Life insurance can seem complicated, but it doesn't have to be. Once you understand the general life insurance types, roles and terms, your life insurance perspective becomes much clearer.
This article is the first in a three-part series designed to help clear-up any confusion. Before we get into three basic life insurance types, let's take a moment to briefly review how insurance policies work.
It's important to remember that no matter what type of policy you have, its basic purpose is to pay a death benefit to the policy beneficiaries when the insured dies. The policy owner is responsible for paying the premiums, and in exchange, the insurance company promises to pay the death benefit. With that concept in mind, let's talk about policy types.
Life insurance types fall under three variations:
Term Life Insurance
Term life insurance provides coverage for a defined period of time, or a term. The premium and amount of coverage usually remains the same throughout the policy lifetime. You can also think of term insurance as temporary insurance, in that, it is intended to provide coverage temporarily. Ten, 20 and 30 years are the most common term periods.
Term life insurance might be needed, for example, for the length of time you carry a mortgage or until your children have completed their education. When you shop for term life insurance, your financial professional will provide information about the premium and the length of time (term) of the policy. Make sure to have your agent verify whether or not the premium and death benefit remain level. Term insurance premiums are typically guaranteed, meaning they cannot be increased by the insurance company during the original term of the policy.
Whole Life Insurance
Whole life insurance coverage continues for your whole lifetime. Assuming required premiums are paid on time, a whole life policy continues until the death of the insured. Whole life policies require premium to be paid until the insured reaches an age stipulated by the insurance company, usually 95, 100, or 120. Beyond that, premiums are no longer required and coverage remains in force until the death of the insured. Some policies will simply pay the face amount to the owner if a predetermined age is attained.
Whole life insurance also earns cash value. Over time, the cash value can grow, potentially to an amount equal to the face amount of the policy. For example, some cash policies must achieve a cash value equal to the face amount before premiums are no longer required. Your financial adviser will provide you with information about the growth of the cash value over time and the number of years premium payments are required.
Universal Life Insurance
Universal life insurance, or UL, insurance is more flexible than term or whole life. The policy can be used to provide coverage permanently*, until the death of the insured, like whole life. Universal life also earns cash value based on an interest crediting rate. A minimum interest crediting rate is guaranteed; the insurance company may use a higher interest crediting rate that is not guaranteed.
Universal life can be a very flexible policy. The premiums you contribute each year can also be flexible. Depending on your objectives, your financial professional can explain the available options to arrive at a policy that works for your needs. When you review the proposal with your agent, look for the guaranteed interest crediting rate, any premium changes throughout the lifetime of the policy, any fees or other charges that may be a part of the policy, and the illustrated value of the policy at the points in time significant to you.
Now that you know the basic types of life insurance, it may also be helpful to review some common life insurance policy terminology. Check out our article on life insurance policy roles here.
*As long as required premium payments are timely made.
Note: This basic information is intended to give you a good foundation on which to begin a conversation with your financial adviser about life insurance. Your adviser should be able to answer all the questions you have about your insurance policy options, how much you will pay, and the protections each policy provides.