Term vs. Whole Life Insurance

Annually renewable term life insurance
Historically, a term life insurance rate increased each year as the risk of death became greater. While unpopular, this type of life insurance policy is still available and is commonly referred to as annually renewable term life insurance (ART).

Guaranteed level term life insurance
Many insurance companies now also offer level term life insurance. This type of life insurance policy has premiums that are designed to remain level for a period of 5, 10, 15, 20, 25 or even 30 years. Level term life insurance policies have become extremely popular because they are very inexpensive and can provide relatively long term coverage. But, be careful! Most level term life insurance policies contain a guarantee of level premiums. However some policies don't provide such guarantees. Without a guarantee, the life insurance company can surprise you by raising your life insurance rate, even during the time in which you expected your premiums to remain level. Needless to say, it is important to make sure that you understand the terms of any life insurance policy you are considering.

Return of premium term life insurance
Return of premium term life insurance (ROP) is a relatively new type of life insurance policy that offers a guaranteed refund of the life insurance premiums at the end of the term period assuming the insured is still living. This type of term life insurance policy is a bit more expensive than regular term life insurance, but the premiums are designed to remain level. These return of premium term life insurance policies are available in 15, 20, or 30-year term versions. Consumer interest in these plans has continued to grow each year, as they are often significantly less expensive than permanent types of life insurance, yet, like many permanent plans, they still may offer cash surrender values if the insured doesn't die.

Whole life insurance
Whole life insurance is a type of permanent life insurance, and is designed to remain in effect throughout one's lifetime. It is well suited to needs that do not diminish over time, such as paying estate settlement costs and taxes. Generally, the life insurance rate (or premium) for this type of policy remains the same throughout the life of the insured. During the early years of the life insurance policy, premiums are much higher than those of a term life insurance policy. As a result, and by design, these life insurance policies develop cash values which can be accessed by the owner of the policy through surrenders or policy loans.
Cash values in whole life insurance policies typically include two components:

• Each life insurance policy has a guaranteed cash value, which typically grows based on a pre-determined schedule during the life of the policy and which "endows" or equals the death benefit upon maturity of the policy (typically at age 100).
• In addition, most whole life insurance policies have a non-guaranteed cash value element, typically made up of "dividends" or "excess interest" which can enhance the value of the life insurance policy over time.

Universal life insurance
Universal life insurance differs from whole life insurance in that this type of life insurance policy distinguishes and itemizes the protection element (death benefit), the expense element, and the cash value element. By separating the three elements, the insurance company can build more flexibility into the life insurance policy. This flexibility allows (within certain guidelines) the life insurance policy owner to modify the face amount or the premium in response to changing needs and circumstances.

Here's how this type of permanent life insurance policy works:

• Premiums are credited to the policy as they are paid. Most plans deduct certain administrative charges from the premium before crediting the balance to the policy value as net premiums.
• Each month, the insurance company deducts certain amounts from the policy value to cover the costs of mortality (death benefits), as well as for any riders and/or supplemental benefits.
• Also, each month, interest is credited to the policy based upon the cash value in the policy and based on a current declared interest rate as determined by the insurance company. This rate can and will change periodically.
  

Most policies also have a decreasing surrender charge which is deducted from the cash value if the policy is surrendered. This feature allows the insurance company to recover certain expenses which are associated with the issue of the policy. The surrender value is the cash value less any applicable surrender charge.

To age 100 level guaranteed life insurance
This type of life insurance policy offers a guaranteed level premium to age 100, along with a guaranteed level death benefit to age 100. Most often, this is accomplished within a Universal Life policy, with the addition of a feature commonly known as a "no-lapse rider". Some, but not all, of these plans also include an "extension of maturity" feature, which provides that if the insured lives to age 100, having paid the "no-lapse" premiums each year, the full face amount of coverage will continue on a guaranteed basis at no charge thereafter.

Survivorship or 2nd-to-die life insurance
A survivorship life insurance policy, also called 2nd-to-die life insurance, is a type of coverage that is generally offered either as universal life or whole life insurance and pays a death benefit at the later death of two insured individuals, usually a husband and wife. It has become extremely popular with wealthy individuals since the mid-1980's as a method of discounting their inevitable future estate tax liabilities which can, in effect, confiscate an amount to over half of a family's entire net worth!

Congress instituted an unlimited marital deduction in 1981. As a result, most individuals arrange their affairs in a manner such that they delay the payment of any estate taxes until the second insured's death. A "2nd-to-die" life insurance policy allows the insurance company to delay the payment of the death benefit until the second insured's death, thereby creating the necessary dollars to pay the taxes exactly when they are needed! This coverage is widely used because it is generally much less expensive than individual permanent life insurance coverage on either spouse. For more information or a free life insurance quote, visit www.survivorship.com.