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 Simply,
term life insurance provides death-benefit protection for
a specified period of time (for instance, you might buy a
policy that has to be renewed in two years). Generally speaking,
if you're looking for coverage for a short period of time,
term life makes more sense.
Non-Guaranteed
Term Life Insurance
Non-Guaranteed
term life provides coverage only for a short time (usually
a year) and is pure death-benefit protection. The risk with
term life is that your health might deteriorate and you could
be unable to get another policy once the term is up. Premiums
can also increase dramatically as you age, but term life insurance
is usually a good choice for young people who can't afford
the higher expense of permanent insurance, or for people covering
specific needs that will disappear in time, such as a car
loan or a mortgage.
Yearly
Renewable and Convertible Term
Yearly
renewable term insurance offers a longer term, usually for
five, 10, or 20 years. By buying a longer term policy, your
costs can be stretched out to avoid the annual increases found
in non-guaranteed term life.
Convertible
term is like yearly renewable term but it also offers conversion
to a permanent policy in the future - when regular term premiums
might become cost-prohibitive or if your health declines.
Convertible term policies usually provide the maximum protection
with the smallest amount of cash outlay required. This is
a good choice especially for young people who are unable to
afford the higher cost of permanent insurance right now but
need maximum life insurance and also want to have the option
of converting to permanent coverage in the future.
PERMANENT LIFE INSURANCE
If you
are looking to have a policy for the rest of your life, or
have investment goals, Permanent Life Insurance is the better
choice over Term Life Insurance.
Whole
Life or Ordinary Life Insurance
 Similar
to yearly renewable term and convertible term, whole life
policies stretch the cost of insurance out over a longer period
of time in order to level out the otherwise increasing cost
of insurance. In this case, however, it is spread not over
a few years but over your entire life. Your excess premium
dollars are invested in the company's general portfolio. Because
you aren't personally managing that investment, your selection
of an insurance company is vitally important.
With this
type of policy, however, the inflexibility of premium payments
could become a burden if your expenses increase or if you
lose your job.
Universal
Life Insurance
This
option offers greater flexibility than whole or term life.
After your initial payment, you can reduce or increase
the amount of your death benefit (although to increase
the amount, you'll probably have to give the insurance
company medical proof that you are still in good health).
Also, after your initial payment, you can pay premiums
any time, in almost any amount within the policy's required
minimums and maximums.
You will need to actively manage these policies to maintain
sufficient funding, especially because the insurance company
can increase charges (like mortality and expenses). Plus,
part of your premium is invested by your insurance company,
so you'll need to be careful when choosing a company.
Variable
Life Insurance
There
are both Universal and Whole Life versions of Variable Life.
This option provides death benefits and cash values that fluctuate
with the performance of the insurance company's portfolio
of investments (you'll receive a prospectus along with your
policy). The cash value is not guaranteed, but you get to
choose where your premium dollars go among the variety of
investments in the portfolio. Thus, while there is no guaranteed
cash value, you have control over your money and can invest
it according to your own tolerance for risk.
If your
investments perform well, you'll have a higher cash value
and death benefit. If they don't, you'll have a lower cash
value and death benefit, although some policies guarantee
a minimum death benefit.
You can
also take loans against the cash value of your policy, but
if you don't pay them back with interest, your beneficiaries
will receive a reduced death benefit.
You can
also surrender your policy for cash or convert it into an
annuity, but keep in mind that cashing in a permanent policy
after only a couple of years is an expensive way to get insurance
protection for a short time.
Look closely at the underlying funds a company offers:
- Are
they well-balanced?
- Do
they give you a range of choices to satisfy all risk
tolerances?
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