Guaranteed Level Term Insurance

Term insurance provides life insurance protection with a level premium for a specified period only. After that specified period is over the premium begins rapidly increasing annually. The face amount of the policy is payable if the insured dies while the policy is in force and nothing is paid if the insured survives and has allowed the policy to lapse or has terminated the policy.

Term insurance is commonly considered as temporary insurance and very closely resembles homeowner’s and auto insurance. If a person insures their life for a 10-year period with a term insurance policy and terminates the policy at the end of the 10-year period, then the premiums are considered earned by the life insurance company and the policy has no further value. There was no claim since the insured lived.

The cost of term insurance is relatively low compared to permanent forms of insurance. This is because most term policies are not issuable during old age where death is most probable and where the cost of insurance is high. The life insurance industry has seen a trend towards issuing term life insurance policies to much older individuals than ever before. Some of these policies can last through statistical life expectancy, but because of the older ages they are issued at or how long then are kept, they can be retained past the policy’s conversion period making coverage a “bet” on being inforce at the time of death.

Once a term insurance policy reaches the annually increasing premium stage, the policyowner is faced with three choices: terminate the coverage altogether, terminate the policy after new coverage is obtained, or convert the term policy, subject to its conversion right, into a permanent policy with the same life insurance company.

Term Conversion

Most but not all term policies have a conversion feature. This is a contractual right to convert the term policy into a permanent form of life insurance offered by the insurance company at the time the right is elected. The right is free of any requirement for further medical testing or health checks.

Each term insurance policy has a specified date by which the policyowner can elect the conversion right or it is lost.

Types of Term Insurance

Besides the guaranteed level term insurance policy there are two additional forms of term insurance.

Annual Renewable Term, also known as Yearly Renewable Term, is term insurance with a level death benefit but an annual increasing premium. The premium begins with a lower cost than guaranteed level term but quickly ends up more expensive. Commonly used in business situations it is financially viable only if held for three years or less.

Return of Premium (ROP) Term is term insurance with a side fund managed by the insurance company. For a premium higher than the premium for a guaranteed level term policy, the policyowner pays the premium for the life of the term period, in this case 15, 20 or 30 years. If the insured has not died during that period, and the death benefit paid, the carrier will normally refund all premiums paid. There are exceptions by carrier for the portion of the premiums paid that are attributable to substandard or flat extra charges. There is a pro-rated refund commonly beginning after year 6 but a 100% refund of premiums paid does not occur until the entire term period has been completed and the premiums have been paid for all years.

Whole Life Insurance

Whole life insurance offers permanent protection and cash values. The protection offered by the whole life policy is permanent and the policy never expires as long as the required annual premium is paid. It neither has to be renewed nor converted. If the policyowners continue to pay premiums or pay up their policies, they have life insurance protection for as long as they live no matter their health. Eventually the death benefit of the policy will be paid. This is important as most people need some life insurance even if to pay funeral and late stage medical expenses.

Whole life insurance is a level premium insurance. The policy accumulates a cash value reserve that can reach a substantial level. The policy emphasizes guaranteed protection, but accumulates cash value that can be used for a variety of purposes. A portion of the premiums paid build up the cash value of the policy and are invested by the insurance company. The interest rate return on your investment is added to the cash value of the policy. In addition to crediting your policy with interest, participating policies may also give the policyowner the opportunity to earn dividends. Dividends are generally declared annually and are a non-guaranteed return of premium intended to reflect a company’s favorable operating experience. The cash values that accumulate inside the whole life insurance policy can be utilized as cash surrender values, paid-up insurance, or extended term insurance.

Universal Life Insurance

Universal life insurance, commonly called UL or current assumption UL, was the first variation of whole life insurance, was introduced in the late 1970s, and became the first life insurance policy to offer truly flexible premiums. These policies were unique because they offered significant flexibility in premium payments and shifted some of the investment fluctuations to the policyowner because the premium is based on interest rates in excess of they guaranteed interested, but do not give the policyowner the option to direct the investment portfolio.

Usually the only time a minimum premium is rigidly required is in the first policy year. After the first policy year it is entirely up to the policyowner to determine how premium to pay and whether or not to pay premiums. However, the total premiums paid, no matter the timing, must be sufficient to cover the costs of maintaining the policy.

The flexibility of UL policies extend to prefunding the premium payments, choosing when to pay the premium, increasing or decreasing the death benefit, choosing a level or increasing death benefit, and the ability to make partial withdrawals from the policy without incurring indebtedness.

Today there are several different types of universal life products on the market.

No-Lapse Guarantee Variable Universal Life

The latest variable universal life product types now incorporate a no-lapse guarantee feature. Like the no-lapse guarantee universal life policy, the no-lapse guarantee variable universal life policy can offer the same no-lapse assurance as long as the specified premium is paid and paid on time to insure a positive balance in the no-lapse guarantee account. The no-lapse guarantee variable universal life policy still offers the possibility of strong upside cash value growth with the comfort of a strong guarantee against lapse due to poor, long-term, subaccount performance.

Indexed Universal Life

The most recent version of universal life is the indexed universal life commonly called IUL. An IUL combines all of the same flexibilities of the universal life policy with the ability to earn interest based on the upward movement of one or more stock market indices. Indexed universal life differs from variable universal life in that it is not considered a security.

The major difference between universal life and indexed universal life is the way the interest is credited. An indexed universal life policy earns interest based in part on the movement of one or more stock indices, excluding dividends. The indexed universal life policy differs from the variable universal life policy in that most indexed universal life policies protect against downside performance of the stock market indices by guaranteeing a minimal annual rate of return which is credited to the policy’s cash value based on the indexed crediting method selected. In return for the guarantee of little or no market downside risk, an indexed universal life policy caps the upside performance by various methods.

No-Lapse Guaranteed Indexed Universal Life

This latest variation to the indexed universal life policy adds a no-lapse guarantee feature for an extra charge. Similar to that of the variable universal life, this no-lapse guarantee feature guarantees that the death benefit will remain in force if the specified premiums are paid in full and on time protecting the policyowner against poor, long-term market indices performance while still offering the policyowner the probability of upside performance over the long term.