Term life insurance, as the name suggests, provides protection only for a specific term or period of time. It may never pay out, and that is actually a good thing! It means the term of insurance ended prior to your death. Term life insurance is the cheapest, simplest, and most popular form of life insurance.
There are several types of term policies. A level term plan provides a set amount of coverage with premiums that are fixed for a specified period of time, such as 10 or 15 years. Convertible term plan allow the insured the ability to switch the term policy to a permanent or whole life policy. Increasing or decreasing term plans provide a consistent premium year to year, but the coverage amount is modified to go either higher or lower at certain points.
Many employers include group life insurance in the benefit package offered to employees. A basic insurance life benefit may be provided at the employer cost, but it could be a nominal amount such as $10,000. Some employers choose to also provide an optional (or voluntary) life insurance plant. Employees have the option of purchasing additional life insurance and paying the cost through payroll deductions.
Optional life insurance is usually less expensive than individual plans because of reduced administrative expenses. Having one policy issued to a group of people is more efficient for an insurance company, and this savings is reflected in the premium. The cost of the coverage is based on a number of factors, including the type of industry, average age and gender of the employees.
While optional life coverage may be cheaper, there are some downsides. When you leave the company, you may not be able to take the coverage with you at an affordable rate. Also, group policies are virtually always term policies. Depending on your personal insurance needs, a whole life or universal life policy may be a better fit.
Universal life plans are a type of whole life policy that provides flexibility on both the premium payments and coverage amount. Universal life plan include a savings component that allows a cash value to accumulate on a tax deferred basis. The insurance company invests a portion of the premiums in savings vehicles such as money market funds and bonds. It is used to either offset some of the cost, or paid out as additional benefits when a death claim is filed.
Universal life adjusts to your needs – whether that be a greater amount of life insurance at certain times in your life, or lower premium at other times.
Another appealing feature of universal life plans is that you can borrow or withdraw money from the policy.
Whole life, also known as permanent life insurance, provides coverage until death. There are policies referred to as single premium or lump sum, that requires one single upfront premium payment. But the more typical plan requires that premium be paid annually and, unlike term insurance, the premiums remain consistent even as you get older.
Whole life insurance is a good fit for those who can afford higher premiums from the start, need the policy until death, and want the added bonus of having a savings component, or “cash value,” build up from the premium paid.
With whole life insurance, there are no worries about becoming uninsurable at some point due to illness or an accident. The whole life policy guarantees a payout upon your death.
Cash value life insurance is just another name for whole life or permanent insurance. The cash value component has several advantages. The interest and other earnings that comprise the cash value are not subject to taxes. You can borrow the cash value through loans, and the distributions will not be taxable. Furthermore, the loan on your cash value never has to be repaid. Many people use their cash values, which can be quite large at older ages, to supplement their retirement income.
Although the loans are not subject to tax, the insurance company will charge you interest on the loan, and whatever you borrow will reduce your overall policy value.
If you are lucky enough to live until the termination date, which is usually age 100, the policy is terminated and the cash value (which will be the face amount of the policy at that time) will be paid.
Endowment policies are a type of whole life plan that pays the face amount upon death. Premiums are paid only for a specified period of time or until a certain age, and a portion of this premium goes to build up a fund. At the end of this time period, if death has not occurred, a maturity benefit is paid out, and there is no more life insurance coverage.
Endowment policies lost much of their appeal when key tax advantages were eliminated through tax legislation in the 1980’s.