policy for cash.
Universal Life has several unique features not found in whole life policies. Specifically, the policyowner is provided with the flexibility to vary the timing and amount of premiums and the face amount, depending upon present needs.
Cash values are a function of past and present premium payments, interest crediting rates, mortality charges and expense charges. The interest rate credited to the policy cash value is based on current rates of interest, subject to a stated guaranteed minimum interest rate. In addition, current mortality and expense charges are deducted from the accumulation value, but the only guarantee is that these charges will not exceed certain maximums. As a result, the policyowner bears more of the risk of adverse trends in mortality and expenses than if a traditional whole life insurance policy were purchased. On the other hand, if the insurance company’s mortality costs and expenses improve, the policyowner may benefit through lower charges.
Second-To-Die or Survivorship Life Insurance
This is one policy that covers the lives of two insureds, typically a married couple. The death benefit is payable only when the last of two insureds dies. Typically this policy type is used to provide liquidity to pay estate taxes when the second spouse dies. Other uses of this form of life insurance include: to protect dual income families, to provide key person business insurance, to replace an asset gifted to charity and to fund a business buyout.
Because of the timing of the death benefit payment, the premium charges for survivorship life insurance plans are generally lower than those of comparable single life plans.
Second-To-Die life insurance policies are available in whole life, universal life and variable life versions and can be funded on either a single premium or annual premium basis.
Variable Life Insurance
This product combines permanent life insurance protection with a flexible investment plan that allows the policyowner to choose to invest premiums and cash values among a broad range of investments. Under such a policy, there is no guaranteed minimum cash value. The policyowner bears all the investment risk associated with the policy. There are two types of variable life insurance – variable whole life and variable universal life.
Under a variable whole life policy the death benefit may increase or decrease depending on investment performance, but will not fall below the guaranteed minimum, provided the required premium is paid.
Variable Universal Life policies (VUL) provide the policyowner with the flexibility to vary the timing and amount of premiums and the face amount of coverage, much like the fixed interest rate universal life policy. The primary difference is that under the VUL design the policyowner directs the investment of cash values among a variety of investments and assumes all of the investment risk. In addition, most variable universal life policies do not guarantee a minimum death benefit.