Life Insurance

Term insurance is the most basic, and generally least expensive, form of life insurance for people under age 50. A term policy is written for a specific period of time, typically 1 to 10 years, and may be renewable at the end of each term. Also, the premiums increase at the end of each term and can become prohibitively expensive for older individuals. . This is a type of Life Insurance that provides protection only for a specific period of time. Normally sold in 5,10,20, or 30 year periods. This is the most affordable for a young person but, can be quite expensive when one wants to renew at the end of the term.

Declining Balance Term insurance, a variation on this theme, is often used as mortgage insurance since it can be written to match the amortization of your mortgage principal. While the premium stays constant over the term, the face value steadily declines. Once the mortgage is paid off, the insurance is no longer needed and the policy expires. Unlike many other policies, term insurance has no cash value.

Whole Life combines permanent protection with a savings component. As long as you continue to pay the premiums, you are able to lock in coverage at a level premium rate. Part of that premium accrues as cash value. A traditional type of life policy which provides coverage for the “whole life” of the insured, rather than for a specific term period. The proceeds are paid at the insured’s death or at the age specified in the policy, usually age 100 or more, when the insured survives that long.

Universal Life is similar to whole life with the added benefit of potentially higher earnings on the savings component. Universal life policies are also highly flexible in regard to premiums and face value. A combination flexible premium, adjustable life insurance policy.

Drawbacks to this type of insurance include higher fees and interest rate sensitivity. Universal policies include up-front fees as well as ongoing administrative fees totaling as high as 5% to 7% of your premiums. You may also find your premiums increasing when interest rates decline.

Variable Life generally offers fixed premiums and control over your policy's cash value. Your cash value is invested in your choice of stock, bond, or money market funding options. Fees for these policies may be higher than for universal life .

Universal Variable Life insurance is the most aggressive type of policy. Like variable life, you control your investment in mutual funds.

Key Terms and Definitions

* Face Value -- The original death benefit amount.
* Convertibility -- Option to convert from one type of policy (term) to another (whole life), usually without a physical examination.
* Cash Value -- The savings portion of a policy that can be borrowed against or cashed in.
* Premiums -- Monthly, quarterly, or yearly payments required to maintain coverage.
* Beneficiary -- The individual(s) or entity (e.g., trust) that is designated as benefit recipient.
* Paid Up -- A policy requiring no further premium payments due to prepayment or earnings.