Types of Insurance

Annually renewable term

(ART), the purest form of term insurance. The death benefit remains level, and the policy may be guaranteed to be renewable each year without proof of insurability, but the premium increases annually to the attained age, as the probability of death increases

Level premium for whole life insurance

The premium for whole life policies is based on the issue age; therefore, it remains the same throughout the life of the policy.

Minimum premium

the amount needed to keep the policy in force for the current year. Paying the minimum premium will make the policy perform as an annually renewable term product.

Single Premium whole life

(SPWL) is designed to provide a level death benefit to the insured's age 100 for a one-time, lump-sum payment. The policy is completely paid-up after one premium and generates immediate cash.

Permanent life insurance

A general term used to refer to various forms of life insurance policies that build cash value and remain in effect for the entire life of the insured (or until age 100) as long as the premium is paid. THE MOST COMMON TYPE OF THIS is whole life.

Renewable provision

Allows the policyowner the right to renew the coverage at the expiration date without evidence of insurability. The premium for the new term policy will be based on the insured's current age.

Ordinary whole life

Also known as straight life or continuous premium whole life. The basic whole life policy. The policyowner pays the premium from the time the poly is issued until the insured's death or age 100 (whichever occurs first). Of the common whole life polcies, THIS TYPE will have the lowest annual premium.

Cash value for whole life insurance

Created by the accumulation of premium, scheduled to equal the face amount of the policy when the insured reaches age 100 (the policy maturity date), and is paid out to the policy owner. (The insured and the policyowner do not have to be the same person.) Credited to the policy on a regular basis and have a guaranteed interest rate.

Level death benefit option

Option A of universal life. The death benefit remains level while the cash value gradually increases, thereby lowering the pure insurance in the later years. This lowers the expenses and allows for greater cash value in the older years.

Increasing death benefit option

Option B of universal life. The death benefit includes the annual increase in cash value so that the death benefit gradually increases each year by the amount to the face amount of the policy plus the current amount of cash value. Since the pure insurance with the insurer remains level for life, the expenses of this option are much greater than those for Option A, thereby causing the cash value to be lower in the older years (all else being equal).

Convertible provision

Provides the policyowner with the right to convert the policy to a permanent insurance policy without evidence of insurability. The premium will be based on the insured's attained age at the time of conversion.

Premium

The cost of the policy; payment required to keep the policy in force. Paid in advance either periodically or in a lump sum.

Death benefit for whole life insurance

The death benefit is guaranteed and also remains level for life.

Whole life insurance

Provides lifetime protection, and includes a savings element (or cash value). Endow at the insured's age 100, which means the cash value created by the accumulation of premium is scheduled to equal the face amount of the policy at age 100. The policy premium is calculated assuming that the policy owner will be paying the premium until that age. Premiums for whole life policies usually are higher than for term insurance.

Limited payment whole life

Unlike straight life, THIS TYPE is designed so that the premiums for coverage will be completely paid-up well before age 100. Some of the more common versions of THIS TYPE are 20-pay life whereby coverage is completely paid for in 20 years, and LP-65, whereby the coverage is completely paid up for by the insured's age 65. All other factors being equal, this type of policy has a shorter premium-paying period than straight life insurance, so the annual premium will be higher. Cash value builds up faster for the limited-pay policies.

Target premium

a recommended amount that should be paid on a policy in order to cover the cost of insurance protection and to keep the policy in force throughout its lifetime.

Return of premium life insurance

(ROP), an increasing term insurance policy that pays an additional death benefit to the beneficiary equal to the amount of premiums paid. Paid if the death occurs within a specific period of time or if the insured outlives the policy term. Structured to consider the low risk factor of a term policy but at a significant increase in premium cost, sometimes as much as 25% to 50% more. Traditional term policies offer a low-cost, simple-death benefit for a specified term, but have no investment component or cash value. When the term is over, the policy expires and the insured is without coverage. THIS TYPE OF POLICY offers the pure protection of a term policy, but if the insured remains healthy and is still alive once their term limit expires, the insurance company guarantees a return of premium. However, since the amount return equals the amount paid in, the returned premiums are not taxable.

Universal life insurance

Also known by the name flexible premium adjustable life. This implies that the policyowner has the flexibility to increase the amount of premium paid into the policy and to later decrease it again. In fact, the policyowner may even skip paying a premium and the policy will not lapse as long as there is sufficient cash value at the time to cover the monthly deductions for cost of insurance. If the cash value is too small, the policy will expire. Since the premium can be adjusted, the insurance companies may give the policyowner a choice to pay either of the 2 types of premiums: minimum or target premium. THIS TYPE has 2 components: an insurance component and a cash account. The insurance component of a universal life policy is always annually renewable term insurance. THIS TYPE allows the partial withdrawal (partial surrender) of the policy cash value. However, there may be a charge for each withdrawal and there are usually limits as to how much and how often a withdrawal may be made. During the withdrawal, the interest earned and the withdrawn cash value may be subjected to taxation, depending upon the plan. The death benefit will be reduced by the amount of any partial surrender. Note, however, that a partial surrender from THIS TYPE OF POLICY is not the same as a policy loan.

Adjustable life

Developed in an effort to provide the policyowner with the best of both worlds (term and permanent coverage.) THIS TYPE can assume the form of either term insurance of permanent insurance. The insured typically determines how much coverage is needed and the affordable amount of premium. The insurer will then determine the appropriate type of insurance to meet the insured's needs. As the insured's needs change, the policy owner can make adjustments in his or her policy. Typically the policy owner has the following options: increase or decrease the premium or the premium-paying period; increase or decrease the face amount; or change the period of protection. THIS TYPE contains most of the common features of other whole life policies, but the cash value of THIS TYPE only develops when the premiums paid are more than the cost of the policy.

Statutory definition of life insurance

Established by the IRS and applies to all life insurance contracts issued after December 31, 1984. There must be a specified "corridor" or gap maintained between the cash value and the death benefit in a life insurance policy. The percentages that apply to the corridor are established in a table published by the IRS and vary as to the age of the insured and the amount of coverage. If this corridor is not maintained, the policy is no longer defined as life insurance for tax purposes and consequently loses most of the tax advantages that have been associated with life insurance.

Decreasing term policy

Features a level premium and a death benefit that decreases each year over the duration of the policy term. Primarily used when the amount of needed protection is time sensitive or decreases over time. Commonly purchased to insure the payment of a mortgage or other debts if the insured dies prematurely. Therefore, the amount of coverage decreases as the outstanding loan balance decreases each year. Usually convertible; however, it is usually not renewable since the death benefit is $0 at the end of the policy term.

Level term insurance

Most common type of temporary protection purchased. The death benefit does not change throughout the life of the policy.