Although there are several different types of life insurance policies available, most coverage falls under one of two main categories: term life insurance and permanent life insurance.
- What Is Term Life Insurance?
- Who Should Buy Term Life Insurance?
- What Are The Different Types Of Term Life Insurance?
- What Are The Benefits Of Term Life Insurance?
- What Should Be Considered Before Purchasing Term Life Insurance?
- What Are My Options At The End Of My Term Period?
- What Is Permanent Life Insurance?
- Who Should Buy Permanent Life Insurance?
- What Are The Different Types Of Permanent Life Insurance?
- What Are the Benefits of Permanent Life Insurance?
- What Should Be Considered Before Purchasing Permanent Life Insurance?
All term life insurance products provide a death benefit at a set price for a specific period of time – usually between 10 and 30 years. As the policyholder, you have the option to pay a monthly, quarterly, semi-annual, or annual premium for the length of your term period. In return, the insurance company agrees to pay your beneficiary a death benefit should you die while the policy is active and all premiums have been paid. Term life insurance does not build up a cash value, and is less expensive than permanent life insurance.
Term life insurance is an ideal coverage option for the following scenarios:
- You need a low-cost source of income replacement to protect family members who depend on your salary.
- You want to keep your life insurance costs to a minimum.
- You just bought a home.
- You just had a baby.
- You just got a new job.
- You’re paying off a mortgage.
- You’re paying college tuition for one or more children.
- You’re paying off a student loan.
- You need temporary supplemental coverage for a whole life insurance policy (e.g., a guaranteed universal life policy).
- Any situation where the need to replace a stream of income or cover a debt is temporary, even if it might be long-term.
Level Term Life Insurance. Level term life insurance provides coverage for a defined period of time: usually 10, 15, 20, 25, or 30 years. Premiums are guaranteed for the duration of the term – also known as the initial level period. Once the initial level period is up, the policy can be renewed at a premium that increases annually. A medical exam is usually required to qualify for this type of coverage. SelectQuote specializes in level term life insurance because level term offers the lowest premium for the greatest amount of coverage.
Who Should Buy Level Term Life Insurance? A level term life policy is recommended if you need coverage for a defined period of time – e.g., while you’re raising a family.
Group Term Life Insurance. Group term life insurance is term insurance provided by an employer, union or other group. Some group life insurance plans are provided for free (paid for by the employer), while others are paid for by the employee. Premiums increase periodically, generally every five years, and are adjusted to the insured’s new age. Coverage ends when an employee or member leaves the group. No medical exam is required to qualify for coverage. Because most group life policies don’t provide enough coverage to replace more than a year or two of income, many people who have group life insurance purchase additional individual life insurance policies. Although some group plans allow additional coverage at the insured’s option, an individual policy will usually come at a far lower premium than the group life insurance can offer. This is because the pricing for an individual level term life policy is partially based on the results of the policyholder’s medical exam. The better the results, the lower the premium. Because group life insurance doesn’t take into account the results of an individual medical exam, premiums tend to be higher.
Who Should Buy Group Term Life Insurance? If your employer or organization provides group life insurance for free, be sure to take advantage. If you have a medical condition or other health issues that might prevent you from qualifying for an individual level term life policy, you can still obtain group coverage. Because group life insurance policies usually don’t provide adequate coverage, you will likely need to supplement your group life insurance with an additional individual life insurance policy.
Annual Renewable Term Life Insurance. This kind of term insurance is renewable every year simply by paying a new – and higher – premium. A one-time medical exam is usually required in order to qualify for this type of coverage.
Who Should Buy Annual Renewable Term Life Insurance? An annual renewable term life policy is only recommended for very short-term coverage, such as a temporary business need. Because your premium increases annually, these policies are more expensive than level term life insurance in the long run.
Decreasing Term Life Insurance. This kind of term life insurance offers a level premium, but the coverage decreases with every passing year. Premiums for decreasing term life insurance are typically low, making this type of policy a viable option for low-income households seeking temporary coverage while a loan or other type of debt is being paid off. A medical exam is usually required in order to qualify for this type of coverage.
Who Should Buy Decreasing Term Life Insurance? Decreasing term life insurance was once a common purchase to protect mortgages or any other debts that are reduced by payments over time. But the market for level premium and level death benefit coverage has become so competitive that a level policy can usually be purchased for the same price as a decreasing policy – if not less. For the same premium, a level policy would be preferable to a decreasing policy because the death benefit would be maintained.
Return Of Premium (ROP) Term Life Insurance. With this type of life insurance policy, you get all of your premiums back at the end of the term period. No interest is earned on return of premium policies, and they have much higher premiums than other types of term life insurance. A medical exam is usually required in order to qualify for this type of coverage.
Who Should Buy ROP Term Life Insurance? An ROP term life insurance policy is recommended for those who don’t mind paying a higher current premium in order to get their money back at the end of their term period. This type of coverage is not recommended for smokers or people with health issues who a) typically pay much higher premiums to begin with and b) might be less likely to outlive their policies. If you buy ROP term life insurance, don’t shop around for lower premiums – ending your policy early forfeits the return of any premiums you’ve already paid.
Low Prices. Term is the most affordable type of life insurance you can buy. It usually provides the greatest amount of coverage for the lowest premium. And with level term life insurance, your premiums are guaranteed for a known period of your choosing – so you’ll always know exactly how much you’ll pay for your coverage from year to year. All else being equal, the younger you are when you purchase a term life policy, the lower your rate will be.
Guaranteed Renewability. As long as you pay your premiums on time, your coverage will remain in place – and you’ll never have to take another medical exam should you decide to renew your policy. Many policies are guaranteed renewable to age 95, while some even extend to age 100 and beyond.
Flexibility. As your coverage needs change, so can your policy – to a limited extent. Increases in coverage are possible if you have a newly purchased policy and can provide evidence of being a good risk. Many carriers will allow you to reduce the face amount of your coverage as early as one year into your policy. And the fact that your policy has a fixed payment period can be ideal if you know that your coverage needs will decrease significantly (or be eliminated entirely) once you pay off a debt or your kids are out of college.
No Hidden Fees, Exclusions Or Risks. Because term life policies don’t generate cash value, they’re less complicated and easier to understand than other types of life insurance. You get what you pay for: coverage for a set period of time.
Conversion Options. Most term plans can be converted to a permanent insurance plan, and you won’t be required to take a new medical exam in order to qualify – even if you’re in poor health. Most plans are convertible until the end of the initial term period or until the policyholder reaches the age of 70, whichever comes first.
When Your Policy’s Term Period Is Over, Your Rates Will Begin To Increase. You should choose your term period based on how long you believe you might need coverage. Let’s say you purchase a 10-year level term life insurance policy. If you still require coverage after your 10 years are up, you can renew on an annual basis – but your premium will go up every year.
Extending Coverage Is Expensive. Should you wish to continue your coverage after your initial term period is up, you will be paying more than you did for your original term life insurance policy. Whether you renew your current policy or opt for conversion to a permanent life insurance plan, you will have to pay a significantly increased premium.
If you wish to extend your coverage once your term period is up, you have three options:
1. Convert To A Permanent Policy. Converting your term policy to a permanent policy such as universal or whole life insurance can be expensive, as these types of policies have considerably higher premiums than term life insurance. But converting has its benefits, including guaranteed insurability regardless of any health issues that you may encounter in the future. This is because no medical exam is required for conversion to a permanent plan. Depending on the available rate classes for your new permanent policy, you can usually keep your original underwriting and rate class from your term policy. Most term policies allow you to convert to permanent insurance until the end of the initial term period or until you turn 70, whichever comes first.
2. Renew Your Term Policy At An Annually Increasing Rate. Provided that you’ve paid all your premiums, you are guaranteed to be able to renew your level term life policy at the end of your term period – but at a higher rate than you were paying for the term period you originally selected. If you choose to renew your policy, your premium will increase every year. Decreasing your coverage amount is one way to cut costs in this scenario.
3. Shop For A New Level Term Policy At Current Rates For Your Age. You can try to obtain a new policy, either from a new company or your current one. You will pay the rates for your current age, and your premium will depend on your insurability. A medical exam will probably be required. If you are no longer insurable, you will still be able to renew your existing policy – even if you apply with your current carrier. But a new, fully underwritten policy will be cheaper than your annual renewal rates if your insurability hasn’t changed too much.
Permanent life insurance is just what it sounds like – insurance coverage designed to last for your entire life. Permanent life insurance products provide a death benefit, or payout equal to the amount of the policy, at a set price. This price may either be fixed until a certain age or for the lifetime of the policyholder. In return, the insurance company agrees to pay your beneficiary a death benefit equal to the policy amount when you die. So that your premiums can remain the same when you are older, permanent policies charge higher premiums in their early years than would be needed to insure you at that time. Permanent premiums are therefore higher than term premiums would be for the same age.
Permanent life insurance is an ideal coverage option for the following scenarios:
- You don’t want to outlive your policy.
- You don’t want to have to convert to a permanent policy when your term runs out.
- You want your premium to stay the same for the rest of your life.
- You want a permanent death benefit for your beneficiaries.
- Your family health history indicates that you might develop a medical condition in the future (e.g., cancer or heart disease) that could make you uninsurable.
- You want to maximize your pension.
- You want to replace deferred annuities designated for heirs.
- You want to equalize inheritances for your heirs.
- You want to ensure that contractual obligations are met.
- You want to provide for a new or disabled family member or partner.
- You want continued income at an advanced age.
- You want to arrange for charitable bequests.
Whole Life Insurance. Whole life insurance provides a lifetime of coverage at a set premium, meaning your premium is guaranteed for the life of the policy. The policy develops a cash value, usually on a guaranteed schedule, that is an asset of the insurance company. These monies (and the investment returns the company can earn on them) balance out the need for future, higher premiums as you age. You can borrow against your whole life policy’s cash value, although doing so entails a corresponding reduction in the death benefit. If you cancel your policy, you will receive part or all of the cash value – and coverage will cease. A medical exam is usually required in order to qualify for this type of coverage.
Who Should Buy Whole Life Insurance? A whole life insurance policy is recommended if you want permanent insurance and more complete guarantees than a universal life policy (see below) can provide. While the premiums are high, you’ll receive a lifetime of coverage at a set premium with a guaranteed death benefit, and cash value that you’ll be able to borrow against over time.
Universal Life Insurance. Like whole life insurance, universal life insurance provides a lifetime of coverage. Because a universal life policy offers a flexible premium and face amount, it is potentially less expensive than a whole life policy. While universal life insurance does develop a cash value, that value is not guaranteed. Given that universal life insurance has more variables than whole life insurance, it is advisable to thoroughly research how this type of coverage works before making a decision to buy a policy.
WHAT ARE THE BENEFITS OF PERMANENT LIFE INSURANCE?
Permanent Coverage. Permanent life insurance can provide a lifetime of coverage at a level premium, meaning you’ll pay the same premium for the life of the policy.
Cash Value. Permanent policies may generate cash value that can grow over the life of the policy and receive favorable tax treatment. This means that the policyholder may be able to borrow against the policy or even cancel it for part or all of the cash value while he or she is still alive.
Retirement And Estate Planning. Because you can’t outlive a permanent policy, permanent life insurance is more suitable than term life insurance when it comes to retirement and estate planning.
WHAT SHOULD BE CONSIDERED BEFORE PURCHASING PERMANENT LIFE INSURANCE?
High Premiums. Because permanent policies provide a lifetime of coverage and generate cash value, the premiums are much higher than they would be for term life insurance. Premiums for a permanent policy are typically 7-10 times the cost of a 20-year term life policy. This can discourage people from buying as much permanent life insurance as they really need.
It’s More Complicated. The relationships between premiums, cash values, credited interest rates, and other aspects of a permanent policy are integral to its design, and not necessarily obvious to the consumer. If not explained properly, these relationships can cause confusion or, worse, an unpleasant surprise once the policy is in place. Given the flexibility (at least with UL) and customization involved in putting together a permanent policy that meets your goals, the purchasing process generally requires more research, planning and professional assistance.
“Risk.” Depending on the type of permanent insurance policy you choose (and the performance of that policy with respect to economic conditions), you may need to reduce your death benefit, pay higher premiums in the future, or watch your cash value decrease over the life of the policy. To avoid such surprises and disappointments, SelectQuote generally recommends buying term life insurance and investing the difference between term and permanent insurance premiums.