Term insurance comes in two basic varieties—level term and decreasing term. These days, almost everyone buys level term insurance. The terms “level” and “decreasing” refer to the death benefit amount during the term of the policy. A level term policy pays the same benefit amount if death occurs at any point during the term. Show
Common types of level term
Renewable term policiesYearly renewable term, once popular, is no longer a top seller. The most popular type is now 20-year term. Most companies will not sell term insurance to an applicant for a term that ends past his or her 80th birthday. If a policy is “renewable,” that means it continues in force for an additional term or terms, up to a specified age, even if the health of the insured (or other factors) would cause him or her to be rejected if he or she applied for a new life insurance policy. Generally, the premium for the policy is based on the insured person’s age and health at the policy’s start, and the premium remains the same (level) for the length of the term. So, premiums for 5-year renewable term can be level for 5 years, then to a new rate reflecting the new age of the insured, and so on every five years. Some longer term policies will guarantee that the premium will not increase during the term; others don’t make that guarantee, enabling the insurance company to raise the rate during the policy’s term. Some term policies are convertible. This means that the policy’s owner has the right to change it into a permanent type of life insurance without additional evidence of insurability. “Return of premium”In most types of term insurance, including homeowners and auto insurance, if you haven’t had a claim under the policy by the time it expires, you get no refund of the premium. Your premium bought the protection that you had but didn’t need, and you’ve received fair value. Some term life insurance consumers have been unhappy at this outcome, so some insurers have created term life with a “return of premium” feature. The premiums for the insurance with this feature are often significantly higher than for policies without it, and they generally require that you keep the policy in force to its term or else you forfeit the return of premium benefit. Some policies will return the base premium but not the extra premium (for the return benefit), and others will return both.
Life insurance serves a variety of purposes, providing financial support to heirs and charitable organizations, indemnification against the loss of a key person of a business, funding of a business continuation plan, and as a benefit for executives and employees. Between term and cash value life insurance, there is a solution for a wide range of planning needs and objectives. Term Life InsuranceTerm life insurance pays a specified face amount (i.e., death benefit) if the insured dies during the policy term. The level term period is usually specified as a number of years, such as 10 or 20, or to a specified age, such as age 65. Premiums for most term contracts are fixed and guaranteed at issue. The majority of term contracts provide level death benefit coverage, although decreasing and increasing death benefit coverage is available as well. Term insurance has no cash value. Term policies with increasing premiums are called renewable. Renewable term insurance provides protection for a stated number of years and allows the policy owner to renew the policy for the successive periods without furnishing evidence of insurability. Yearly renewable term features premiums that increase annually. Other term policies have increasing premiums on a basis of three, five, or ten years. The right to renew is usually limited to a stated number of years or up to a specified age. Level term policies have premiums that remain the same each year. Level term policies are typically used to cover a certain number of years—10-year and 20-year term are most common. Some level term policies may have the ability to be renewed (i.e., become a yearly renewable term policy) after the specified number of years have passed. A variation of traditional level term insurance is return of premium term insurance, which returns all premiums if the insured survives to the end of the specified term period. Return of premium insurance is considerably more expensive than traditional term insurance. Re-entry term insurance allows the policy owner to pay a lower premium at the time of renewal if he or she meets certain insurability criteria. If the insured does not re-qualify, the rates remain at the guaranteed level, which are much higher than the re-entry rates. Many term insurance policies include a convertibility provision. Convertibility allows a policy owner to replace term coverage with permanent coverage within a specified period without evidence of insurability. Convertibility provisions allow the policy owner to obtain term insurance, or temporary coverage, and reserve the option to purchase permanent coverage for an amount equal to the term insurance face amount if needs change. Conversion typically must occur within a specified number of years no greater than the length of the term period. Permanent (Cash Value) Life InsuranceCash value life insurance, also referred to as permanent coverage, differs from term because the premiums paid are sufficient to both cover the death claims and expenses of the insurer and also build a cash value, or savings fund, within the contract. There are several variations on permanent life insurance. Whole Life InsuranceA whole life insurance policy’s face amount will be paid at the death of the insured, no matter when the death occurs, as long as the policy is in force. The policy owner must pay the scheduled premiums on time and meet the requirements of the policy to keep the policy in force. Premiums for most whole life insurance contracts remain level and are calculated to ensure that the policy will remain in force for the lifetime of the insured (i.e., age 121). The initial annual premiums can be several times higher than those of a term policy with a comparable face amount. These higher premiums fund the permanent coverage while establishing cash values within the policy. The cash value forms a reserve, enabling the insurance company to keep premiums level and still pay the policy’s full death benefit. Policy owners may borrow from cash values via policy loans pursuant to the terms and conditions of the contract. Optional riders and benefits, in addition to the policy death benefit, may be added to the policy. Whole life insurance policies can be issued as participating or non-participating. Participating policies are entitled to share, via non-guaranteed policy dividends, in any distribution of the insurer’s surplus funds that it decides to make to those policies. Non-participating policies are not entitled to dividends. Universal Life InsuranceUniversal life policies offer more flexibility and transparency than whole life policies. The policy owner has the ability to modify the amount and duration of premium payments, within certain limits, and still maintain coverage for life as long as the cash value reserve is positive. Universal life premiums, which are often made annually, are reduced by the current policy expenses, and the remainder is deposited into the cash value account of the policy. Each month, the cash value is credited with interest and the policy is debited by a cost of insurance charge and any other policy charges and fees drawn from the cash value. Interest credited to the account is determined by the insurer (in the form of a crediting rate) and may have a contractually guaranteed minimum rate. Death benefits in a universal life contract may be fixed at a specified level or may increase each year by an amount equal to either the accumulated cash value or the premiums paid. Similar to whole life contracts, loans may be taken out against the cash value and riders may be added. Indexed Universal Life InsuranceIndexed universal life is a universal life variation with the same operational characteristics and platform, but with an interest crediting rate determined by reference to an equity index, such as the S&P 500, without dividends. The index return is typically adjusted by a participation percentage rate, then subject to a maximum interest rate cap and minimum interest rate floor. Indexed universal life offers the potential for a higher yield than universal life, with indirect participation in the equity market, as well as a guaranteed minimum crediting rate (i.e., floor) that provides downside protection for the policy owner. Variable Universal Life InsuranceVariable universal life insurance policies are also based on the universal life platform, varying in their investment flexibility and risk/return opportunity. Variable universal life products permit the policy owner to allocate a portion of each premium payment into one or more “separate account” funds. Separate accounts, which are similar to mutual funds, are not subject to the restrictions of the carrier’s general account portfolio, reducing the policy owner’s exposure in the event of carrier insolvency. Variable universal life policies are monitored and subject to the rules established by the Securities and Exchange Commission, as the investment options are deemed to be securities. All variable universal life policies must be accompanied by a prospectus that provides detailed information on policy mechanics, expenses, and changes, and general information regarding the inherent risks associated with securities. Variable universal life is most appropriate for individuals willing to accept greater risk for greater reward, as the policy’s cash value is dependent on non-guaranteed market value changes. No-Lapse Guarantee Universal Life InsuranceNo-lapse guarantee life insurance policies are universal life policies with a guarantee that if a specified minimum premium is paid regularly, the policy will not lapse for a specified period, or for life, even if the cash value decreases to zero. No-lapse guarantee insurance is often characterized as having minimal or no cash value accumulation. It is best suited for individuals focused on ensuring the life insurance death benefit will be available at a guaranteed cost, and where cash value accumulation may be less important. Term and Cash Value Life Insurance Comparison This is not an offer to sell a security or insurance product. This information is provided for informational purposes only and should not be construed as legal or tax advice. You should discuss your circumstances with a financial professional before making any decisions. This material and the opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual. https://www.trcfinancial.com/disclosure Which type of term policy allows the policyowner to switch to a permanent insurance?Some term policies are convertible. This means that the policy's owner has the right to change it into a permanent type of life insurance without additional evidence of insurability.
When convertible term life insurance is converted to a permanent policy the insured must?With convertible insurance, the policyholder only needs to pay their insurance premiums on time to retain the option of converting the policy from term to permanent.
Can you convert term insurance to permanent insurance?A term-to-permanent life insurance conversion, or “term-to-perm” conversion, allows you to extend your life insurance coverage. You may have a 10-,15-, 20- or 30-year term life insurance contract now. Instead of letting it expire, you may be able to exchange it for a permanent policy without needing a new medical exam.
Is it a good idea to convert term life insurance to permanent?Converting a term life insurance policy to a permanent policy allows you to extend your coverage without going through the underwriting process. This can be a valuable option if your health changes for the worse.
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Which provision allows the policyowner to change a term Life policy to a permanent
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