Life Insurance Definitions
A few definition are in order to better grasp what may be new language to some.
Policy: a legal contract between you and the insurer. It defines the details of the life insurance coverage, names the parties involved, and all the terms, fees, costs, etc.
Owner: the owner of the policy is the one who is entering into the contract with the carrier for the insurance coverage.
Insured: the person whose life the policy is on. The insured is often, but not always, the owner.
Insurer: the insurer is the life insurance company who is offering the policy. The insurer is also known as the carrier, provider, or company.
Beneficiary: the policy owner names a beneficiary of the death benefit. You can name multiple beneficiaries, contingent beneficiaries, and even tertiary beneficiaries. Upon the insured’s death, the beneficiary would receive the life insurance proceeds income tax free.
Death benefit: the death benefit refers to the lump sum payout form the insurer to the beneficiary when the insured dies. There are other option apart form a lump sum, including annual payments, monthly payments, or a lump sum and monthly payments. A death benefit can remain level, increase along with the cash value, or remain level with return of premium, minus withdrawals.
OK, now that we have some definitions to help guide us, let’s take a look at the different policy types available.
Two Main Types of Life Insurance Policies
The two main types of life insurance policies are term life vs permanent life insurance. Within the two categories are a number of other products. Let’s start with the most popular policy, term life.
Term life insurance
Click to view our sample term life insurance rates by age chart to see how affordable term life can be.
What is term life insurance?
Term Life Definition: Term life provides pure death benefit protection for a specific period of time (typically 10, 15, 20 or 30 years). The specific period of time is the “term” of the policy. Once the term ends the life insurance policy will renew on an annual basis. Most term life insurance policies will allow the owner of the policy to renew until age 95.
But beware, most life insurance policies renew at an increased premium. Many increase as much as 300%, but there are some life insurance companies whose term product only increases a small amount, while some companies keep the premium the same but decrease the face amount.
There are two types of term policies: level term vs decreasing term life insurance.With a decreasing term insurance the death benefit goes down over time, even though your policy premiums stay the same.
Alternatively, level term life insurance offers fixed premiums and a fixed death benefit for the term of the coverage (the term refers to how long the coverage lasts).
Finally, there is also level term life that offers a fixed death benefit, but the premium goes up every five years. The main takeaway here is read your policy.
Ideally, you want to lock into the maximum years you need instead of relying on the renewal option. For those term policy holders that decide down the road they want to keep their life insurance, it is best to exercise the polcy’s conversion option.
Most term life insurance policies include a conversion option rider allowing the owner to convert to a permanent policy with no proof of insurability, i.e. no health screening. The conversion option will change a term policy into a whole life or universal life policy. The premium will increase but the rate class is based on the rate class you originally qualified for the term policy at and not based on your current health status.
This is a huge benefit for someone who has a term policy that comes down with an illness and cannot get a new policy or additional life insurance. Simply convert the term policy to a universal life or whole life policy and keep the insurance for the remainder of your life.
Typical term lengths available: 10, 15 20 and 30 year. However, some companies offer annual renewable term (ART), i.e. 1 year. There is also the option for 5 year and 25 year terms, but fewer companies provide those option. There is also a company that offers years 16, 17, 18, etc…all the way to 30, so you can tailor the policy down to the specific year.
Many term policies include a terminal illness rider or accelerated death benefit which allows a portion of the coverage to be taken out early for the insured’s use due to a diagnosis of being terminally ill.
Return of Premium Term Life Insurance is also available with up term lengths of 20, 30 and even 35 year terms. Once the policy ends, and assuming you don’t die, the premiums are returned to you. Return of Premium (ROP) life insurance is a rider added to term life insurance. It works by returning all premiums paid by the policy owner over the life of the term.
For example, a 30 year term life insurance policy with a return of premium rider for a healthy 40 year old male would run around $135 a month. After 30 years, the total premiums paid would amount to $48,600. Upon the end of the term, the insurer would pay out the full amount of premiums paid. This is a great option for those who desire to make their life insurance a forced savings account, with the payout upon the end of the policy or when the insured dies.
Term life insurance is the most well known type of life insurance policy and the most affordable. Most financial planners, such as Dave Ramsey and Suze Orman, will recommend you buy term life insurance instead of whole life insurance and invest the difference. However, this is general and not specific advice as each client has his or her own needs and circumstances.
What product is best for you will depend on a myriad of things, including if you are a business owner (such as key man life insurance, or for funding a buy-sell agreement with life insurance), planning for your estate, or simply looking to cover your income if you were to die prematurely.
The team at TermLife2Go would be happy to go over your specific needs and help you make the right decision for you based on your unique circumstances. We work with dozens of top rated companies and will be able to align the right company to your specific health and lifestyle.
