Life insurance is a contract known as a policy between an insurer and a policy owner. There are two common types of life insurance – term and cash value. If you own the policy, you are the policyholder in both cases. The rights of ownership allow you to:
- Change the beneficiary or add other beneficiaries
- Assign, or transfer, ownership to someone else
- Borrow from the policy’s account value, if it has one
Types of life insurance
All life insurance is alike in several ways. First, you pay premiums to a life insurance company in exchange for its promise to pay a certain amount of money to the beneficiary you designate when you buy the insurance. This money is called the death benefit.
The contract between you and the insurer spells out the terms of the coverage. For example, your policy may last for a specific time, or period and may be renewable. Or you can buy a cash value policy, also known as permanent insurance. You must pay your premiums on time with either term or cash-value insurance to keep the policy in force. If you fail to pay, the policy lapses, and no death benefit will be paid if you die.
Insurance online
An insurance company’s website can be a valuable resource, especially if you want to learn more about the various types of life insurance the company offers.
There may be a calculator to help you estimate the coverage you need. And if you purchase a policy, you’ll probably be able to manage your account, make payments, or report a claim online.
Term insurance
Term insurance is the more straightforward and, at least initially, less expensive coverage. Your policy covers you for a specific period in exchange for your premiums. Common terms could be as long as 20 or 30 years. If you die during that time, and your policy is in force, money is paid to your beneficiaries. However, if you are alive when the term ends and don’t renew, you are no longer insured.
Term insurance policies may be renewable or convertible. If the policy is renewable, you may extend it for an additional term. However, many policies are not renewable after reaching a specific age, such as 70 or 75. At each renewal, the premium increases.
In the case of convertible policies, you can turn your term policy into a permanent policy with the same death benefit. Generally, you can do it without demonstrating that you are in good health. However, the premiums for a convertible plan are usually higher than for a regular term.
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Cash value insurance
Cash value insurance combines a death benefit with a cash value account funded with part of each premium you pay. Earnings on the account’s assets are tax-deferred. If you die while the policy is in force, your beneficiary receives the death benefit, including the cash value balance.
It would be best if you remembered that if you end your policy before you die, the insurer will subtract any outstanding loans you’ve taken against your cash-value account and send you the remainder, called the cash surrender value. No death benefit will be paid.
If the policy has been in force for several years, the amount you receive may be more significant than your paid premiums. Earnings on the account’s assets are tax-deferred.
Comparing alternatives
If you’re not certain whether term or permanent insurance is right for you, it may help to think about how you would answer these questions:
- Is a cash value account an effective way to save for your goals or might investments be better choices?
- What’s the comparative cost of purchasing the amount of coverage you need?
- Do you anticipate that your insurance needs will change significantly in the foreseeable future?
- Is there any reason to think you may be less insurable in the future than you are now?
Types of cash value insurance
There are two basic types of cash value insurance:
- Sometimes called straight life, the whole life insurance is the most traditional. The premiums stay the same for the length of the policy. Whole life or permanent insurance remains in effect until you die – even if you live to 100! You accumulate a cash reserve, but you have no say over how the money is invested.
- Universal life insurance offers some flexibility. For example, you can vary the premium amount by applying a portion of the accumulated savings to cover the cost. You can also increase or decrease the amount of the death benefit while the policy is in force. But there’s a fundamental difference compared to whole life: the premiums are flexible.
Term insurance vs cash value insurance
| Term insurance | Cash value insurance |
|---|---|
| As long as you pay the premium, you’re covered | As long as you pay the premium, you’re covered |
| If you die, your beneficiaries receive the death benefit | If you die, your beneficiaries receive the death benefit. If you stop paying |
| If you stop paying the premium, the policy ends and you get nothing back | If you stop paying the premium, you get the cash surrender value |
Life Insurance Types And Their Difference Explained by Inna Rosputnia
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