Term Life Insurance
Term life insurance (also commonly known as term assurance) is a term used to describe all the various types of life insurance policies that provide coverage for a specified period of time and at a fixed premium rate. The beneficiary is compensated if the policy holder dies during the period in which he/she is insured. At the expiry of the period, the policy holder can choose to obtain further coverage (which usually comes with new terms and conditions) or can decide to do away with the coverage. The various types of term insurance policies include: level term life insurance, renewable term life insurance and convertible term insurance.
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Level term Life Insurance
Term Insurance is a pure death benefit policy and comes in two different varieties, i.e. Decreasing Term Insurance and Level Term Insurance. Level Term insurance policy is the most common type of term life insurance and is preferred by many clients. The policy is popular because it compensates the beneficiary with the same amount of benefits if death occurs at any point during the insured term. The only major disadvantage of level term policy is the relatively higher rates of premium and lack of flexibility which makes it rather costly.
Renewable Term Life Insurance
Renewable term life insurance is a temporary form of life insurance which comes with either level or increasing premiums, lasting anywhere from 1-30 years. The main benefit of renewable term insurance is the low cost of premiums and the affordable assets protection. Another unique advantage is that the insured can extend the duration of the contract after it expires without incurring any extra charges or without no further terms and conditions (Grannis 112).
The fact that changes in health and age can result in paying more premiums for the same amount of coverage is a major con of this type of insurance. There is also a set age limit beyond which one can no longer renew the term.
Convertible Term Insurance
Convertible term insurance allows one to convert the policy to permanent life insurance of equal value should the policy holder decide to change. Usually such conversion doesn’t require underwriting or medical examination. The main advantage of this type of policy is the flexibility and annual option to renew or convert to permanent policy, while the amount of coverage remains the same.
On the other hand, the higher annual premiums and astronomically high costs in case of change in health add to the cons of this type of insurance policy.
Permanent Life Insurance
Unlike Term Life Insurance which provides cover over a period of insured term, Permanent insurance provide coverage throughout the lifetime of the policy holder. For this type of policy, one is secured as long as the premium payments are made as required and as long as the coverage is not terminated by the insured. The various types of permanent insurance include whole life, universal life and variable universal life.
Whole life insurance
Whole life insurance (also referred to as straight life insurance) is a fixed premium insurance policy which covers the lifetime of the insured, as long as the premiums are paid. The key benefit of a simple straight life insurance policy is consistency. The insured pays a fixed premium from day one throughout the entire lifetime and the cash value portion remains intact, and earns interest at the same time.
The major problem with whole life insurance policy is the low interest earnings resulting from conservative investment decisions which are usually done without involving the policy holder.
Variable life insurance
Variable Life Insurance is a type of permanent life insurance that builds cash value by making investments which are similar to mutual funds. The beneficiary is compensated at any time of death as long as there is sufficient cash to cover the costs of the insurance. The key advantage of VUL is the absence of a fixed endowment age, which means that there is no limit on the amount of benefits paid. As the policy holder accumulates cash value the death benefit also increases continually, eventually resulting in higher value for the beneficiary.
However, unlike many other types of insurance, VUL is more expensive and has potentially higher costs and policy administrative expenses. VUL is also relatively complex and thus it can be sold inappropriately to a client (Stephanie 78).
Universal life insurance
Universal life insurance (UL) is a type of permanent insurance (in the US) similar to and derived from whole life insurance. UL offers flexible means of premium payment and adjustable ways of receiving benefits. What this simply means is that the insured can pay premiums as he/she desires as long as there are sufficient cash values to pay for the cost of insurance (Oviatt 45).
The insured also has options to choose how he/she wants the death benefits to be paid to the beneficiary. However, UL is more expensive than many other insurance policies in terms of costs of premium fees, allocation fees and the cost of insurance and has conservative interest rates (Bhatia 80).
Term Policy of choice
Renewable term insurance is the most appropriate policy of choice that suits my financial status, since it comes at relatively low cost of premiums. The flexibility to renew the policy with little or no cost makes it worthwhile. The policy also provides a near perfect temporary coverage for my family, considering my critical role as the bread winner of the family (Barry 67).
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Renewable term is worth the cost in light of my plans for family growth and the fact that I am not 100 percent certain how long the term should be. The policy also provides affordable and budget friendly asset protection for mortgages and other asset loans.
Permanent policy of choice
Whole life insurance is my permanent policy of choice because it provides consistent coverage for an indeterminate length of time. Whole life insurance also offers permanent insurance needs and packages that are quite irresistible. Some of the benefits of whole life insurance include supplemental retirement income. The policy also offers income for surviving spouse and also covers funeral expenses. These permanent insurance needs are, needless to say, very important considering my family responsibilities and plan for future family growth (Zack 91).
Whole life insurance also provides cash value accumulation which is not dependent on the rise or fall of the market and which can be used to obtain loans. Other benefits of whole life insurance which are consistent to my plan for future family growth are tax benefits and potential dividend payments for investment of accumulated cash value.
Life insurance is a good place to start as it provides a wide variety of policies that could provide financial security to one’s family and those who matter most. Term life insurance is suitable for individuals seeking secure income replacement. Permanent insurance on the other hand is suitable for estate planning needs and long-term investment strategies. Some life insurance policies not only provide death benefit, but also build cash value that can be used as asset security or for obtaining loans when needed. There are also multiple policies to match one’s financial state or budget needs. The choice of policy depends on the individual’s special needs, financial status, future plans and investment strategies.
Barry, James. The New Life Insurance Investment Advisor. Boston: Foundation Press Publishers, 2014. Print.
Bhatia, Sethi. The Fundamental elements of Banking and Insurance. New York: Lord& Bhatia Publishers, 2013. Print.
Grannis, Alexander. A Comprehensive Guide to Life Insurance. Chicago: University of Chicago Publishers, 2013. Print.
Oviatt, Simon. The Economic Place of Insurance and its Relation to Society. Cambridge: Simon& Oviatt Publishers, 2014. Print.
Stephanie, Nishwan. Importance of Equitable life Insurance. Washington DC: Nishwan Social and Economics Publishers, 2012. Print.
Zack, Hawkins. The History of Life Insurance in the United States. New York: Oxford University Publishers, 2014. Print.