The text in this section is adapted from "Life Insurance Buyer's Guide," a part of Model Laws, Regulations and Guidelines. Used by permission of the National Association of Insurance Commissioners.
All policies are not the same. Some give coverage
for your lifetime and others cover you for a specific number of years. Some
build up cash values
and others do not. Some policies combine different kinds of insurance, and
others let you change from one kind of insurance to another. Some policies
may offer other benefits while you are still living. Your choice should
be based on your needs and what you can afford.
There are two basic types of life insurance: term
insurance and cash value insurance. Term insurance
generally has lower premiums in the early years, but it does not build up
cash values that you can use in the future. You may combine cash value life
insurance with term insurance for the period of your greatest need for life
insurance to replace income.
Term insurance covers you for a term of one or more years. It pays a death
benefit only if you die in that term. Term insurance generally offers the
largest insurance protection for your premium dollar. It generally does
not build up cash value.
You can renew most term insurance policies for one or more terms even if
your health has changed. Each time you renew the policy for a new term,
premiums may be higher. Ask what the premiums will be if you continue to
renew the policy. Also ask if you will lose the right to renew the policy
at some age. For a higher premium, some companies will give you the right
to keep the policy in force for a guaranteed period at the same price each
year. At the end of that time, you may need to pass a physical examination
to continue coverage, and premiums may increase. Your options for renewing
a term policy are spelled out in the renewable
clause.
You may be able to trade many term insurance policies for a cash value policy
during a conversion period even if you are not in good health. Premiums
for the new policy will be higher than you have been paying for the term
insurance. Check the convertible clause of your policy to see what your choices are.
Cash value life insurance is a type of insurance where the premiums
charged are higher at the beginning than they would be for the same amount
of term insurance. The part of the premium that is not used for the cost
of insurance is invested by the company and builds up a cash value that
may be used in a variety of ways. You may borrow against a policy's cash
value by taking a policy loan. If you don't pay back the loan and the interest on it,
the amount you owe will be subtracted from the benefits when you die, or
from the cash value if you stop paying premiums and take out the remaining
cash value. You can also use your cash value to keep insurance protection
for a limited time or to buy a reduced amount without having to pay more
premiums. You also can use the cash value to increase your income in retirement
or to help pay for needs such as a child's tuition without canceling the
policy. However, to build up this cash value, you must pay higher premiums
in the earlier years of the policy. Cash value life insurance may be one
of several types; whole life, universal life, and variable life are all types of cash
value insurance.
Whole life insurance covers you for as long as you live if your premiums
are paid. You generally pay the same amount in premiums for as long as you
live. When you first take out the policy, premiums can be several times
higher than you would pay initially for the same amount of term insurance.
But they are smaller than the premiums you would eventually pay if you were
to keep renewing a term policy until your later years.
Some whole life policies let you pay premiums for a shorter period, such
as for 20 years or until age 65. Premiums for these policies are higher
since the premium payments are made during a shorter period.
Universal life insurance is a kind of flexible policy that lets you vary
your premium payments. You can also adjust the face
value of your coverage. Increases may require
proof that you qualify for the new death benefit. The premiums you pay (less
expense charges) go into a policy account that earns interest. Charges are
deducted from the account. If your yearly premium payment plus the interest
your account earns is less than the charges, your account value will become
lower. If it keeps dropping, eventually your coverage will end. To prevent
that, you will need to start making premium payments, to increase your premium
payments, or to lower your death benefits. Even if there is enough in your
account to pay the premiums, continuing to pay premiums yourself means that
you build up more cash value.
Variable life insurance is a kind of insurance where the death benefits
and cash values depend on the investment performance of one or more separate
accounts, which may be invested in mutual funds or other investments allowed
under the policy. Be sure to get the prospectus from the company when buying
this kind of policy and study it carefully. You will have higher
death benefits and cash value if the underlying investments do well. Your
benefits and cash value will be lower or may disappear if the investments
you chose didn't doas well as you expected. You may pay an extra premium
for a guaranteed death benefit.
Source: Reprinted by permission from Life Insurance Buyer's Guide, NAIC, 120 W. 12th St., Suite 1100, Kansas City, MO 64105-1925.