Knowledge of the types of life insurance available can help you avoid buyer’s remorse. There are myriad life insurance plans that are designed to suit different needs. The primary division of life insurance plans is permanent versus temporary. From this, life insurance plans are structured differently according to factors like premium rates and supplementary benefits offered.
Term life insurance plans exist either for a specific number of years or until the insured attains a certain age. Term plans do not bear cash values. They are not to be confused with endowment insurance that is designed to provide either a death benefit before maturity or an endowment upon maturity.
Permanent life insurance could remain in force for the lifetime of the insured (typically up to age 100). These plans bear cash values that are referred to as a “living benefit”.
Term plans are quite varied and branch out into a number of forms:
a) Level term life insurance- This is probably the most commonly used term plan. This type of life insurance has a level death benefit for a specific period of time. A level premium is normally associated with this type of term plan.
b) Variable term plans- These plans can either have an increasing or decreasing death benefit. With increasing term plans, the death benefit is incrementally increased by specified amounts over the period. A premium increase usually accompanies the change in death benefit. With decreasing term life, the opposite happens. These term plans are useful for mortgage and family income coverage.
c) Renewable term life plans- These can be renewed or extended on maturity. Renewable plans usually have guaranteed insurability embedded in the contract. However, the premium changes to match the longevity risk of the insured at maturity.
d) Convertible term insurance- Some term plans are renewable in the sense that they can be converted before maturity. In most cases, this can be done without the insured having to provide further evidence of insurability.
e) Refundable term plans- These are usually the most expensive type of term insurance. The idea is that if the plan attains maturity, the accumulated premiums paid would be refunded to the policy owner (without interest). The utility of this type of term insurance is dubious.
Permanent life insurance plans are arguably more varied than term plans. They are divided into whole life and universal life plans. Upon death of the insured, the sum assured and/or net cash value is paid to the beneficiaries or estate of the insured. In the case of maturity, the net cash value will be given to the policy owner. Typically, insurers offer more optional supplementary benefits on permanent life insurance.
a) Whole life: Cash values build in Whole Life plans after two to three years generally. This type of life insurance can be distinguished according to premium payment periods or inclusion of dividends. Not all whole life plans are the same.
b) Universal life: The key dichotomy where this type is concerned is variable versus fixed. Fixed plans operate with declared interest rates while variable UL plans have fluctuating cash values and death benefits based on returns from a mutual fund investment-type. Some Universal plans have level premiums while other use increasing premiums.
An important point to note is that universal life plans accrue interest from policy inception. This is a key difference between universal life plans and whole life insurance. Another key difference is that universal life plans are more flexible than their whole life counterpart.
Whatever type of life insurance is chosen, it must suit your needs. It is important to keep in mind that life insurance plans differ not only in terms of the type. For example, two insurers can offer the same type of plan with different stipulations and optional supplementary benefits. This merely empowers informed clients to select plans best suited to their circumstances.