Term
Life Insurance:
Term
life insurance provides coverage over a certain term, usually between
five and 30 years. Today, most term policies will guarantee a level
premium for only a specific number of years. For example, a 30-year
Term life plan may guarantee a level premium for the first 15 years;
then, the Insurance Company reserves the right to raise the premium
within specified limits for the remaining 15 years. This is in direct
contrast to Whole life insurance where premiums are locked in at one
rate throughout the life of the policy. With Universal life
insurance, the policyholder generally has an adjustable premium,
within a specified range, that can directly affect the term of the
policy and the cash value.
Some
Term life insurance policies can be renewed to age 95. Usually, the
premium goes up a varying amount every time the policy is renewed,
with the reasoning that the policyholder gets older, and is therefore
at more risk.
Some
Term life policies offer the option to convert the policy to a
permanent or whole life policy at the time of renewal.
Initial
premiums are usually lower for Term life than for similar amounts of
insurance purchased through Universal or Whole life insurance plans.
However, Term life insurance builds no cash value. As with Universal
and Whole life plans, premiums for Term life insurance are
considerably higher for those purchasing coverage in later years.
Universal
Life Insurance
Universal
life insurance has become popular among people who want a policy
offering some of features of Term life insurance, as well as certain
other features found in Whole life insurance policies.
Universal
life policies usually have flexible or adjustable premiums as defined
within the actual policies. This means the policyholder can change
the amount of premium payment, within an acceptable range set by the
insurance companies. By paying the lowest premium allowed for the
policy, the death benefit may last only a few years, similar to Term
life insurance. On the other hand, by paying higher premiums, the
death benefit generally extends the coverage over more years. In
addition, higher premium rates can help build cash value in the
policies.
The
policyholder must be careful to not pay premium amounts above the
maximum amount specified for the policy over a period of time, or it
may become disqualified as life insurance for federal income tax
purposes. The result would be some unexpected income taxes due upon
the death of the insured.
Universal
life insurance plans are also useful in estate planning. This is
especially true for married couples who have a lot of non-liquid
assets like real estate, and want to provide enough liquidity to pay
estate taxes that will become due after the death of the surviving
spouse. In this case the couple might consider purchasing a joint and
last survivor universal life insurance policy with flexible premiums.
The death benefit is paid at the death of the second joint insured.
Whole
Life Insurance
Whole
life insurance provides coverage of the policyholder's entire life.
Therefore, the policy does not need renewing, and the premiums
generally remain the same.
Whole
life policies are called other names as well, including Permanent
insurance and Ordinary life insurance.
Whole
life insurance offers both a death benefit and a cash value. The cash
value builds throughout the duration of the policy. Some people
borrow from the cash value. It is not necessary to pay the loan back,
but there is an interest charge. In addition, if death of the
policyholder occurs before the loan is paid back, the amount
outstanding will be deducted from the face value before payment is
made to the beneficiary.
If
a policy owner or policy holder is still living at age 100 and the
premium requirements are current, plus, no outstanding loan exist
against the policy, most companies will pay the full death benefit.
Whole
life insurance is popular for those who like the forced savings
feature (cash value building, partly from premium payments) as well
as the tax-deferment option. In addition, Whole life insurance is
especially attractive to those who do not want to worry about the
renewability of the policy due to possible declining health in
advanced years, as well as higher premiums.