Comparison of the main types of life insurance
| term life insurance | permanent life insurance | ||
|---|---|---|---|
| ordinary life insurance | Universal life insurance | ||
| insurance premiums | Initially low, but can increase each time you renew the policy. Premiums are based on your age at the time you purchase or renew your policy. | Initially higher than term life insurance, but usually does not increase. Insurance premiums are based on your age at the time you purchase the policy. | Flexible. Insurance premiums are based on your age at the time you purchase the policy. Most policies allow you to change your premium payments, but this will affect your death benefit, cash value, or both. |
| How long does the policy last? | The period of your choice, is generally one year, five to 30 years, or more. | All your life, if you keep the policy. | Depends. The policy remains in force until the maturity date, generally upon reaching ages 95 or 100 as long as you have cash value. |
| What the policy pays | Death benefits only. | Death benefits, plus possible cash value that you can withdraw, invest, or use to borrow. | Death benefits, plus possible cash value that you can withdraw, invest, or use to borrow. |
| Advantages | Good option if you want coverage for a specific period, such as when you are starting a family. You can convert it to a permanent life policy or renew it without having to go through a medical exam. | Insurance premiums, death benefit, and cash value are guaranteed. | Flexible. You can change the death benefit and insurance premiums. |
| Disadvantages | Insurance premiums will increase each time you renew the policy. It does not allow you to generate savings. | It can be expensive to cover a short-term need. Usually has little or no cash value for the first few years. It is not flexible enough to make changes when necessary. | It can be expensive to cover a short-term need. Payment is not guaranteed. Low-interest rates can affect the cash value, which can increase insurance premium payments. |
Other types of life insurance
These types of life insurance provide only specific coverages:
- Credit life insurance pays the balance of a loan if you die before paying off the loan. Banks and other lenders may require you to purchase a credit life insurance policy as a condition of a loan.
If you already have a life insurance policy, you may not need credit life insurance. Instead, you can assign part of the death benefits to the lender to pay off the loan balance.
Prepaid funeral insurance pays for funeral expenses. One advantage of this insurance is that it locks in funeral costs at affordable prices. Funeral insurance can be expensive compared to other types of life insurance. The amount you pay in insurance premiums often exceeds what the policy pays when you die. Also, many policies will not pay the full amount of funeral expenses if you die before paying the required amount. A regular life insurance policy or savings program might be a better option to pay for funeral costs.The Death Benefit Under Universal Life Option B
Modification of your policy
You can usually add features or other coverages to your policy to better suit your needs. This is done by purchasing riders for your policy. Some of the more common riders are:
- Additional term life insurance adds term life coverage to a permanent life policy. For example, if you need $500,000 of total coverage, you could buy a $100,000 permanent life policy with an additional $400,000 term life insurance rider. As you earn more income, you can convert part or all of the rider to the universal life policy or you can buy another regular life insurance policy.
- Guaranteed insurance allows you to purchase additional coverage, regardless of your age or health condition. The company may still use these factors to determine the price of your insurance premium. Generally, you must purchase the additional coverage before a certain date or life event, such as retirement or your 50th birthday.
- Accidental death insurance provides an additional payment if you die as a result of an accident. For example, if you have a policy with a $500,000 death benefit and a $500,000 accidental death rider, your beneficiary would receive $1 million if you die in an accident. There are certain restrictions.
- The disability insurance premium waiver covers the insurance premium if you qualify as disabled under the policy definitions. This rider is generally only available to people under the age of 60.
- The accelerated death benefit prepays part or all of your death benefits while you are still living. You must have a terminal illness, a specified illness, or an illness that requires long-term care. People often buy this rider to help pay for long-term care expenses in case they need it later.
- The spousal amendment clause provides term insurance coverage for your spouse. Basically, this rider combines two policies into one.
- The Children’s Amendment Rider provides term insurance for your children. Most companies require that the child be at least 14 days old. Coverage generally lasts until the child turns 21 or 25.
group life insurance
Some employers and other groups offer life insurance as an added benefit. Those who offer it must make it available to all their employees and members, regardless of age or state of health.
Most group life insurance is term life insurance, but some groups also offer permanent life insurance policies. The amount of coverage is often limited. A basic group policy through your job usually has a death benefit equal to one or two times your annual salary. Other group policies limit the death benefit to a fixed amount, such as $100,000 for a term life insurance policy and $50,000 for permanent life insurance.
You generally don’t have to answer health questions or have a medical exam, unless you want more coverage than the basic group policy provides.
If you get life insurance through your employer, the coverage usually ends when you leave your job.