Many people are confused by the wide variety of life insurance plans available. But, in reality, there are only two types of life insurance: term life insurance and cash-value life insurance. Term life insurance is often described as “pure protection” because it pays benefits only if the insured person dies within the time period (term) covered by the policy. The policy must be renewed if coverage is desired for another time period. Cash-value life insurance pays benefits at death and includes a savings/investment element that can provide benefits to the policyholder prior to the death of the insured person. Thus, it includes a cash value representing the value of the investment element in the life insurance policy. Because of its investment aspect, many people automatically believe it is the better option. Cash-value life insurance costs much more than term insurance, however, and there are much better investment options.
Term Life Insurance
Term life insurance contracts are most often written for time periods (or terms) of 1, 5, 10, or even 20 years. If the insured survives the specified time period, the beneficiary receives no monetary benefits. Term insurance can be purchased in contracts with face amounts in multiples of $1000, usually with a minimum face amount of $50,000. The face amount is the dollar value of life insurance protection as listed in the policy and used to calculate the premium. Variations on term life insurance include decreasing term insurance, guaranteed renewable term insurance, convertible term insurance, and credit (term) life insurance.
Term Life Insurance
Term life insurance contracts are most often written for time periods (or terms) of 1, 5, 10, or even 20 years. If the insured survives the specified time period, the beneficiary receives no monetary benefits. Term insurance can be purchased in contracts with face amounts in multiples of $1000, usually with a minimum face amount of $50,000. The face amount is the dollar value of life insurance protection as listed in the policy and used to calculate the premium. Variations on term life insurance include decreasing term insurance, guaranteed renewable term insurance, convertible term insurance, and credit (term) life insurance.
Unless otherwise stipulated by the original contract, you must apply for a new contract and may be required to undergo a medical examination to renew the policy. The premium will increase with each renewal, reflecting your increasing age and greater likelihood of dying while the new policy remains in force. If you have a health problem, you may be denied a new policy or be asked to pay even higher premiums. For example, a $100,000 five-year renewable term policy for a man age 25 might have an annual premium of $100; at age 35, the policy might cost $135; and at age 45, it might cost $220. Term policies are much less expensive than cash-value policies at any given age because they do not include a savings/investment element.
Guaranteed Renewable Term Insurance
Guaranteed Renewable Term Insurance
Proving insurability at renewal may be difficult if you develop a health problem during the time period of a term policy. Term life insurance policies, however, are usually written as guaranteed renewable term insurance. The guarantee protects you against the possibility of becoming uninsurable. The number of renewals you can make without proving insurability may be limited, and a maximum age may be specified for these renewals (usually 65 or 70 years). Unless you are positive that you will not need a renewal, guaranteed renewable term insurance is recommended.
Level-Premium Term Insurance
Level-Premium Term Insurance
You can partially avoid term insurance premium increases as you grow older by buying level-premium (or guaranteed level-premium) term insurance, which is a term policy with a long time period (perhaps 5, 10, or 20 years). Under such a policy, the premiums remain constant throughout the entire life of the policy. Premiums charged in early years are higher than necessary to balance out the lower-than-necessary premiums in later years coveredby the policy. Premiums on policies written for ten or more years usually remain constant for a five-year interval, then might increase to a new constant rate for another five- or ten-year interval. Such level-premium policies may include a reenter provision, requiring proof of good health at the beginning of each five-year interval. If health status changes, the insured must reenter the policy at a higher rate than originally anticipated. Be extremely wary of policies with such a provision, especially if you anticipate needing coverage beyond the initial level-premium interval.
Decreasing Term Insurance
With decreasing term insurance, the face amount of coverage declines annually, while the premiums remain constant. The owner chooses an initial face amount and a contract period, after which the face amount of the policy gradually declines (usually each year) to some minimum (such as $50,000) in the last year of the contract. For example, a woman age 35 might buy a 30-year $200,000 decreasing term policy that declines by $5000 each year. The major benefit of decreasing term policies is that they more closely fit changing insurance needs, which typically decline as a person ages.
Convertible Term Insurance
Convertible Term Insurance
Convertible term insurance offers the policyholder the option of exchanging a term policy for a cash-value policy without evidence of insurability. Usually, this conversion is available only in the early years of the term policy. Some policies provide for an automatic conversion from term to cash-value insurance after a specific number of years. There are two ways to convert a term policy to a cash-value policy. First, you can simply request the conversion and begin paying the higher premiums required for the cash-value policy. The savings/investment element of the cash-value policy will begin accumulating as of the date of the conversion. Second, you can pay the company the cash value that would have built up had the policy originally been written on a cash-value basis. Although this lump sum may be a considerable amount, it does represent an asset for the policyholder. Furthermore, the new premiums will be based on your age at the time that you bought the original term policy, which may result in lower premiums.
Group Term Life Insurance
Group Term Life Insurance
Group term life insurance is issued to people as members of a group rather than as individuals. Most such policies are written for a large number of employees, with premiums being paid in full or in part by the employer. Grouplife insurance premiums are average rates based on the characteristics of the group as a whole. If you are insured under a group plan, you need not prove your insurability, and you can usually convert the policy to an individual basis without proof of insurability if you leave the group. Such convertibility represents a major benefit for people whose health status makes individual life insurance unaffordable or unattainable.
Credit Term Life Insurance Credit term life insurance will pay the remaining balance of a loan if the insured dies before repaying the debt. In essence, it is adecreasing term insurance policy with the creditor named as beneficiary. This product is usually grossly overpriced, and the only people who should consider its purchase arethose who are uninsurable because of a serious health condition. Most people are insurable and can obtain term life coverage for a minimal cost, so they do not need credit term life insurance.
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