Types Of Life Insurance Policies
For the most part, there are two types of life insurance plans - either term or permanent plans or some combination of the two. Life insurers offer various forms of term plans and traditional life policies as well as "interest sensitive" products which have become more prevalent since the 1980's . In New York State, the Department of Financial Services must approve any life insurance policy before a company can issue it to consumers and New York Insurance Law provides for standard provisions that must be included in every policy.
Term Insurance - Like LEASING a Car
Term insurance provides protection for a specified period of time. This period could be as short as one year or provide coverage for a specific number of years such as 5, 10, 20 years or to a specified age such as 80 or in some cases up to the oldest age in the life insurance mortality tables. Policies are sold with various premium guarantees. The longer the guarantee, the higher the initial premium. If you die during the term period, the company will pay the face amount of the policy to your beneficiary. If you live beyond the term period you had selected, no benefit is payable. As a rule, term policies offer a death benefit with no savings element or cash value.
Premiums are locked in for the specified period of time under the policy terms. The premiums you pay for term insurance are lower at the earlier ages as compared with the premiums you pay for permanent insurance, but term rates rise as you grow older. Term plans may be "convertible" to a permanent plan of insurance. The coverage can be "level" providing the same benefit until the policy expires or you can have "decreasing" coverage during the term period with the premiums remaining the same. If you do not pay the premium for your term insurance policy, it will generally lapse without cash value, as compared to a permanent type of policy that has a cash value component. Currently term insurance rates are very competitive and among the lowest historically experienced.
It should be noted that it is a widely held belief that term insurance is the least expensive pure life insurance coverage available. One needs to review the policy terms carefully to decide which term life options are suitable to meet your particular circumstances.
Types of Term Insurance
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Renewable Term. Renewable term plans give you the right to renew for another period when a term ends, regardless of the state of your health. With each new term the premium is increased. The right to renew the policy without evidence of insurability is an important advantage to you. Otherwise, the risk you take is that your health may deteriorate and you may be unable to obtain a policy at the same rates or even at all, leaving you and your beneficiaries without coverage.
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Convertible Term. Convertible term policies often permit you to exchange the policy for a permanent plan. You must exercise this option during the conversion period. The length of the conversion period will vary depending on the type of term policy purchased. If you convert within the prescribed period, you are not required to give any information about your health. The premium rate you pay on conversion is usually based on your "current attained age", which is your age on the conversion date. This type of policy often provides the maximum protection with the smallest amount of cash outlay.
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Level or Decreasing Term. Under a level term policy the face amount of the policy remains the same for the entire period. With decreasing term the face amount reduces over the period. The premium stays the same each year. Often such policies are sold as mortgage protection with the amount of insurance decreasing as the balance of the mortgage decreases. If the insured dies the proceeds of the policy can be used to pay off the mortgage.
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Adjustable Premium. Traditionally, insurers have not had the right to change premiums after the policy is sold. Since such policies may continue for many years, insurers must use conservative mortality, interest and expense rate estimates in the premium calculation. Adjustable premium insurance, however, allows insurers to offer insurance at lower "current" premiums based upon less conservative assumptions with the right to change these premiums in the future. The premium, however, can never be more than the maximum guaranteed premiums stated in the policy.
Permanent Insurance (Whole Life or Ordinary Life) - Like BUYING a car
While term insurance is designed to provide protection for a specified time period, permanent insurance is designed to provide coverage for your entire lifetime. To keep the premium rate level, the premium at the younger ages exceeds the actual cost of protection. This extra premium builds a reserve (cash value) which helps pay for the policy in later years as the cost of protection rises above the premium. Whole life policies stretch the cost of insurance over a longer period of time in order to level out the otherwise increasing cost of insurance. Under some policies, premiums are required to be paid for a set number of years. Under other policies, premiums are paid throughout the policyholder's lifetime. The insurance company invests the excess premium dollars
This type of policy, which is sometimes called cash value life insurance, generates a savings element. Cash values are critical to a permanent life insurance policy. The size of the cash value build-up differs from company to company. Sometimes, there is no correlation between the size of the cash value and the premiums paid. It is the cash value of the policy that can be accessed while the policyholder is alive.
The Commissioners 1980 Standard Ordinary Mortality Table (CSO) is the current table used in calculating minimum nonforfeiture values and policy reserves for ordinary life insurance policies. This table provides the minimum cash values that must be guaranteed in your policy.
The policy's essential elements consist of the premium payable each year, the death benefits payable to the beneficiary and the cash surrender value the policyholder would receive if the policy is surrendered prior to death. You may make a loan against the cash value of the policy at a specified rate of interest or a variable rate of interest but such outstanding loans, if not repaid, will reduce the death benefit.
In 1984 a new federal tax law required that for permanent insurance to enjoy preferred tax treatment it must provide coverage up to at least age 95, limit the amount of premium that may be paid in relation to the face amount of coverage and establish a minimum ratio between cash value and face amount of insurance. Many permanent policies will contain provisions, which specify these tax requirements.
There are two basic categories of permanent insurance, traditional and interest-sensitive, each with a number of variations. In addition, each category is generally available in either fixed-dollar or variable form.
Traditional Whole Life
Traditional whole life policies are based upon long-term estimates of expense, interest and mortality. The premiums, death benefits and cash values are stated in the policy.
There are six basic variations of traditional permanent insurance:
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Non-Participating Whole Life: A non-participating whole life policy will give you a level premium and face amount during your entire life. The advantages of such a policy are its fixed costs and generally low out-of-pocket premium payments. The disadvantage is that it pays no dividends.
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Participating Whole Life: A participating whole life policy pays dividends. The dividends represent the favorable experience of the company and result from excess investment earnings, favorable mortality and expense savings. Dividends can be paid in cash, used to reduce premiums, left to accumulate at interest or used to purchase paid-up additional insurance. Dividends are not guaranteed.
The Family Policy
The family policy is a combination plan that provides insurance protection under one contract to all members of your immediate family husband, wife and children. Usually family policies are sold in units (packages) of protection, such as $5,000 on the main wage earner, $1,500 on the spouse and $1,000 on each child.
Long Term Care and Long Term Care Insurance
The links below provide important information about long term care and the long term care insurance policies available in New York. This information is intended to help you make informed decisions about the need for financial protection and, should you choose to obtain long term care insurance, to help you choose a policy that will meet your individual needs.
Continuing Care Retirement Communities
About Long Term Care
Long Term Care Insurance