Term life insurance is typically paid out in one of three ways:
Level term coverage pays a death benefit that remains the same over the term. For example, a 20-year level term policy with a $100,000 death benefit will always pay $100,000, whether the insured dies in the fifth or 15th year. Depending on the policy, your premium for level term coverage will either remain the same or increase at a scheduled rate.Decreasing term coverage pays a death benefit that decreases over the term at a scheduled rate. For example, a 20-year decreasing term policy may begin with a $100,000 death benefit that decreases by $5,000 per year. If you die in the 11th year, the policy pays $50,000. Decreasing term coverage can be a good option for parents since a child's need for financial support typically decreases as the child gets older. A disadvantage of decreasing term coverage is that its convertibility value also decreases each year. Premiums typically remain about the same over the term. Mortgage life insurance is a version of this type of term life insurance.Increasing term coverage pays a death benefit that increases over the term at a scheduled rate, which is often linked to inflation. For example, a 20-year increasing term policy may begin with a $100,000 death benefit that increases by 5 percent of the face value per year. If you die in the 12th year, the policy would pay about $155,000. Premiums typically increase each year relative to the benefit increase.
Permanent Life Insurance
Permanent life policies usually have higher premiums because they provide coverage for your entire life and have other features and benefits. The main feature of most permanent life insurance is a cash value or savings component that grows over time and may be withdrawn, invested, or borrowed against during your lifetime. You can also use it to pay for future premiums to keep the policy during your retirement years.
Your initial premiums for permanent insurance are typically higher than for term life. There are two main reasons for this. First, the policy likely has a cash or cash value savings feature, and second, you're buying coverage for a longer period of time based on your current age. Generally, the premiums on a whole life policy never change. Universal life or variable life insurance premiums may change over time because the cost of insurance usually gets higher as you get older. Be sure you understand how your premiums might change over time.
If you buy a permanent policy when you're young and continue the policy into middle age, your premium will likely be lower than a term life policy bought when you're older. This is true even if the death benefit is similar.
A portion of each premium is placed into an account – known as the cash value – that grows over time. The amount may grow at a fixed interest rate for whole life or universal life policies. It may be tied to indexed interest rates in an indexed universal life policy. In a variable universal life policy, the cash values may increase or decrease if the sub accounts you select increase or decrease based on their underlying performance. These sub accounts are invested in stocks, bonds, or both and are subject to their own expenses.
A policy might allow you to withdraw from the cash value, use it as collateral for a loan, or use it to make future premium payments. Sometimes, if you withdraw the cash value, the company will cancel the policy. If that happens, the coverage will end and it might affect your taxes.
When you die, beneficiaries get the policy's death benefit. Depending on the policy, your beneficiary may get the death benefit and the cash value.
It might take a few years for a policy to build a cash value. The policies might also apply a surrender fee if you withdraw the money early. You might also be liable for income taxes on the money you withdraw from the cash value that exceeds the premiums you paid.
Consider your needs before deciding which type of life insurance is best for you. Buying a permanent life insurance policy and surrendering it early might not be a good financial decision.Premium Low initially but may increase with each renewal. Higher initially than term life. Normally doesn't increase because it's based on your age at the time the policy is issued. Flexible premium payments. Protects you for… A specified period. Your entire life if you keep the policy. A flexible time period, which may be your entire life. Policy Benefits Death benefits only. Death benefits, possibly a guaranteed cash value and a loan value. Death benefits (that may include a cash value), possibly a cash value, and a loan value. Advantages Ability to buy more coverage for a lower premium. Generally fixed premium amount. Cash value accumulation. You may have loan options for the cash value. More flexibility with your payments. Cash value is credited with current interest rates. Disadvantages Premium increases with age. No cash value. May be expensive to cover a short-term need. Usually little to no cash value in the first few years. May be expensive to cover a short-term need. The payment isn't guaranteed. Low interest rates can affect cash value, which may increase the premium payments. Available Options May be renewable or convertible to a permanent life insurance policy. May pay dividends. May provide a reduced paid-up policy. Partial cash surrenders permitted. Partial withdrawals are allowed. Increase and decreases to coverage amounts may be allowed