There are many different types of life insurance and the industry has done a good job of making it seem more complicated than it really is. The two primary types are term and permanent. Each has different iterations and it is good to develop an understanding of both. 

TERM LIFE INSURANCE

Term life insurance provides coverage at a fixed rate of payments for an established and limited period of time. After that period expires, coverage at the previous rate of premiums is no longer guaranteed and the client must either forgo coverage or potentially obtain further coverage with different payments or conditions. If the insured dies during the term of the policy, the death benefit will be paid to the beneficiary.

Term insurance is the least expensive way to purchase coverage, because statistically there is a low chance of one dying before the term is up (this is why most term contracts aren’t available at older ages) so they will be keeping your premium dollars and rarely paying a death claim.

Term insurance comes in two varieties: Annually Renewable and Fixed Premium.

Annually Renewable Term (ART)

  • Priced based on the the expected probability of the insured dying during their one year of coverage
  • Lowest possible premiums because the term length is the shortest and the life insurance company is assuming very low amount of risk
  • Automatically renewable without providing proof of insurability, guaranteed each year until the insured reaches a certain age
  • Premium will get more expensive each year one owns the policy
  • If you intend to own the policy for 5 years or more, it is almost always more cost effective to lock in your premiums for a set number of years.
  • Very few carriers offer Annually Renewable Term insurance. The carriers who do are typically carriers whose term insurance is very expensive relative to the market and the only way they can get people to purchase it is to offer pricing on an annually renewable basis.

Fixed Premium Term Insurance

  • Coverage is provided at a fixed rate of payment for limited periods of time (called the relevant term)
  • After that period expires, the coverage at the previous rate of premiums is no longer guaranteed and the client must either forgo coverage or potentially obtain further coverage with different payments and / or conditions.
  • Typically, from a cost standpoint, fixed term coverage is the most cost effective choice if the insured plans to own the coverage for 5 years or more.
PERMANENT LIFE INSURANCE

Permanent life insurance sometimes refers to life insurance such as whole life, variable life, universal life, or indexed universal life where the policy death benefit is in force with no duration limit (unlike term life insurance). It is significantly more expensive than term life insurance because the carrier knows that a death benefit will be paid at some point.

Permanent policies have the potential to accrue a cash value. These cash values are based on either market performance, or the performance of the life insurance company’s investment portfolio, or the interest rate environment, depending on the type of policy.

Permanent insurance comes in many different varieties. The most common types are very generally explained here. Please note, if you are interested in one of these policies, email or call us to discuss further as there are many nuances (and advantages and pitfalls) to be aware of:

Whole Life Insurance

  • Remains in force for the insured’s whole life
  • Requires (in most cases) premiums to be paid every year into the policy
  • Comes in two main varieties:
    • Participating policies allow for the carrier to share the excess profits of the company with the policy holder (often in the form of what are called dividends). Typically these distributions are not taxed because they are considered an overcharge of premium. The greater the overcharge by the company, the greater the dividend. These have some flexibility after issue with death benefits, cash values and premiums.
    • Non-participating policies cannot be altered after issue and the insurance company assumes all risk of future performance versus the actuaries’ estimates.

Variable Life Insurance

  • Provides permanent protection to the beneficiary upon the death of the policy holder
  • The policy owner can allocate a portion of their premium dollars to a separate account (sort of like a mutual fund) comprised of various instruments and investment funds within the insurance company’s portfolio of such stocks, bonds, equity funds, money market funds and bond funds. The investment performance can help or hurt the integrity of the policy, depending on the performance of the investments.
  • All the risk of policy performance is assumed by the policy owner.

Universal Life Insurance

  • A flexible, permanent policy offering the low-cost protection of term life insurance as well as a savings element which is invested to provide a cash value buildup
  • The death benefit, savings element and premiums can be reviewed and altered as a policyholder’s circumstances change.
  • The lowest-cost types of universal life insurance are often called ‘permanent term insurance’ and are appropriate for use in Irrevocable Life Insurance Trusts when access to policies is not allowed and the death benefit needs to be in force for as long as possible at as low a premium structure as possible.