Several persons form opinions about life insurance without realising how varied life insurance plans are. The variability among life insurance plans extends to the supplementary benefits offered with them. Some insurers even combine life plans with annuities. However, one can spot a fundamental difference between life insurance plans. Some forms of life insurance are temporary while others are permanent.
Term life plans exist for a defined period or up to a specific age and do not have cash values. Endowment plans are a form of temporary insurance that bear cash values. Permanent life insurance plans endure for a life span or up to age 100 and have cash values. Permanent life insurance may be further sub-divided into Whole Life and Universal Life plans.
i) Term Insurance plans that you can acquire include:
a) Level term life insurance:
This type of policy has a level death benefit over the period. Level term plans usually have a level premium associated with them.
b) Increasing and decreasing term life insurance:
These term plans have a variable death benefit. With increasing term life, the death benefit increases by a specified amount over the period. Premium increases generally accompany the death benefit increments. The opposite happens with decreasing term insurance. This type of policy is used for mortgage redemption and family income coverage.
c) Renewable term life insurance:
As the name suggests, this type of term plan can be renewed when the coverage period has ended. The policy virtually guarantees insurability through the renewal provision. The new premium rate is determined by the attained age, but the premium remains level for the additional term.
d) Convertible term insurance:
This type of term life has a clause that allows the policy owner to convert the policy to permanent insurance without having to provide evidence of insurability. The clause may specify that the policy must be converted before a certain period. The premium for the converted policy would be determined by the age of the person or the death benefit would be reduced to match the current premium.
e) Refundable term insurance:
Refundable term is a non-convertible term plan that allows for a refund of all premiums paid if a claim is not presented by the end of the period. This plan is a lot more expensive than a non-refundable term insurance plan for the same period. The premiums are refunded without interest once the coverage period has ended. Refundable term life plans may seem attractive but are not economically viable compared to either a non-refundable term plan or permanent life insurance.
ii) Endowment insurance operates on the basis of a guaranteed sum assured. If the insured dies before maturity, the insurer will pay the sum assured once the plan is in force. If the insured survives the period, the policy owner would receive the sum assured in full. Endowment insurance matures either at a specific age or after a set period.
iii) Whole life insurance plans usually provide lifetime coverage for a level premium. Cash values build in Whole Life plans after two to three years generally. This is a key difference between Whole Life and Universal Life plans. Permanent life insurance typically exists up to age 100 or a lifetime, whichever is shorter. Upon death or maturity, the sum assured and net cash value is paid to the estate of the insured or the insured respectively. Whole life plans can be distinguished according to premium payment periods or inclusion of dividends. Dividend paying Whole Life plans can be very profitable.
iv) Universal Life insurance
Universal life (UL) insurance is a more flexible form of life insurance. There are fixed and variable universal life plans. 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.
With some level-premium UL plans, the cash values are used to compensate for the higher risk of insuring. This is not always the case and depends on the policy of a particular insurer. Interest is earned on these plans from inception and premium allocation is transparent. This is another key difference between UL plans and Whole Life plans. Universal Life plans offer flexible premiums where the payer could add more to the investment portfolio if he or she so desires.
There are many life insurance plans to choose from. Some plans operate better than others across several contexts. Certain plans, like refundable term insurance, are absolute rubbish. There are life insurance plans to suit every need and some that may even boost your savings favourably. Insurers have some discretion with the value they add to life plans. There are several other provisions and optional supplementary benefits available that transform a life insurance plan to an holistic financial planning package. This is the added value that you should seek when selecting insurers and plans.