Types of Life Insurance
Term Life Insurance
Term life insurance is the most common type of life insurance. The rates are locked in for a specified period of time. Typically 10, 15, 20 and 30 years.
Pros of term insurance:
- Can obtain a large amount of benefit for least amount of cost.
- Rates can be locked in for a fixed period of time.
- Policies can be converted to a permanent policy without any medical underwriting.
Cons of term insurance:
- Policy expires at the end of the term.
- Policy is inflexible. You may not reduce or increase death benefit.
- Death benefit does not increase with inflation.
- At the end of the term, premiums can be significantly more expensive as age increases and if an adverse change of health has occurred.
Some term life insurance has a provision, or rider, which is an option that gives the owner the right to change to a plan of permanent insurance without providing evidence of insurability. The policy will define the time period in which a conversion may be exercised; it may be limited to a number of years after policy issue, such as 5 or 10 years, or to a certain age, such as age 65. This time limitation is to minimize adverse selection, which is always present in term renewals and conversions. Those policyowners in poor health at the time of renewal, or as the conversion period ends, are more likely to use these policy provisions and pay a higher premium than those who are in good health or otherwise insurable.
The conversion may be on an attained age (current) or original age (or retroactive) basis. The premium rate of an attained age conversion, the most common type, is based on the insured’s age at the time of conversion. Original age conversions allow the new policy to be issued at the age of the originally issued term policy.
Universal Life Insurance
Universal life insurance is a permanent type of life insurance that provides flexibility. It is typically more expensive than a term policy but less expensive than a whole life policy.
Pros of universal life insurance:
- Rate can be locked in for life.
- Policy is flexible. Death benefit may be reduced at any time.
- Additional premium can be paid into policy to accumulate more cash value.
- Cash accumulates on a tax-free basis.
- Premiums are adjustable within a minimum and maximum range.
- Cash accumulates based on interest rates
- Less expensive than whole life.
Cons of universal life:
- More expensive than term insurance.
- If cash does not accumulate and only minimum premiums are paid, an increase in premium may be required to keep the policy in force.
Whole Life Insurance
Whole life insurance is a permanent life insurance policy. It is the most expensive type of permanent insurance, but can accumulate the most cash value with the highest guarantee rates.
Pros of whole life insurance:
- Rates are guaranteed for life.
- Policy accumulates cash value by receiving company dividends.
- Death benefit increases over time with paid up additions.
- Cash accumulates on a tax free basis.
- Guaranteed rates of return.
Cons of whole life insurance:
- Most expensive option.
- Premiums must be paid regularly.
- Policy is inflexible.
Juvenile Life Insurance
Life insurance for your child is a gift in their future. The main purpose of purchasing a life insurance policy for a child is not the death benefit. It is to protect their insurability. While your child is young and healthy, he can qualify for coverage and add increase options that can be purchased in the future without further medical underwriting.
Consider this example: Several years ago, a set of new parents purchased a life insurance policy on their healthy, newborn son. It was a relatively small policy for $100,000 death benefit and a premium of $30/month. At the age of 7, he was diagnosed with Type 1 diabetes. As a result, this child will have a difficult time purchasing a policy in adulthood without paying substantially higher premiums. However, the policy has future purchase options which will allow him to purchase additional death benefit amount without any medical questions at certain ages (18, 21, 25, 28, 30) or at a life event (marriage, birth of a child).
Juvenile policies tend to be significantly less expensive than adult policies and there is very little medical underwriting. Therefore, it can make a special gift, especially if there is an adverse change in health. Furthermore, the policy accumulates cash on a tax favored basis that is available to the child at a later date.
For more information about life insurance, contact Set for Life Insurance today!