It’s a life insurance jungle out there. This way to safety.
Life Insurance Basics
One simple definition of life insurance states it is coverage placed on the life of an individual whereas an insurance company issues a policy and pays a stated death benefit in the event of the insured’s death. Life insurance is intended to provide financial stability and support to the dependents and beneficiaries of the insured.
While the general concept of life insurance seems simple enough, there is nothing simple about the overwhelming number of policy options available in the marketplace today. Our discussion will focus on the two basic types of life insurance: term life insurance and permanent life insurance. We will also briefly describe the most common variations of each type of life insurance.
Term Life Insurance
Term life insurance provides pure life insurance in its most inexpensive form. Term life insurance provides coverage for a set period of time (the policy term) and pays a death benefit only if the insured dies during the policy term. The policy term typically ranges from 1 to 30 years, with 20 years being the most common term.
One of the biggest advantages of term life insurance is its lower initial cost in comparison to permanent life insurance. Term life insurance policies have no cash value accounts, policy loan provisions or other features typically found in permanent life insurance policies. With term life policies, you’re just paying for the death benefit, which is the lump sum payment your beneficiaries will receive if you die during the term of the policy. With most permanent life policies, your premiums help fund the death benefit and can accumulate cash value.
Term life insurance is often a good choice for people in their family-formation years, especially if they’re on a tight budget. It allows an individual to buy high levels of coverage when the need for protection is often greatest. Term life insurance is also a good option for covering needs that will disappear in time. For instance, if paying for a child’s education is an applicant’s major financial goal, it would be wise for the applicant to purchase a term life insurance policy that will cover the period necessary to reach that goal.
Level Premium Term Life Insurance
Level premium term life insurance offers fully-guaranteed premium rates, which means the premiums on the policy are guaranteed to remain the same for the entire term period. Level premium term life insurance is a fully-underwritten product and is available in amounts as low as $50,000 up to $20 million or more, depending on the insurance company. It is the most common form of term life insurance.
Return of Premium (ROP) Term Life Insurance
Return of Premium (ROP) term life insurance is a relatively new product that combines the advantages of traditional term life insurance such as affordable, guaranteed level premium periods (10, 20 or 30 years), with a return of premium feature. At the end of the level premium period, the company will return 100% of the premiums paid to the policy owner (excluding substandard fees and any extra charges).
Of course, there is a price to be paid for this added benefit. The premiums for ROP policies are higher than premiums for standard term life policies. The insurance company will invest these additional premium dollars during the term of the policy, which allows them to return your premiums to you at the end of the term period.
One factor to consider is that term life insurance rates have dropped considerably over the past decade, mostly because people are living longer. If you own a standard term life policy, there’s no harm done in dropping that policy for a newer and cheaper term life policy. But if you own an ROP policy, dropping the policy before the full term has expired means that you will have paid a high price for your life insurance coverage and the premiums you’ve paid may only be partially refunded.
No Medical Exam Term Life Insurance
No medical exam term life combines the advantages of traditional term life insurance such as affordable, guaranteed level premium periods, with simplified underwriting. Policies can be approved and in force in as little as 24-48 hours, with no medical exams and no lengthy underwriting.
Qualified applicants can currently select coverage amounts from $50,000 to $400,000 and coverage periods of 10, 15, or 20 years. Applications are completed by telephone, and you can sign the forms electronically. There are no forms to fill out or mail.
Permanent Life Insurance
Permanent life insurance provides lifelong protection. As long as the premiums are paid, the policy will stay in force until a death benefit is paid. These policies are designed and priced to keep over an extended period. They are recommended for people who believe they will have a lifelong need for life insurance coverage or for coverage that extends beyond the maximum allowed by term life insurance (currently 30 years).
Another characteristic of permanent life insurance is a feature known as cash value or cash-surrender value. In fact, permanent life insurance is often referred to as cash value life insurance because these types of policies can build cash value over time, as well as provide a death benefit to the beneficiaries.
Cash values, which accumulate on a tax-deferred basis just like assets in most retirement plans, can be used in the future for any nearly any purpose. Policy owners can borrow cash value for a down payment on a home, to help pay for their children’s education or to provide income for retirement. When money is borrowed from a permanent life insurance policy, the policy’s cash value is used as collateral, and the borrowing rates tend to be relatively low. And unlike loans from most financial institutions, the loan is not dependent on credit checks or other restrictions. The loan must ultimately be paid back with interest, or the beneficiaries will receive a reduced death benefit and cash surrender value.
If the policy owner needs or wants to stop paying premiums, the cash value can be used to continue the current life insurance protection for a specified time or to provide a lesser amount of protection for the remainder of the policy. If the policy owner decides to stop paying premiums and surrenders the policy, the guaranteed policy values will be paid to him/her.
There are several types of permanent life insurance policies available including whole life, universal life, and variable life. Each offers its set of options and features including fixed or variable premiums, fixed or variable death benefits and policy loan provisions among others.
Whole Life Insurance
Whole life insurance is also referred to as ordinary life. This the most common type of permanent life insurance. It provides the certainty of a guaranteed amount of death benefit and a guaranteed rate of return on cash values. The premium is also level and guaranteed never to increase. Some types of whole life insurance policies allow policy owners to participate in the financial prosperity of the insurance company by receiving dividends. Dividends can by used to grow the death benefit and the cash value of the policy.
Universal Life Insurance
Universal life insurance is also referred to as adjustable life insurance. It allows policy owners to pay premiums at any time, in virtually any amount, subject to certain minimums and maximums. Policy owners can also reduce or increase the death benefit of a universal life insurance policy more easily than with other types of permanent life insurance policies. Universal life insurance policies provide the certainty of a guaranteed minimum amount of death benefit, as long as premiums are sufficient to sustain that death benefit. Most universal life insurance policies will also provide a guaranteed rate of return on the policy’s cash value. However, it is possible a policy will not accumulate cash value if the insurance company’s administrative expenses increase, mortality assumptions are changed, investment portfolio does not perform as expected, or the policy premium payments are insufficient.
Variable Universal Life Insurance
Variable Universal life insurance is similar to universal life insurance. It is a flexible premium, permanent life insurance policy that allows policy owners to have premium dollars allocated to a variety of investment options, including a fixed account. The policy allows for changes to the death benefit and policy premium. Variable universal life insurance may be a good option for people who want to combine life insurance with a higher potential for investment return at a higher risk.
Included Features vs. Available Options (Riders)
Many term life insurance policies include specific features with the policy that do not require additional premium. QuickQuote refers to these throughout the Web site as ‘Included Features.’
An example of a typical Included Feature is the Accelerated Death Benefit provision. This provision typically allows for the one-time acceleration or advance of up to 50% of the death benefit proceeds payable under the base insurance policy, not to exceed $250,000. An insured may become eligible for this benefit if diagnosed by a qualified physician as having 12 months or fewer to live. Specific requirements and limits vary by company.
Nearly all term life insurance policies in the marketplace offer optional benefits the policy owner can add to the policy for an additional premium. These benefits are commonly called optional riders. QuickQuote refers to these throughout the Web site as ‘Available Options.’
Examples of common riders are:
Accidental Death Benefit Rider: This benefit is optional with many policies today. It provides an additional death benefit when the insured’s death is caused by accident.
Children’s Term Life Insurance Rider: An optional policy provision that provides a small amount of life insurance coverage on the lives of the primary insured’s children. The amount of coverage varies by company, and one rider typically covers all of the insured’s eligible children.
Waiver of Premium Rider: An optional policy provision that provides for the continuation of life insurance coverage without further premium payments if the insured becomes totally disabled.
Applicants don’t always qualify for Preferred or Standard rating classes. In these cases, the insurance company may offer a Substandard rating class. Substandard rating classes are sometimes called “table rates” and can range from one level below Standard to several levels below. These are the two most common designations used by life insurance companies:
- Table A – Table H
- Table 1 – Table 8
The difference in cost for each table is about 20 percent more than the Standard rate. For example, if a Standard policy cost $1,000, then a Table B (or Table 2) policy would cost about $1,400. As with most other things, this will vary by company.