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Term Life Insurance

Term life insurance is the variety of life insurance which most people envision and which best meets most buyer's needs. It provides coverage only for a limited number of years, and the policy owner pays an unchanging premium for the duration of the term of coverage. (The alternative to term life insurance is permanent life insurance, which encompasses whole life insurance and universal life insurance.)

A standard term life insurance policy guarantees fixed premiums. That means that the size of payments made to the life insurance company does not change over time. The policy owner makes payments, all of equal amount, at equal intervals of time (monthly, quarterly, semi-annually, or yearly, depending on the company and policy). The policy owner is free to discontinue payments at any time; if he/she does so, however, the policy will terminate (i.e. the life insurance company is no longer obliged to pay a death benefit).

A standard term life insurance policy guarantees a fixed death benefit. That means that the death benefit will be of a certain amount regardless of how long the policy has been in force. The insurance company will pay the same amount if the insured dies during the first day of coverage as if he/she dies during the 29th year of coverage.

Term life insurance policies provide temporary coverage. For example, a 20-year policy is intended to provide coverage for 20 years and no longer.

You might imagine that your life insurance is simply gone at the end of your term of coverage: if the insured is still alive, your beneficiary gets nothing. That's not a bad thing; after all, a healthy, living person is preferable to a cash payment. However, there are usually alternatives to letting your coverage simply cease.

Most term life insurance policies simply don't terminate after the "term of coverage." You can keep paying premiums and keep enjoying coverage. However, after the specified term of coverage, the rates you pay are no longer fixed at the level they were. Your contract will probably stipulate new rates much, much higher than you were originally paying. This alternative may be worth the higher rates, however, if your insured is ill and not far from death. Continuing your "temporary" life insurance is typically allowed only until the insured attains a certain, advanced age (often 90 years old).

Another option is conversion. Conversion means that your life insurance company will replace an existing term life insurance policy with a permanent life insurance policy of the same face amount death benefit). Life insurance companies tend to offer at least one, but it may not be a desirable one. For instance, your only option may be to convert to a permanent policy whose rates are guaranteed for only a decade. Moreover, you may not be able to exercise the conversion option at just any time. For instance, conversion may only be allowed during the first five years of your term life coverage.

A final option is renewal, but this option is comparatively rarer than the preceding options. Renewable life insurance can be replaced with a life insurance policy of the same type, face amount, and health class. Renewing life insurance spares you the hazard of being assigned to a more expensive health class. However, life insurance rates trend downward so long as life expectancy trends upward, so unless the health of your insured has deteriorated, you may find better life insurance rates by starting the application process anew.

Whole Life Insurance

Whole life insurance is the priciest of the three principal types of life insurance (term, whole, and universal), but it guarantees a death benefit, guarantees a cash value growth rate, and guarantees a fixed premium. Buyers are attracted to the guaranteed death benefit and the minimal risk of lapse. Unlike universal life insurance (the other variety of permanent life insurance) in order to prevent this policy lapsing, the policy owner has only to make regular payments of a fixed premium, just as though this were a simple term life insurance policy.

Universal life insurance

Universal life insurance is permanent life insurance which offers the policyholder the most flexibility but also requires the most vigilance in order to keep the policy on track. It is more expensive than term life insurance but less expensive than whole life insurance. With universal life insurance, there is no set schedule of payments and the growth of cash value is not fixed. In order to ensure that the policy remain in force, the policy holder must attend to the amount of cash value saved up and at all times maintain enough to meet the insurer's charges.