What Type of Life Insurance Do I Need?

Typically, life insurance fits into one of two classes - permanent insurance and term insurance. There are, however, many variations within each of these classes. Following are examples of each. This is by no means an exhaustive list. But will give you a good idea about each class.

What is Term Life Insurance?

Term life insurance provides life insurance for a limited period of time. As the name suggests, it is for a specific term, a number of years, or until the insured reaches a specified age. If the insured dies within that period, the beneficiary receives the death benefit. However, if the insured survives the specified term of the policy, the policy simply ends. Term life insurance typically has no cash value; this is the savings element that is present in some policies.

A couple of important features to consider when researching term insurance policies are renewability and convertibility. Some term policies contain the option of renewability. At the end of the term, the policy can be renewed for a limited number of additional years without evidence of insurability. The premium normally will increase with each renewal, which is expected, because of the insured's increasing age. Renewability may be a very important factor to an insured who has recently had a decline in health status.

If that person had to apply for new insurance after the term expired, he may find himself uninsurable and be without coverage he may need. Fortunately, he can turn to the renewability feature and will have extended coverage without evidence of insurability. Be aware, as the insured reaches advanced ages, the premiums can become very expensive and the renewability can expire.

Convertibility is another option on a term policy. It is the option to convert a term policy into a permanent policy without new evidence of insurability. Convertibility is allowed on an "attained age" basis or an "original age" basis. Attained age allows you to purchase a new permanent policy at the premium rate for your current age. Original age allows you to go back to the premium rate you were charged at the age you first purchased the term policy. As you can imagine, the company will charge an additional fee for original age rates. Attained age is the most frequently used convertibility option.

Types of Term Life Insurance

Level term - The death benefit remains the same for the length of the contract. There are generally three types.

Yearly renewable term - This type of term policy functions as the name suggests. It is issued for a year and the owner can renew annually for future one-year periods. With this type of policy, the insured may be required to furnish evidence of insurability for renewal. The insured must be allowed to renew, and the increase in premium is based on age and life expectancy. Kentucky Home Life does not provide this type of term for several reasons.

Renewable terms for other durations - There can be term policies written for different durations, depending on what the company offers, such as 5-year term, 10-year term, etc. In each of these, the premium would remain the same for the duration of the term. The policy may be renewed at the end of the term, but the premium will change due to the age of the insured at time of renewal. Kentucky Home Life provides a 10-year level term that is renewable and convertible.

Term to sixty-five - Also acts as the name suggests. It provides coverage to a specified age. The premium stays level throughout the term; however, insurance expires when the term is over. Kentucky Home Life does not provide this type of coverage.

Decreasing/Increasing term - The death benefit changes during the length of the contract. There are generally two types.

Decreasing face amount - The face amount, or benefit, decreases over the term of the policy, but the premium remains the same. This type of policy is most commonly used for loan or mortgage protection and can cover a variety of durations, usually 10-30 years. They are typically structured to provide enough benefit to pay off the loan if an insured dies. Kentucky Home Life provides 15 and 30 year decreasing term products at this time.

Increasing term - Normally issued as a rider to another policy. The face amount, or benefit, increases over the term of the policy. Kentucky Home Life does not provide this type of term coverage.

What is Permanent Life Insurance?

Unlike term life insurance, permanent life insurance remains in force for the full life of the insured as long as premium payments are made in accordance with the policy provisions. Typically, permanent life insurance has a cash value or account value after some period of time.

Types of Permanent Life Insurance

Traditional whole life insurance - This permanent type of life insurance is different from term insurance in that it provides coverage over the insured's lifetime, not just a portion of the insured's life. Whole life provides coverage to age 120. Since the companies charge premiums based on the assumption that everyone would be dead by age of 120, the company pays the policy face amount to those who attain age 120.

In general, premiums can be paid until age 120, or for a portion of the insured's life. Single premium whole life policies are paid with one lump sum payment. Premiums stay level throughout the policy term. Since premiums are based on age, the younger a person is when the policy is purchased, the lower the premium will be throughout the life of the policy. In addition to level premiums, the death benefit also remains the same.

It was mentioned earlier that premiums for whole life policies could be paid for a shorter period of time instead of being paid to age 120. This is referred to as limited payment whole life. This allows the premiums to be paid for a shorter time while the death benefit stays in force until age 120. Once the premiums are paid for the chosen period of time, the policy is paid up.

Other forms of limited pay policies are those in which the premiums are paid for a certain number of years or to a certain age. Companies will offer different options such as "Life to 65" or "20 Pay Life." The premiums would be calculated so that the insured would pay until he reaches the specified age or the specified number of years. Then the premiums would no longer be paid. If you choose to purchase one of these limited pay policies, your premiums will be higher than if you paid premiums until age 120. This is because the coverage is until age 120, but the premiums are being paid for fewer years.

A very important aspect of whole life policies is that they have a cash value. This means the policy also has a savings aspect for the insured. A portion of each premium payment goes into the cash value. The policy owner can access this money in a number of ways. Whole life policies have to contain a schedule that shows the owner the minimum value he can receive if he decides to surrender the policy. However, a surrender is not the only way to access the funds. Loans can be taken out up to the cash value; however, interest is charged for this loan, which can be repaid at any time. If the policy is surrendered, the loan is deducted from the cash value. If the insured dies, the loan is deducted from the face amount.

Indeterminate premium whole life - Many proposed insured's are concerned with providing as many death benefits for their premium dollars as possible yet providing coverage for life. Indeterminate premium whole life policies provide lower initial premium rates plus an opportunity to benefit from future rate reductions as mortality rates continue to decline. Future improvements in life expectancies offer great promise for lower premium rates. Traditional whole life products do not allow for these improvements in life expectancies. Their rates remain level and these rates are guaranteed. Indeterminate premium whole life premium adjustments must be based on age, sex and premium class. Rates cannot be raised to offset adverse investment expenses, increased overhead or poor management. Also, adjustment due to life expectancies is limited to a maximum rate, which is stated in each policy. Adjustments based on life expectancies are likely to lower premium rates giving the premium payor the better situation. The cash values of these policies are guaranteed like traditional whole life policies and paid-up options remain.

Whole life insurance comes in many complicated and confusing types. Participating Whole Life, Interest Sensitive Whole life, Variable Whole Life Insurance, Universal Whole Life, Variable Universal Whole Life and Survivorship Whole Life are some of those. Many agents know about one or more of these types of products. Few agents know about all of these in detail. Indeterminate Whole Life policy will require an illustration.

Illustrations

You may be thinking of buying a policy where cash values, death benefits, dividends or premiums may vary based on events or situations the company does not guarantee (such as premiums). If so, you may get an illustration from the agent or company that will project how the policy may perform. The illustration will show how the values that are not guaranteed will change as interest rates and other factors change. The illustration also will show you the values the company guarantees. Remember that nobody knows what will happen in the future. You should be ready to adjust your financial plans if the policy's value doesn't increase as quickly as shown in the illustration. You may be asked to sign a statement that says you understand that some of the values in the illustration are not guaranteed.

You may be thinking of buying a policy where cash values, death benefits, dividends or premiums may vary based on events or situations the company does not guarantee (such as premiums). If so, you may get an illustration from the agent or company that will project how the policy may perform. The illustration will show how the values that are not guaranteed will change as interest rates and other factors change. The illustration also will show you the values the company guarantees. Remember that nobody knows what will happen in the future. You should be ready to adjust your financial plans if the policy's value doesn't increase as quickly as shown in the illustration. You may be asked to sign a statement that says you understand that some of the values in the illustration are not guaranteed.