August 19, 2019
In our previous installment, we discussed the two main categories of life insurance: permanent life insurance and term life insurance, but that really just scratches the surface. There are many variations of both of the main types of life insurance policies, in this article we will break down some of the more common variations.
Term Life Insurance Variants
Guaranteed Level Term – This is traditionally known as a basic term policy where the premium is guaranteed to remain level for the initial term period, but after which time the premiums increase significantly on an annual basis.
Decreasing Term – Some Term policies have a death benefit that goes down over time. These policies are often set up to maintain a level premium, and would remain in-force until the death benefit reached zero.
Increasing Term – Some Term policies have a death benefit that increases over time, though these policies are less common than Decreasing Term policies. This feature is often added to an existing term policy through a cost of living rider.
Annual Renewable Term – This type of term policy only has a one-year term, and premiums increase each year. This type of product was designed for individuals with a short-term need for life insurance coverage.
Return of Premium Term – Some Term policies will refund a portion of the premiums paid into the policy at the end of a specified period of time. This is usually a rider that is added to an existing term policy.
Guaranteed Renewable Term – This type of term policy allows the policy holder to renew their term policy at the end of the original term period. These policies are typically more expensive than a regular term policy.
Permanent Life Insurance Variants
Whole Life – Whole Life policies have a level premium designed to accrue significant cash value over the course of the policy.
Variable Life – Variable Life policies do not have a minimum premium requirement beyond covering the monthly cost of insurance deduction, and any money paid into the policy beyond the minimum needed to cover the cost of insurance is placed into an investment account. Both the accumulated value within the policy as well as the death benefit can gain value from market movements but they can also lose value, and if the investment account goes below a certain amount additional premiums would need to be paid to maintain the policy.
Universal Life – Universal Life policies, similarly to Variable Life policies, do not have a minimum premium requirement and any money paid into the policy beyond covering the cost of insurance goes into an account tied to interest rates (typically with a guaranteed minimum interest rate specified in the policy). The most common type of Universal Life policy is known as Guaranteed Universal Life, and many insurance companies refer to it as a “flexible premium adjustable life insurance” policy. Not confusing at all!
Variable Universal Life – Variable Universal Life is a less common form of Universal Life, it is a hybridized policy that combines features of a Variable Life policy and a Universal Life policy. These types of policies are identical to UL/GUL/flexible premium adjustable life policies except that premiums paid into the policy in excess of the monthly cost of insurance deductions go into an investment account like a Variable Life policy.
Indexed Universal Life – Indexed Universal Life is another hybrid policy that has flexible premiums like a Universal Life policy, and the accrued value in the policy grows with an interest rate that is tied to a financial benchmark, like the S&P 500 Index. Unlike Variable Life and Variable Universal Life, the accrued value in the policy is not directly invested in the market so downside risk is minimized- if the index performs poorly the policy holder isn’t at risk of having to pay increased premiums, they would just receive zero interest for that period.
Survivorship – These types of policies insure more than one person, and can be set up to pay the death benefit after the first insured passes away (known as a “first to die” policy) or after the second insured passes away (known as a “survivorship” or “second to die” policy). These can be term or permanent policies, but we see Survivorship Universal Life policies most frequently.
As you can see, things can get pretty complicated when we ask our client what kind of life insurance policy they have! The biggest take-away here is, make sure to speak with a qualified and licensed life settlement provider or broker about your specific policy if you are considering lapsing any type of life insurance policy. There are many types of policies out there, and many people are under the false impression that a permanent policy is better than a term policy regarding a life settlement evaluation.