term life insurance
Term life insurance is considered "pure protection." When you buy term life insurance, you are buying insurance only on your life; there is no savings feature as there is with a cash value policy. If you die during the covered period, or the term of the policy, the insurance company will pay your beneficiaries the face value of the policy. The face value is the amount of money the beneficiaries receive if the insured person dies.
The annual premium increases as the insured person gets older. Premium rates are based on the probability of death at each age level and on the insurance company's cost of doing business. The major advantage of term insurance for younger families is the opportunity to secure a lot of protection against the loss of the primary wage earner for relatively little cost. As people grow older, there is a greater likelihood or the probability of death, so the premiums become quite high. Many older people stop paying for their term insurance since they no longer need to protect survivors from income loss.
One variation on term insurance is a level term policy. Bot the premium and the face value of the policy remain level in this type of policy. This is why it is called level term. The insured person pays the same premium throughout the term of the coverage, say 20 years, and the amount the insurance company pays when the insured person dies remains constant. These policies have higher premiums for younger policyholders than traditional term policies, and the premium is less than the actual cost in later years. The higher payments in the early years, together with the interest that is earned, serve to balance out the underpayment of the later years.
Another variation is a decreasing term policy. The premium remains the same during the term of coverage, as with level term insurance, but the face value paid out at death decreases each year. People frequently purchase this type of policy to cover a mortgage in case one of the primary breadwinners in the family dies. The amount the insurance company pays out decreases over time; just as the mortgage debt decreases when homeowners make payments through the years.
Some term insurance has a guaranteed renewability feature. This means the insured person doesn't have to take a medical test or otherwise prove insurability to continue coverage when the term of the policy expires. This feature is important if you plan to keep the coverage for longer than the original term.
The annual premium increases as the insured person gets older. Premium rates are based on the probability of death at each age level and on the insurance company's cost of doing business. The major advantage of term insurance for younger families is the opportunity to secure a lot of protection against the loss of the primary wage earner for relatively little cost. As people grow older, there is a greater likelihood or the probability of death, so the premiums become quite high. Many older people stop paying for their term insurance since they no longer need to protect survivors from income loss.
One variation on term insurance is a level term policy. Bot the premium and the face value of the policy remain level in this type of policy. This is why it is called level term. The insured person pays the same premium throughout the term of the coverage, say 20 years, and the amount the insurance company pays when the insured person dies remains constant. These policies have higher premiums for younger policyholders than traditional term policies, and the premium is less than the actual cost in later years. The higher payments in the early years, together with the interest that is earned, serve to balance out the underpayment of the later years.
Another variation is a decreasing term policy. The premium remains the same during the term of coverage, as with level term insurance, but the face value paid out at death decreases each year. People frequently purchase this type of policy to cover a mortgage in case one of the primary breadwinners in the family dies. The amount the insurance company pays out decreases over time; just as the mortgage debt decreases when homeowners make payments through the years.
Some term insurance has a guaranteed renewability feature. This means the insured person doesn't have to take a medical test or otherwise prove insurability to continue coverage when the term of the policy expires. This feature is important if you plan to keep the coverage for longer than the original term.
cash value life insurance
A cash value policy offers protection plus a savings feature. As with term insurance, the insurance company pays the beneficiaries the face value of the policy if the insured person dies while the policy is in force. With most cash value policies, the premiums are the same each year as long as the policy is in force, unlike premiums for most term polices, which increase with the age of the insured person. Because part of the premium goes toward the savings feature, the insurance policy charges more for a cash value policy than for a term policy with the same dollar coverage. The amount of savings available in cash, loans or withdrawals is called the cash value or the cash surrender value.
There are many different kinds of cash value policies. Only three will be described here. The most popular type is the whole life policy. The uninsured person pays the same premium each year of his or her life (hence the term "whole life") or until he or she reaches some specified age, such as 85 or 90. As its name indicates, a limited payment policy requires the insured to pay a level, or unchanging premium for a limited number of years, such as 20. The policy is then paid up. For the same coverage, the premiums are generally higher for a limited payment policy than for a whole life policy because the number of premiums are less. Many athletes, models and entertainers like limited payment plans because they can afford large premiums during their primary earning years, which for most are quite limited. An endowment life insurance policy also has a limited number of level premium payments, such as 20. The primary difference between an endowment and a limited payment policy is that the insured can receive the face value of the endowment policy after making the last payment. In other words, the cash value of the policy is equal to the face value of the policy after all premiums are paid. For limited payment policies, the cash value is less than the face value after all premiums are paid.
When a policy has a cash value or cash surrender value, the policyholder can do several things with the accumulated amount:
People who have trouble saving may like the investment feature of cash value policies. Others believe they can do much better investing the difference in premiums between a term and cash value policy in their own savings and investment plans.
There are many different kinds of cash value policies. Only three will be described here. The most popular type is the whole life policy. The uninsured person pays the same premium each year of his or her life (hence the term "whole life") or until he or she reaches some specified age, such as 85 or 90. As its name indicates, a limited payment policy requires the insured to pay a level, or unchanging premium for a limited number of years, such as 20. The policy is then paid up. For the same coverage, the premiums are generally higher for a limited payment policy than for a whole life policy because the number of premiums are less. Many athletes, models and entertainers like limited payment plans because they can afford large premiums during their primary earning years, which for most are quite limited. An endowment life insurance policy also has a limited number of level premium payments, such as 20. The primary difference between an endowment and a limited payment policy is that the insured can receive the face value of the endowment policy after making the last payment. In other words, the cash value of the policy is equal to the face value of the policy after all premiums are paid. For limited payment policies, the cash value is less than the face value after all premiums are paid.
When a policy has a cash value or cash surrender value, the policyholder can do several things with the accumulated amount:
- Borrow up to the full amount of the cash value at a favorable interest rate.
- Cancel the policy and receive the cash value.
- Use the cash value to pay future premiums.
- Receive the cash value paid over a period of years.
People who have trouble saving may like the investment feature of cash value policies. Others believe they can do much better investing the difference in premiums between a term and cash value policy in their own savings and investment plans.