Life Insurance Plans and Options: The Basics
Using life insurance to protect against a mortgage is a very basic use of life insurance. There are numerous options for which plan to select. Listed below are the basics of life insurance and how the benefits of these choices can help provide protection.
There are two types of life insurance plans: term (temporary) or permanent plans. Life insurers offer various forms of term plans and traditional life policies as well as combinations of the two types.
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. If death occurs 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.
Types of Term Insurance:
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 can be increased.
Convertible term policies will permit you to exchange the policy for a permanent plan such as whole life, universal life or variable life. Exercising this option is offered during the conversion period. The premium rate you pay on conversion is usually based on your current attained age.
Level or Decreasing Term.
With a level term policy the face amount of the policy remains the same for the entire period. Decreasing term policies will allow the face value (death benefit) to reduce or decrease over the term period. Often such policies are sold as mortgage protection with the amount of insurance decreasing as the balance of the mortgage decreases. The suggestion is the benefit from the mortgage protection policy would match up with decreasing amount of the remaining mortgage.
Permanent Insurance (Whole Life).
Term insurance is designed to provide protection for a specified time period; permanent insurance is designed to provide coverage for an 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.
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 cash value of the policy can be accessed while the policyholder is alive; these benefits are known as "living benefits."
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.
Interest Sensitive Whole Life.
While insurers guarantee stated benefits on traditional contracts far into the future based on long-term and overall company experience, they allocate investment earnings differently on interest sensitive whole life in order to better reflect current fluctuations in interest rates. The advantage is that improvements in interest rates will be reflected more quickly in interest sensitive insurance than in traditional; the disadvantage, of course, is that decreases in interest rates will also be felt more quickly in interest sensitive whole life.
Other Coverage and Options: Variations
Credit Life Insurance.
This policy is usually sold on a group basis to a creditor, such as a bank, finance company or a company selling high priced items on the installment plan. The policy generally pays the outstanding balance of the debt at the time of the borrower's death, subject to policy maximums. Debts covered in this way include: personal loans, loans to cover the purchase of appliances, motor vehicles, mobile homes, farm equipment, educational loans, bank credit and revolving check loans, mortgages loans, etc.
Monthly Debit Ordinary Insurance.
Debit insurance is insurance with premiums payable monthly which are meant to be collected by the agent at your home. In most cases, however, home collections are not made and premiums are mailed by you to the agent or to the company.
Modified Life Plan.
A modified life plan is similar to whole life except that you pay a lower premium for the first few years and a higher than regular whole life premium in later years. This class of policy is almost never offered by insurance companies any longer but many are still in force.
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. This policy is generally no longer offered but many are still in force.
Joint Life and Survivor Insurance.
Joint Life and Survivor Insurance provide coverage for two or more persons with the death benefit payable at the death of the last of the insured. Premiums are significantly lower under joint life and survivor insurance than for policies that insure only one person, since the probability of having to pay a death claim is lower.
Senior Life Plans.
Senior life insurance, sometimes referred to as graded death benefit plans, provides eligible older applicants with minimal whole life coverage without a medical examination. Since such policies are issued with little or no underwriting they will provide only for a return of premium or minimum graded benefits if death occurs during a specified period which is generally the first two or three policy years. The permissible issue ages for this type of coverage range can vary but the general range is age 60 to age 80. There can be a maximum of available protection such as $10,000.
Pre-need Insurance or burial insurance.
This is for a small face amount, typically purchased to pay the burial expenses of the insured.