Two Main Types of Life Insurance

Life insurance policies may be categorized into two main types:  term insurance and permanent insurance.  These two general classifications vary mainly in the duration of coverage provided to the life insurance Policyholder.  Furthermore, each general classification has many variations.

Term Life Insurance

Term insurance is life insurance coverage for a specific number of years.  Different term-type life insurance policies have different duration schemes.  There are term insurance coverage schemes for 1, 5, 10, 15, and 30 years.  This doesn’t in any way encompass all the different duration schemes of term life insurance policies currently available.  It is also possible that the term life insurance can hinge not on the number of years but on a maximum age limit.  This means some policies would specify life insurance coverage until one is 65.

Term life insurance offers coverage only at the specified time period or duration.  Say a person has term insurance for 1 year.  If this life insurance policy owner dies anytime within the year covered, the insured’s beneficiary will get the amount specified in the life insurance policy.

Term insurance policies are perfect for people who have burdensome financial responsibilities that they want to protect their families against for a specific time period.  It is also for people who have no means to buy permanent or whole life insurance policies that generally have higher insurance premiums.  Term insurance is also for people who want to have immediate insurance but are still deciding on the type of permanent insurance to acquire.

A good example of a typical term insurance policyholder is a married couple that wants to make sure that their children will be able to finish college in case of the couple's unexpected death.  In this case, it is fairly easy to ascertain the number of years they need life insurance.  Another instance when term insurance would be perfect is when the married couple has unpaid loans and mortgages which they wouldn’t want to be passed on to their loved ones in the event of their deaths before they have been able to pay off these financial obligations.  In this case, the number of years they were given by their loan company to make full payment on their debts becomes the benchmark for determining the number of years bundled with the term life insurance they need.  There are also different variations in term life insurance attributes.  Here are some of the significant terms and term insurance variants you may encounter when taking out term life insurance coverage:

- Level term insurance -

Level term insurance refers to the type of life insurance coverage for which the amount of money payable to the insured beneficiary or beneficiaries upon the policyholder’s death anytime within the specified term coverage remains the same.  For instance, if a person takes out a 20-year level term insurance plan, the benefit amount his family is going to be paid if he dies on the 5th year of his coverage will be the same as the amount of money his family will receive if he dies on the 10th year of his coverage.

Level term insurance policies typically have fixed premiums that will not increase over time.  At the application stage, the individual applying for level term life insurance will be assessed by the insurance company for risk value factors such as age, health, and risk behavior (penchant for risky activities).  Based on the results of the assessment, the individual will be asked to pay a fixed amount of premiums monthly, quarterly, semiannually, or annually for the whole term of the life insurance coverage.  It is just fair to say that some insurance companies offering level term life insurance do not guarantee that insurance premiums will not rise through the term of the insurance coverage.

- Decreasing term insurance -

This is another type of term life insurance.  In this type of life insurance policy, the benefit amount payable to the policyholder’s beneficiaries steadily decreases over time.  Typically, the value of insurance drops by a fixed amount or percentage every year.  However, the premiums will remain fixed throughout the whole term.

- Renewable term insurance -

Some term insurance plans are renewable.  For obvious reasons, renewable term insurance plans usually apply to short-term (1 or 5 years) insurance plans rather than long-term ones (20 or 30 years).  Within the time period of insurance coverage, the policyholder will have to pay the premiums assessed from the start of the coverage.  In most short-duration renewable term insurance plan types, the premiums almost always remain fixed for the policy's coverage.

However, when the short-term coverage ends, the policyholder will have to renew the insurance plan.  This is if he or she desires to do so and if the insurance company permits the renewal.  Generally, insurance companies will not renew coverage if the policyholder will become too old to be considered as a good risk (say 80 years old) within the new term of coverage.  Age limits and restrictions vary by state and by insurance company.

At the time of renewal, it is highly likely that the insurance premiums will be greater than the premiums for the initial term under the same policy.  This is mainly because the policyholder has become older.  In insurance parlance, this generally translates to greater risks for insurance companies.

- Convertible term insurance -

Convertible term life insurance refers to those types of insurance policies that can be readily converted to permanent life insurance without the need to prove insurability on the part of the policyholder.  Upon conversion, however, the insurance policy holder will need to pay higher insurance premiums than what he had been paying under the term life insurance policy.

- Return of Premium Term Insurance -

The policy owners are not generally refunded their insurance premiums if they are covered by a term insurance scheme.  If the policyholder does not expire within the term specified in the life insurance policy, the insurance policy holder suffers the loss of the premiums already paid for protection he or she didn’t need.

Due to insistent demand, some insurance companies began offering term insurance plans that refunded the premiums paid by their policyholders if no death claim was made on a policy.  These types of insurance policies typically have higher premiums than regular term insurance plans.  Under such term insurance policies, the policyholder has to consistently make premium payments to his or her insurance policy for the full term of coverage specified.  Otherwise, he or she may forfeit the return of premium benefit.

The refundable amount also varies according to policy.  Some insurance policies with the return of premium feature will only refund some of the premiums paid.  On the other hand, some policies will return all the premiums.