There are two major types of life insurance—term and whole life.
Whole life is sometimes called permanent life insurance, and it
encompasses several subcategories, including traditional whole life,
universal life, variable life and variable universal life. In 2003,
about 6.4 million individual life insurance policies bought were
term and about 7.1 million were whole life.
Life insurance products for groups are different from life insurance
sold to individuals. The information below focuses on life insurance
sold to individuals.
Term
Term Insurance is the simplest form of life insurance. It pays only
if death occurs during the term of the policy, which is usually from
one to 30 years. Most term policies have no other benefit
provisions.
There are two basic types of term life insurance policies—level term
and decreasing term.
Level term
means that the death benefit stays the same throughout the
duration of the policy.
Decreasing term
means that the death benefit drops, usually in one-year
increments, over the course of the policy’s term.
In
2003, virtually all (97 percent) of the term life insurance bought
was level term.
For more on the different types of term life insurance, click
here.
Whole Life/Permanent
Whole life or permanent insurance pays a death benefit whenever you
die—even if you live to 100! There are three major types of whole
life or permanent life insurance—traditional whole life, universal
life, and variable universal life, and there are variations within
each type.
In the case of traditional whole life, both the death benefit and
the premium are designed to stay the same (level) throughout the
life of the policy. The cost per $1,000 of benefit increases as the
insured person ages, and it obviously gets very high when the
insured lives to 80 and beyond. The insurance company could charge a
premium that increases each year, but that would make it very hard
for most people to afford life insurance at advanced ages. So the
comapny keeps the premium level by charging a premium that, in the
early years, is higher than what’s needed to pay claims, investing
that money, and then using it to supplement the level premium to
help pay the cost of life insurance for older people.
By law, when these “overpayments” reach a certain amount, they must
be available to the policyowner as a cash value if he or she decides
not to continue with the original plan. The cash value is an
alternative, not an additional, benefit under the policy.
In the 1970s and 1980s, life insurance companies introduced two
variations on the traditional whole life product—universal life
insurance and variable universal life insurance.
For more on the different types of whole life/permanent insurance,
click
How is life insurance sold?
You can buy life insurance either as an “individual” or as part of a
“group” plan.
Individual Policy
When you buy an individual policy, you choose the company, the plan,
and the benefits and features that are right for you and your
family. You might be able to buy the policy from the same agent or
company representative who sells you property and liability
insurance for your home, auto or business. And although you won’t
qualify for any discounts by buying your life insurance and other
insurance from the same representative, working with a single
advisor for all your insurance needs can make your financial life
simpler.
Individual policies are typically sold through insurance agents or
brokers. If you buy a policy through an agent or broker, you will
pay a commission, also called a “load,” that is built into the
premium rate. The commission compensates the agent or broker for the
time spent advising you on how much and what type of life insurance
to buy, for facilitating the application process, and for any
further service that’s needed in future years to keep the policy
up-to-date (such as changing beneficiary designations, arranging
policy loans or coordinating your financial plans with your lawyer
and accountant).
There are two other ways to buy individual life insurance. In
Connecticut, Massachusetts and New York, you can buy it from a
savings bank. Or you can buy a policy directly from an insurance
company or from a fee-only financial advisor—what’s known as a “no
load” or “low load” policy. Although there is no sales commission on
these policies, the company will still have charges built into the
premium to cover its marketing expenses, application processing
expenses and subsequent services. Finding an insurance company that
will sell you a no-load policy isn’t easy; typing in “no load life
insurance” on Internet search engines will in many cases lead you to
an agent or broker.
Group Policy
You might have life insurance automatically from your employer; many
large companies do this. Your employer also might offer you the
chance to buy additional life insurance under a group policy. And
you might be eligible to buy life insurance under a group policy
from a union or trade association or other group you belong to (such
as a college alumni association or an automobile club).
Compared to buying an individual life insurance policy, there are
several advantages to buying life insurance under a group policy:
Group purchase
can sometimes offer you a lower rate for a given death benefit
either because the employer or other group sponsor subsidizes
the premium or because the rates are averages weighted by people
younger than you.
There are
virtually no health qualifications for getting the group
coverage.
Premium payment
is usually by payroll deduction (for employer-based group
coverage) or linked with other payments (e.g., credit card
bills), lowering the chance of missing a payment.
Most employer group plans are term insurance, but if you leave that
employer your state may require that you be allowed to convert the
policy to a form of whole life insurance with the same insurance
company that provides the group life insurance. You would then pay
premiums directly to the company and keep the insurance in force.
This can be an advantage if you are older, or have experienced
deteriorating health, as it gives you the opportunity to qualify for
whole life insurance without having a medical exam.
Credit Life Insurance
Credit cards and lending institutions may offer life insurance to
pay off your outstanding loans in the event of your death. This is
generally made available in two ways
As part of the
loan at no extra charge. In this case the cost of the life
insurance is borne by the lender and is included in its interest
rate or other finance charges. If you have this type of credit
life insurance, you don’t need separate life insurance to pay
off that loan if you die.
As an option at
an extra charge. In this case, you should usually reject the
optional coverage, provided that you have some other life
insurance (group or individual) that can be designated to pay
off the loan if you die. If you’re under age 50 and you don’t
have other insurance that could pay off this loan, consider
buying individual life insurance for this purpose as the rates
will probably be better. At 50 or over (or younger with health
issues), if you have no other life insurance for this purpose,
the optional credit life insurance is likely to be cheaper than
individual life insurance.
