Traditional Life insurance is broken down into two basic types of insurance: Term (temporary) and Whole Life (permanent). Term coverage expires or renews after a set number of years (ie. 10, 20, or 30 years) and the premiums are lower than permanent insurance. Permanent coverage remains in effect for the lifetime of the insured and can be paid up in full within a shortened duration of time, or over a lifetime without an increase in premiums.
TERM INSURANCE
Term insurance is the oldest and most traditional form of life insurance. The insurance company promises to pay the sum insured if the life insured dies within the period specified in the policy. You can opt for terms for 5 to 30 years, or Term to age 100. Term insurance can provide protection for either: a level, increasing, or decreasing amount over the term period.
Level Term
The amount of insurance coverage and premiums remain level for the specified term.
Increasing Term
Although this is not a common type of policy this may be employed in situations where the liability being protected against is both temporary and increasing. For example this insurance could be used to protect the value of a key employee in an organization where the employee’s salary is expected to increase every year.
Decreasing / Reducing Term
The premiums remain the same for the specified period; but the amount of insurance coverage decreases during the same specified term. The need for which it was purchased should be of a decreasing nature too, such as a homeowner’s mortgage.
Term to 100 (T-100)
This is a more permanent insurance plan that covers the insured to age 100. Most T-100 policies will pay out at death or age 100, whichever comes first. They do not usually have any cash surrender values; but some contracts offer a refund of premium option usually after about 20 years, or a reduced paid up insurance value.
With the exception of a Term to 100 policy very few traditional term insurance policies ever pay out a death benefit. This is a ‘temporary’ type of life insurance plan that offers peace of mind during the time the insured needs coverage.
Renewable & Convertible
Most term policies are renewable for extended terms up to age 80 or 85. They may also be convertible into a whole life plan up to age 65 or 70, without answering any health questions.
WHOLE LIFE
The concept of a whole life policy is to offer insurance for the whole of life for payment of a level premium throughout. During the early policy years the premium is more than enough to cover the risk. After about the third year the difference is invested to form policy reserves to subsidize what would otherwise be inadequate premium in the later years.
If the policy owner decides to terminate the insurance policy, the insurance company is released from its future obligations under the contract. At that time, the insurance company will return to the policy owner an equitable share of the accumulated policy reserve called the policy’s cash surrender value (CSV). Another benefit to having a policy reserve is a feature called automatic premium loan, which protects the policy owner when the premiums go unpaid. The reserve also permits loans to be made against the security of the policy.
Participating Whole Life
Whole life policies may be participating which means that policyholders are eligible to receive ‘dividends’ supported by the earnings of the insurer. Dividends are not guaranteed and will vary based on the performance of the company. There are several ways for dividends to be distributed, for example: paid in cash, left on deposit, purchase of paid up additions (extra insurance), investing in segregated funds and enhanced protection for an increasing death benefit. Understanding Participating Whole Life and Dividend Scale Interest Rate
Non-Participating Whole Life
All of the premiums, benefits and values associated with the policy are fixed and guaranteed at the time of the policy issue. Owners of non-participating policies are not entitled to dividends from the insurer; but will have other benefits as mentioned in the whole life summary such as the policy reserve.
UNIVERSAL LIFE
Universal Life blends term insurance and an investment account earning market returns in one contract. The policy owner chooses the investment from a range of options including; savings accounts, to guaranteed term deposits, to funds which track specific market indices – even mutual fund like investments called segregated funds.
The prime attraction of the universal life policy lies within its flexibility. Flexibility allows the policy owner to increase or decrease the face amount of insurance; add more lives insured; and substitute one life insured for another. There is also flexibility in deposits: amounts, frequency, timing and duration provided the policy value is adequate to maintain the cost of insurance.
Universal Life is not for every consumer due to higher administration costs than found in traditional whole life plans and the variable nature of the plan may make it unsuitable for those clients for whom guarantees are of paramount concern. In many cases the more traditional plans may be more appropriate than Universal Life.