Types of Coverage

When you look for the right life insurance policy, it’s important to understand the types of insurance available so you can be confident you make the right buying decision. In general, life insurance comes it two basic categories: term and permanent. A term life insurance policy has designated start and end dates. It covers you between those specific dates, so long as you continue to pay the agreed premium. Permanent life insurance policies have no end date. They cover you as long as you continue to pay the monthly premiums.

Term and Permanent Life Insurance Policies

A term life insurance policy gets its name from the coverage “term,” or specified dates of coverage. You can buy a short policy that covers you for only a year, or sign up for a policy that covers you as long as 30 years. A term life policy is best for those who want to ensure their dependents can continue the same standard of living the insured person’s salary provides.

A permanent life insurance policy is an open-ended policy. The policy lasts until you cancel or until the policy pays out because of your death. The biggest selling point for permanent life insurance is the ability to accrue interest and cash value on the policy. You can borrow against it while you are still living. However, these types of benefits are better secured through banking and other investment vehicles. Permanent life insurance policies are complicated, costly and rarely the best insurance option.

Policy Categories

Agents break term life insurance policies into three categories: Guaranteed Level, Return of Premium, and Annually Renewable. All of these policies carry specific limits on the amount of coverage over a specific time. There are four main types of permanent life insurance policies, but there are many other special variations put out by different companies using their own special brand of sales gimmick. Generally, permanent insurance comes as whole, universal, variable, or universal variable.

Annually Renewable Term

Annually renewable policies offer basic security. You can renew your policy each year, but the premium will increase as you age. These policies work best in situations where you need coverage for only a short time. If you know you need life insurance, but you are still researching your options, consider buying one of these policies right away to make sure your family is covered until you can make a more lasting decision.

Guaranteed Level Term

Guaranteed level term life insurance is the most commonly purchased type of term policy. That’s because it guarantees you a set premium every month. You’ll pay a little more for the convenience and security of a guaranteed premium, but the cost is still much lower than any type of whole life insurance. You can buy guaranteed level policies in terms of 5, 10, 15, 20, 25, or 30 years.

Return of Premium Term

Return of premium term life insurance pays a refund when the term ends, if the insured person is still living. The policy costs about 25 to 50 percent more than regular term insurance. It’s like a hybrid of permanent and term life insurance. The insurance company invests the extra money you pay, and you get back that extra 25 to 50 percent if you are living at the end of the policy term. Consumer groups don’t recommend this type of policy because it only benefits the insurance company, not the policyholder. The insured does not get back any of the profits made on the insurance company’s investment.

Convertible Term

Most people like term insurance because it is so affordable. However, permanent insurance can have some tax advantages for very wealth individuals. You can buy a convertible term life insurance policy that offers the chance to convert to whole life without taking a medical exam. Such a policy leaves more options open to individuals as their life insurance needs change.

Whole Life

Whole, sometimes called traditional whole life insurance, provides life insurance coverage from the day the policy begins until the death of the insured person. The policy accrues a cash value based on the additional premium you pay every month. You pay the administrative costs on the investments, and must split the returns with the insurance company. The policy premium remains constant, so changes can only be made by purchasing a different policy.

Universal

Universal life insurance, sometimes called “interest-sensitive whole life insurance” separates different elements of the policy so that the premiums can be more flexible. The coverage is still permanent, so it will continue until the covered individual cancels the policy or dies, but the premium calculations are more complex. For instance, after 20 to 30 years, the cash value of the policy and investment returns may become enough to pay the premium. This way, the insurance pays its own policy premium and the insured can stop sending in regular payments.

Variable Life

Variable life insurance policies are riskier because the cash value can change depending upon the returns on investments. With universal, you have more choice of the investments to use, but you still pay administrative costs and must split returns with the insurance company. Universal variable is a universal policy that offers the variable investment component.

Term versus Permanent

While the reasons are complex and varied, the simple truth is that whole life insurance costs more than term. If one were to buy the benefits offered by whole life insurance separately, the cost would be much less. One could take the premiums saved by purchasing term and then invest the different in premium through a bond, CD or other secure investment and realize greater savings plus better returns.

Although it wasn’t always the most popular type of insurance, term life is now the type of coverage most people buy. Coverage is simple and straightforward. All you have to do is choose the length of time you want coverage and how much the policy should pay the beneficiary. The only real decisions that you have to worry about are how long the term needs to be and how much money your dependents would need to maintain their current quality of life in the event of your death. Once the term expires, the insurance coverage ends and you have no further obligations.

Term is the Clear Winner

Once you understand that life insurance is mean to replace your income should you die before your time, you can see that permanent life insurance does not make sense. You will not need insurance for your entire life, so why would you need an open-ended policy? For example, if you have a mortgage that your spouse would have to pay alone or children who depend on your income, term life insurance can protect their needs. Once the kids leave home or the mortgage is paid, you no longer need life insurance. With permanent insurance, you pay more for a policy that hangs around long after you need it.