What is Term Life Insurance?
Term life insurance policies cover you for a particular number of years, usually 10, 20, or 30 years. They provide coverage during the years you are likely to need it most. That is, during your 30s, 40s, and 50s when you may have young children to provide for.
Term insurance coverage is usually more affordable because it is only for a fixed duration. It is a smart choice if you are looking for a cheap insurance policy, but it has its limitations.
If you pass away before the term is up, your family receives a set amount of money. The face value, also known as the death benefit, gets paid as a monthly payment, an annuity, or a lump sum.
When you sign up for term life insurance, you must specify the coverage amount and policy length. The life insurer (e.g., Manulife, Sun Life, BMO, etc.) takes these details into account while calculating your premium rates. In the case of a level term insurance, however, the fees and death benefit amount stays the same throughout the term.
What Happens when this Expires?
As your policy approaches its expiration date, it is a good idea to revisit your life insurance coverage needs. If your family no longer needs the financial protection of insurance, you can simply let the policy expire.
But if you do need coverage, there are three options available:
- Extend your current term policy – More terms life insurance products/services are guaranteed renewable. That means you can renew your policy without getting another medical exam. When you sign a contract for a new life insurance policy, you are agreeing to pay the premium each month in order to keep the policy in force.
- Convert your term policy to a permanent life insurance policy – Does your term policy have conversion riders or other related riders? If so, you can convert it into a permanent insurance policy without having to go through the underwriting process again.
- Buy a different life insurance policy – If you are healthy and fit, you can apply for a new coverage policy. However, expect to pay a higher premium rate as the cost of insurance increases with age. In addition, whether you are approved by an underwriter for support/funds which depends on your risk and health conditions.
What is Whole Life Insurance?
Whole life insurance, or permanent life insurance, provides coverage for a lifetime, as long as you pay the premiums on time.
Besides promising a set payout, a whole life policy includes an investment feature. A small share of your each premium payment gets deposited into a saving component called “cash value”. This works similar to a savings account.
Your policy’s cash value grows with interest and earns a fixed return over time. This acts as a financial safety net to fall back on during uncertain times. You can pay your premiums with the permanent life insurance policy’s cash value, take out a policy loan (or loans) against it, or withdraw it — partially or fully — to ease a rough financial patch. You can even surrender the policy in later years to live off its value, which is a great opportunity. A missed premium payment can cause the coverage to lapse.
Generally, permanent life insurance costs more than term insurance policies due to its guaranteed payout and saving component built in. So, if you are looking to save money and sticking to the basics, term life insurance rates are much less costly. When considering whole insurance policies, the insurer will assess a policyholder’s ability to pay the premiums and take responsibility for budgeting.
There are many different policy types, including the following:
Limited Pay Whole Life Insurance
With limited pay whole life insurance, you must pay premiums for a specific duration or until you reach a certain age. Once you reach the target age, your premium payments stop. However, the insurance benefits last your lifetime, and cash value keeps growing. The cash values of a life insurance policy can be very helpful because they can be cashed out when desired.
Term-to-100 Life Insurance
This insurance product offers you the best of traditional permanent life insurance and term insurance — life long coverage and affordable premium rates.
Term-to-100 life insurance policies are in effect for life, but its premiums are less expensive than permanent life insurance, which is standard. That’s because, unlike the latter, it doesn’t have any cash surrender value. Both the premiums and the death benefits are level and unchanging, but your premium payments stop when you reach the age of 100 years.
Funeral Insurance
Funeral insurance, also known as burial insurance, is a type of whole life insurance. In the case of your burial or death, your family—and any heirs or dependents—will receive income replacement from permanent life insurance policies. A funeral insurance policy, on the other hand, is designed to cover only your final expenses and funeral costs.
These plans can be advantageous for those with health issues who do not have other life insurance options and require assistance with funeral expenses.
Participating vs. Non-Participating
A participating type of life insurance policy allows you to share in the profits of the life insurance company, or life insurers, through dividends and participate in the insurance company and its ownership. In contrast, a non-participating policy provides just coverage — nothing else, no dividends, or ownership rights.
The main differences between participating and non-participating insurance is that participating policies provide coverage as well as ownership rights, whilst non-participating policies just provide coverage. Since you receive a portion of the company’s profits as dividends in participating whole life insurance, you typically pay more for coverage.
What Is Universal Life Insurance?
Universal life insurance is whole life insurance with a twist. It provides lifetime coverage and builds cash value, but its premiums are flexible, death benefit adjustable, and cash value growth not guaranteed.
A universal life insurance policy has a minimum and maximum premium amount. It’s entirely up to you how much premium you want to pay, as long as it is with the prescribed range. This kind of flexibility can make it easier to maintain insurance, especially for people whose annual income isn’t fixed.
A cash value component is common in universal life insurance policies. The cash value growth in a universal insurance policy isn’t guaranteed. Instead, it depends on how much premiums you pay and how well the market is doing.
Your policy’s cash value earns interest that’s in line with the current market rate, meaning the rate (or rates) vary. While the insurer guarantees a minimum annual interest rate, if the market does better than expected, your cash value will grow faster. Similarly, if you pay more premiums, your cash value will be higher.
You can also adjust the death benefit of your universal life insurance coverage within the plan limits. Generally speaking, you can lower the death benefit any time but must go through the underwriting procedure again, which includes a medical test, to increase it.
What is Group Life Insurance?
Group life insurance is one of the main types of life insurance that insurance company employers offer to their workers as part of their employee benefit plan through work. Like any other insurance product, group life insurance has certain advantages and disadvantages.
Three key benefits of group life insurance are convenience, acceptance, and price. Sometimes enrolment to group life insurance is automatic; other times, it just requires filling up forms. Also, group life insurance doesn’t require a medical exam, which is particularly beneficial for workers who are older or have a severe health condition. Additionally, it is much cheaper than other whole life insurance products. Often the employer provides a certain amount of coverage — usually one to two times your salary — for free. If you take extra coverage, you’ll have to pay from your pocket.
Downsides of Group Life Insurance
As beneficial as group life insurance is, relying solely on it may not be a good idea because you can’t take it with you. If you switch jobs, you will lose coverage. Some insurers give policyholders the option to convert their group life insurance into individual life insurance if they leave, but the cost of insurance could shoot up dramatically. Also, a group life insurance product is a one-size-fits-all solution. You can’t customize it as per your needs.