Following is an excerpt from TheStreet.com Ratings’ Consumer Guide to Term Life Insurance.
TheStreet.com rates the financial strength of 900 life insurers nationwide to help consumers find sound companies to do business with. TheStreet.com Ratings has been recognized as the most conservative grader of life insurance financial strength by a leading consumer publication and was singled out as the only ratings agency that doesn’t accept payment from any of the companies it rates.
American Life Insurance Company, a unit of AIG (Stock Quote: AIG), is the largest life insurer in the U.S., with nearly twice as much premium volume as the next largest insurer, Northwestern Mutual. There are many companies in excellent financial shape that you should consider when you’re shopping for life insurance. Go to TheStreet.com to look up your specific company.
Life insurance comes in many flavors, each designed to suit a specific need. For instance, there are policies that will pay off the balance on your mortgage. There are policies that will provide your family with a specified income stream for a fixed number of years after your death. There are policies where the benefit goes up in value as you get older. And there are even policies where the benefit goes down in value as you get older.
When you boil it all down, though, there are really only two fundamental types of life insurance policies: permanent life and term life.
As the name would suggest, permanent life is a lifetime insurance policy. You might also think of it as life insurance with a savings account built in. With permanent life, a portion of the premiums you pay to the insurance company go toward establishing a “cash value” which can be withdrawn if you cancel the policy or may potentially be used to pay for future premiums on the policy. And unless you exhaust your cash value, your beneficiaries are guaranteed to receive the death benefit when you pass.
So in a way, a permanent life policy is like an investment with a life insurance component. It is particularly useful for individuals who are concerned about their ability to pay premiums in later years or for those lacking the discipline to establish a separate savings plan.
Term life, on the other hand, provides insurance coverage for only a specified period of time. The death benefit is only paid if you die during that specified term and have paid the required premiums. At the end of the term, however, the policy expires and you walk away with nothing to show. There is no cash value built up and your insurance coverage ceases to exist unless you purchase another policy.
In other words, term life insurance provides temporary coverage. If you live past the end of the term, you will have made years of premium payments but receive no money in return from the insurer. Of course, if you were to die at the beginning of the term, you would have paid very little in the way of premiums and yet the insurance company would have to pay your beneficiaries the full policy benefit.
At first blush, term life insurance may not sound as appealing as permanent life. That is, until you get to the cost. The premiums for a term life policy can be considerably less expensive than those for a permanent life policy. That’s because with term life, you’re not contributing anything extra to build up a cash value. Instead, you’re only paying for the insurance coverage plus the insurer’s administrative expenses.
Thus term life makes the most sense for people who only need life insurance for a limited amount of time, such as until the children are grown and earning their own living, until the mortgage is paid off, or until the family can afford to carry on without your financial contribution.
If you’re still intrigued by permanent life insurance, many financial advisors suggest that disciplined savers are better off purchasing a term policy and investing the extra premium dollars that you would have spent on a permanent policy. This methodology is essentially the same thing as permanent life—i.e. insurance with a savings component—except that the savings component is not tied to the policy, giving you much more freedom in how you invest and use the funds. Assuming you make prudent investment choices, you could then use the amount invested, plus any added investment earnings, to pay future premiums on a term policy.
Term Life Policy Features
If you make the decision that term life is right for you, you must consider any added policy features that you’re willing to pay for. Options available typically include:
A renewable term life policy will allow you to add another term onto the policy when the current term expires, thus extending the term of coverage. This renewal provision usually requires that you extend the policy for the same term and the same face amount as the original policy. The premiums during the second term will be higher than the original policy because you are older, but you usually won’t be required to submit any new evidence of insurability (i.e. no medical exams or health history questionnaires).
A convertible term life policy will allow you to convert the policy from a term policy to a permanent policy at some point in the future without requiring new evidence of insurability. This feature can be appealing if you would really prefer a permanent life policy, with its savings component, but can’t currently afford the higher premiums.
Waiver of Premium Rider
A rider is an addendum to the policy that can either expand or limit the policy’s benefits, with a corresponding increase or decrease in premium. A waiver of premium rider will allow you to skip your premium payments if you become disabled, thus enabling you to keep the policy in force even when you can’t work and make money to pay the premiums.
A spouse rider will provide insurance coverage for your spouse in addition to yourself. This may be appealing if you need coverage for both yourself and your spouse since it will typically cost less than purchasing two separate policies.
Similar to the spouse rider, a children’s rider will provide insurance coverage for your children in addition to yourself. In addition to the added coverage being cheaper, this rider typically covers all of your children, no matter how many you have, for one premium amount. Additionally, many children’s riders will allow the child to convert the policy to his or her own life insurance policy at a specified age, without requiring evidence of insurability.
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