Term versus permanent life

The two main categories of life insurance are term and permanent life insurance.

Term life insurance policies are sold for a fixed number of years that match your needs. Term life policies are often sold for terms of 10 or 30 years.

You may decide that you and your spouse will have enough income from Social Security and retirement pensions when you retire in 10 years. As a result, you decide you only need a policy in case you die in the next 10 years. However, if you have a young family, 20 years may be more appropriate.

A life insurance company will underwrite your policy, using historical data on persons with similar risk characteristics to calculate a premium. Relevant risk characteristics include your health history, age, and gender. You complete a health condition questionnaire and a physical exam, in order to obtain a certificate of insurability. These are requirements to get approved by the insurance company.
The following calculator helps you to calculate how much life insurance you may need: insert our calculator.
Once you receive a quote for a term life policy, you make level premium payments for the term of the policy. If you die before the end of the term, your beneficiary receives a death benefit. With term life insurance, your policy lapses if you stop paying premiums.

When the policy term ends, you generally have the option to renew, but at a higher premium. A higher premium reflects a greater likelihood of your death during the renewal term. (You're older, after all.) Insurance companies say that your mortality risk is higher, and that will justify your having to pay the higher premiums.

Permanent life insurance is different from term life insurance. For one, permanent life insurance provides coverage until you, the policyholder, die. You may cancel, or surrender, a permanent life policy but will likely have to pay a surrender charge. Surrender charges are like paying a back-end load when you sell shares of a mutual fund, or choose to surrender, exchange, or transfer an annuity, while surrender charges are still in effect.
A second major distinction of permanent life insurance is that your policy can build up a cash value. Cash value is also called cash surrender value (CSV). This build up in cash value occurs because the insurance company invests a part of your permanent life premiums, in market sensitive vehicles, such as securities.
How these premiums are put to use, determines what type of permanent life insurance you have. The most common types are whole life, universal life, variable life insurance, and indexed universal life.
Associated with your life insurance choices, is the fact that some types of life insurance allow you to change your premiums or stop paying them for a while. These premiums are called flexible premiums. This situation occurs if the investments associated with variable or variable universal life policies, or if savings associated with indexed universal life policies, earn a higher-than-expected rate of return. This can generate higher account values that can be utilized to offset further premium payments. Likewise, if the premium being paid is the minimal acceptable amount required by the insurance company to keep the contract in-force, increased premium payments may be necessary to offset any substandard performance associated with the investments in variable life or variable universal life policies, to prevent those policies from lapsing.
For example, you may pay $1,000 in premiums over a 12-month period. If the premiums are invested and increase in value, the future premium necessary to keep your policy active may drop to, say, $900. As a result, your premiums accumulate a cash value of $100 after the first year.

Your cash value is the amount you are entitled to if you "surrender" or cancel your policy. With some types of permanent life insurance, you can use the cash value in your policy to adjust either your death benefit or premiums. Alternatively, if the cash value of your policy declines, your death benefit may also decline. Understand that your cash value is a personal asset. You should include this asset whenever you are asked to prepare a statement of your personal net worth. When you apply for a loan you will be asked to prepare a personal balance sheet, showing your assets and liabilities, it is here you should state the cash value of an insurance policy as a personal asset. The cash value of an insurance policy can serve as collateral for a loan.
Next, we'll take a closer look at how term life insurance works.