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Life Insurance Glossary

The main types of life insurance on the market today fall into two categories, Permanent and Temporary (or Term) Life Insurance.

Permanent Life Insurance

If you need to have life insurance coverage until you die, or have investment objectives, permanent insurance proves to be the better choice rather than Term Life Insurance.

Whole Life or Ordinary Life

Much like annually renewable term and convertible term, whole life policies spread the cost of coverage over a longer period of time, leveling out the increasing cost of insurance. Whole life policies spread the expense over your whole life, not just a few years. Costs in excess of the mortality cost in the early years of the policies life, sometimes called "excess premium", are invested by the insurance company as part of their general investment portfolio. Whole life policies pay dividends to policyholders, although the payment of dividends in not guaranteed. Your selection of Company and their financial strength are very important in this instance as they will be managing the investment portfolio for you, for hopefully a long time to come. Another issue to be concerned with in a whole life policy is the rigid payments schedule which might become a problem should your other financial obligations increase or if you become unemployed.

Universal Life

Unlike whole life or term life, policies, Universal Life coverage offers great flexibility. After your initial payment, you can modify, up or down, the amount of your premium payment or when you make payments within pre set company guidelines. You can increase or decrease the policy death benefit as well (however death benefit increases typically require additional medical underwriting to prove that you are still in good health). Rather than pay dividends like whole life policies, Universal life policies have a current and guaranteed minimum interest rates that is credited to the policies cash value build up. These policies must be monitored to insure they are adequately funded as the interest rates being credited minus the charges being deducted (i.e. mortality and other expenses) may not be enough to keep the policy in force resulting in an increased premium to keep the policy from lapse. As with whole life, part of your premium dollars are being invested by the insurance company, so careful attention must be paid when selecting an insurance provider.

Variable Life

Unlike Whole Life, which pays a dividend or Universal Life, which credits an interest rate, Variable Life offers the policyholder the opportunity to share in the investments decisions as well as share in the investment return and risk of over or under investment performance. These options allow for death benefits and cash values that fluctuate with the performance of the underlying investments (Because of the investment element of these policies, you will receive a prospectus prior to applying for these policies). Cash values are not guaranteed, but you get to choose where your premium dollars go among the variety of investments in the portfolio. Thus, while there is no guaranteed cash value, you have control over your money and can invest it according to your own tolerance for risk.

Should your investment selections perform well, increased cash values and greater death benefits can be obtained. If they don't, lower cash values and death benefits are the consequence, although many policies guarantee a minimum death benefit.

Easy access to cash values are available by making loans against the policies however if you don't pay them back with interest, ultimate death benefits will be reduced by outstanding loan amounts.

Surrendering your policy for it's cash is also on option, but note that cashing in a permanent policy within a few years of purchase is an expensive way to get insurance protection for a short time. Unfavorable tax consequences may also result.

Be sure that the underlying funds a policy offers allow you to adequately manage risks, now and in the future, as your tolerance for risk may change over time

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Temporary (or Term) Life Insurance

Term Life insurance coverages provide pure death benefit protection for a specific period of time, (for example, you may buy a policy that is in effect for 5 years). In general, if you are looking for coverage for a specific amount of time, term life insurance should be strongly considered.

Non-Guaranteed Term Life Insurance

Non-Guaranteed term life insurance affords coverage for a short time (usually a year) and is referred to as "pure death-benefit protection". The issue to be concerned with buying term life is should your health deteriorate, you might be unable to get another policy issued once the term is up. Although premiums increase as you get older, sometimes dramatically, term life insurance is usually the coverage of choice for young people who can't afford the higher cost of permanent insurance, or for people whose specific need will disappear in time, such as a mortgage or children become self-sufficient.

Annually Renewable and Convertible Term

Annually renewable term insurance offers a longer term, usually for five, 10, or 20 years. When you buy these longer term policies, your premiums are spread out and the annual increases found in non-guaranteed term life are avoided.

Convertible term is like annually renewable term but it also allows conversion to a permanent policy in the future - when the typical term policy premiums become significantly higher or should your health deteriorate. Convertible term policies usually afford the best combination of the most coverage and the least amount of premium outlay required. Policies with this conversion privilege make an especially attractive option for young people who don't want to pay the higher cost of permanent insurance currently but need large amount of coverage and also want to preserve the right to convert to permanent coverage in the future.

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