Types of Life Insurance Policies

Types of Life Insurance Policies

• Life insurance policies offer various types, each with unique characteristics and functions
• Understanding policy types helps determine suitability for different life situations

Terms to Know

• Accumulate: To build up (e.g., savings)
• Attained age: The insured's age at the time of policy renewal or replacement
• Cash value: Savings element or living benefit in a policy
• Deferred: Withheld or postponed until a specified time or event
• Endow: Policy's cash value reaching the contractual face amount
• Face amount: Stated benefit amount in the policy
• Fixed life insurance: Products that offer guaranteed minimum or fixed benefits
• Lapse: Policy termination due to nonpayment of premium
• Level premium: Premium that doesn't change throughout the policy term
• Nonforfeiture values: Policy benefits that cannot be lost if the policy is surrendered or lapses
• Policy maturity: Time when the face value is paid out in policies
• Securities: Financial instruments that may trade for value, like stocks, bonds, or options
• Variable life insurance: Products where cash values accumulate based on a portfolio of stocks, without guarantees of performance

A. Term Life Insurance

• Term insurance offers temporary protection for a specific period
• It's also known as pure life insurance
• It provides the greatest coverage for the lowest premium compared to other types
• There's a maximum age limit for coverage
• It provides pure death protection

Level Term Insurance

• Level term insurance is the most common temporary protection type
• The death benefit remains the same throughout the policy term

Annually Renewable Term

• Annually renewable term (ART) is the purest form of term insurance
• The death benefit remains level, and the policy may be guaranteed renewable each year without proof of insurability
• However, the premium increases annually based on the insured's age

Decreasing Term

• Decreasing term policies feature a level premium and a death benefit that decreases annually
• Primarily used for time-sensitive protection, like mortgages where the amount needed decreases over time

Increasing Term

• Increasing term features level premiums and a death benefit that increases annually
• Ideal for rising living costs
• Often used as a rider to existing policies

Return of Premium (ROP)

• ROP life insurance is an increasing term insurance policy
• It pays an additional death benefit equal to the premiums paid if the policyholder dies within a specified time period or outlives the policy term
• The amount paid back equals the total premium paid, and isn't taxable

B. Whole Life Insurance

• Whole life insurance provides lifetime protection and a savings (cash value) element

• Premiums are paid until the policy matures (typically at the insured's 100th birthday).

• Premiums for whole life policies generally exceed those for term insurance

• Level premium: Remains the same throughout the policy term

• Death benefit: Guaranteed lifetime amount

• Cash value: Accumulates until the policy's maturity date; may be used for policy loans or withdrawals

Straight Life

• Straight life, also called continuous premium whole life, is the basic whole life policy
• Premiums are paid from policy issue until the insured's death or age 100, whichever comes first
• This has the lowest annual premium compared to other whole life options

Limited Payment

• Unlike straight life, this policy has a limited premium payment period. Premium payment ends after a set number of years (e.g., 20 years)
• Premiums will be greater than straight policy for the same coverage for a shorter payment period
• Cash value builds up faster

Single Premium

• The single premium whole life policy (SPWL) provides a level death benefit up to age 100 with a single payment upfront.
• This fully funds the policy upon issuance

Indexed Whole Life

• Indexed whole life's cash value depends upon the performance of a specific equity index and has a minimum interest rate. The face amount increases annually

C. Flexible Premium Policies

• Adjustable life policies allow the policyholder to adjust premium, premium-paying period, face amount, or period of protection
• Universal life policies allow varying premiums throughout the policy term; however, premiums must exceed the policy's cost of insurance to maintain cash value.

D. Variable Life Insurance

• Variable life policies have cash values based on the investment performance of a portfolio of securities
• The policyholder bears investment risk

E. Specialized Policies

• Joint Life: Covers two or more people and the death benefit is payable upon the first death.
• Survivorship Life: Covers two or more people and the death benefit is payable upon the second or last death.
• Juvenile Life: Insurance written for minors (often increasing in value as they age)
• Group Life: Covers multiple people through an employer, union, etc. There is less individual underwriting needed.
• Credit Life: Insures the debtor for a set amount, and the face value decreases as the debt decreases

F. Group Life Insurance

• A group policy is issued to a sponsoring organization covering multiple lives
• Includes criteria for plan sponsorship and group size
• Coverage is based on average age of the group and gender ratios

G. Credit Life Insurance

• Designed to pay off debt in case of death