Term Life Insurance And Cash Value Life Insurance

There are two types of life insurance policies that you need to understand - "Term Life" and "Cash Value Life" insurance.

Term Life Insurance

Term life insurance policies cover you only for a specific period of time - usually for one, five, 10, 15, or 20 years - or until a specified age, such as 65.

Most term life policies provide only a one-time payment to your beneficiary for the amount of the policy if you die. This payment is called a death benefit. Because they usually have no savings feature, term life policies generally are less expensive and easier to understand than cash value life policies. Except for people past middle age, term life policies usually offer the best value for your money by giving you the biggest death benefit for your premium dollar. The price of a term life policy increases as you grow older. At the same time, your insurance needs may decrease as children grow up and savings and investments increase in value.

Renewable and Convertible Policies
Since term life policies expire at the end of the term, you should look for a renewable policy. A renewable policy allows you to continue your insurance for additional terms regardless of your health and without having to pass a medical exam. This is an important advantage because it may be harder for you to pass a physical exam as you grow older or if you become ill.

It’s important to remember that you will have a new contestable period each time your policy renews. During the contestable period, a company can deny payment of a claim because of suicide or material misrepresentation on the application.

Most term insurance policies are convertible. This means that as your insurance needs change, you can exchange your term life policy for a cash value policy without taking a medical exam or answering health questions. You may choose to convert your term life policy if your health declines and it becomes difficult to qualify for a new term policy at standard rates. You also may convert your term life policy if you decide to use insurance as a way of accumulating funds instead of providing only death benefits. Insurance companies usually allow conversion until age 65.

Annually renewable term (ART) - You may renew most ART policies up to age 100. However, ART premiums are extremely high for middle aged and older consumers. If you’re paying high premiums, you may want to shop around for a better value.

An ART provides a fixed premium and death benefit for one year. When the term ends, you may renew your policy, but the premium will probably increase. To avoid yearly increases, some people look for five-, 10-, or 20-year renewable term policies.

Decreasing term- This policy provides death benefits that decrease each year. Mortgage insurance and credit life insurance are examples of decreasing term policies. If you die, the insurance benefits pay off or reduce your balance on these types of loans. The initial death benefit may equal or approximate the amount of your loan, with the benefit decreasing as you pay down the balance.

Cash Value Life
Cash value life policies provide a death benefit and a way to accumulate funds over time. The primary purpose of a cash value policy, however, is to provide permanent life insurance protection, not to be a savings or retirement plan.

Cash value life policies differ from term life policies in several ways. These include:

Higher initial premiums. You pay not only for a death benefit but also for the cash value feature of the policy. Overall, cash value policies offer less insurance protection per premium dollar than term life policies.

Greater flexibility. You can use the cash value as collateral for a loan. Some people buy cash value policies as a tax-deferred way to build an estate. Dividend-paying policies usually provide an option to apply the dividends to pay all or part of the premiums. Other cash value policies such as universal life provide for payment of the cost of the policy if the policy has accumulated sufficient value.

Much higher agent commissions. Keep this in mind if an agent continues to recommend a cash value life policy when you ask about term life.

Surrender charges and other expenses may consume all or most of a policy´s cash value if you cash it in early. It usually takes at least three to five years to build any cash value. If you buy a cash value policy, try to continue your premium payments for at least 15 to 20 years.

About half the people who buy cash value policies drop them within five years. Dropping a cash value policy can be costly, so think carefully before buying one.

Whole Life

Whole life policies offer protection throughout a person’s lifetime. They are a type of cash value life insurance. You pay the same scheduled premium from the day you buy the policy. There is no need to renew whole life policies. As long as you pay the premium when due, the policy remains in force throughout your life or until you cash it in. The scheduled premium may be level or increase after a fixed time period, but the premium will not change from the amount shown in the policy schedule. It is important that you look at the policy schedule and understand what your premium payments will be and that you can afford them. An insurance company will base the premium on your age at the time of purchase. Initially, the premium for a whole life policy will be higher than that for a term policy. If you keep the policy for a long time, you likely will pay a lower premium when you are older. Part of each premium payment goes to the cash value growth, part for the death benefit, and part for expenses such as commissions and administrative costs.

There are two types of whole life policies:

Nonparticipating policies provide a schedule of guaranteed premiums and death benefits and a table of guaranteed values, but they pay no dividends.

Participating policies guarantee premiums, death benefits, and cash values, and also may pay policy dividends. Because of the dividend feature, premiums tend to be higher. You have several options for using policy dividends, including

letting the dividends accumulate with interest

taking the dividends in cash

using the dividends to pay toward the premium, buy permanent paid-up additions, or buy a combination of one-year term and permanent paid-up additions

Some companies fail to pay dividends at the originally projected rate, while others exceed their original projections. When making your purchase decision, remember that dividends are not guaranteed and may differ from those shown in illustrations. Ask for a company’s history of projected dividends versus paid dividends.