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Term Life Insurance
Term life insurance, which offers a guaranteed death benefit, covers the insured for a set period, such as 10, 15 or 20 years. After that, your payment obligations cease and the coverage ends. Generally, the term life premium and lump-sum death benefit are fixed amounts. Premiums usually are lower than whole life premiums. Coverage usually does not require a health exam, although some companies may require one along with your medical history. Term life does not build cash value; there is no cash payout when the policy ends or if you surrender the policy. Young people often purchase term life for the lower rates and the ability to build in options to renew the policy or convert it to whole life without a health examination or other proof of insurability.
Term Life Types and Options
Level, increasing and decreasing are the three most common types of term life insurance. With level term life, the death benefit and premium generally remain the same over the coverage period. Increasing term life provides for scheduled increases in the premium and death benefit. The decreasing type of term life lowers the death benefit over time, while the premium remains unchanged.
Two term life options remove the requirement for proof of insurability. The guaranteed renewable privilege option allows you to renew the policy without a health exam. The conversion privilege option allows you to convert the term life policy to whole life without a health exam.
Whole Life Insurance
Whole life, also called permanent life, provides guaranteed coverage for the insured’s lifetime as long as premiums are paid. Whole life also offers a guaranteed death benefit.
The premiums usually are fixed amounts and higher than term life premiums. The typical whole life policy has a cash value that increases over the coverage period through payment of premiums and investment of the funds. Some policies pay dividends to policyholders. You can use the cash value of a whole life policy as collateral or take a policy loan from the cash value.
Whole Life Types and Options
You can choose from traditional, universal and variable whole life insurance. With traditional whole life insurance, your premium usually remains unchanged over time, although some insurance companies offer traditional whole life with shorter coverage periods and higher premiums. Universal whole life offers more flexibility and the chance to build cash value through higher earnings rates. However, universal policies involve more risk since investment performance and changing interest rates cause fluctuations in the policy’s cash value, which, in turn, can cause increases and decreases in the premium and death benefit.
Variable whole life brings even more risk, since the policyholder makes the investment decisions. The policy’s cash value, and the premium and death benefit, increases and decreases based on investment performance. You can lose the cash value and the policy altogether because of a poorly performing investment portfolio.
Optional Policy Riders
Insurance companies offer optional riders you can add to your policy for additional fees. Riders, also called endorsements, allow you to add specific coverage to your policy based on your needs. For instance, some riders add coverage for dependents. Other riders provide income or other financial relief if the policyholder is disabled. The accidental death rider increases the payout if the policyholder’s death results from an accident specified in the rider.