Life Insurance

Term Insurance

Term life insurance is pure insurance. When you purchase a term policy, you are buying coverage for a specific period of time. If you die within the time period specified in your policy, the insurance company will pay your beneficiaries the face value of your policy.

Term insurance offers temporary protection. This differs from the permanent forms of life insurance, such as whole life, universal life, and variable universal life, which generally offer lifetime protection. And unlike other types of life insurance, term insurance accumulates no cash value. You don't receive a refund at the end of the policy period if you haven't died. Term life insurance maybe appropriate for temporary life insurance needs or when your cash needs make permanent life insurance unaffordable.

Term insurance is sold for a specified period of time. Annual renewable term life insurance is renewable every year, without proof of insurability. The main drawback associated with annual renewable term, as well as other types of term insurance, is that premiums increase every time you renew your life insurance coverage. The reason is simple: As you get older, your chances of dying increase. And as the likelihood of your death increases, the risk that the insurance company will have to pay a death benefit goes up with it. Unfortunately, term insurance can become too expensive right when you need it most – that is, in your later years.

Whole Life Insurance

When you purchase a whole life policy, you traditionally pay a fixed premium for as long as you live, or for as long as you keep the policy in force. In exchange for this premium, the insurance company promises to pay a set benefit upon your death.

In addition to providing a death benefit, whole life policies build cash value.

Part of your premium goes to the insurance company to pay for the pure protection element of your policy. The remainder is invested in the company's general investment portfolio. The insurance company will pay a guaranteed rate of return on the balance of your policy that is in the investment portfolio.

This cash value buildup is part of the reason the premiums on a whole life policy generally remain fixed for the duration of the policy instead of increasing to match the increased risk of death. As the cash value within your policy grows, the risk to the insurance company declines. Your stake represents an increasing share of the face value of the policy.

Universal Life Insurance

Universal life insurance was developed in the late 1970s to overcome some of the disadvantages of term and whole life insurance.

As with other types of life insurance, you pay regular premiums to your insurance company. In exchange for these premiums, the insurance company will pay a specific benefit to your heirs upon your death.

And, like whole life insurance, a portion of each premium goes to the insurance company to pay for the pure cost of insurance. The remainder is invested in the company's general investment portfolio.

Most universal life policies pay at least a minimum guaranteed rate of return. Any returns above the guaranteed minimum will vary with the performance of the insurance company's portfolio.

© 2007 Emerald Publications