Life Insurance: Providing Security for Your Survivors

Which Type of Policy Should You Own?

Understanding the Language

Life insurance comes in many shapes and forms, but all are structured according to two basic types:

  • Term insurance
  • Cash value insurance (also known as permanent insurance)

Term Life Insurance

Term life insurance is a one-sided contract with an insurance company. If you die, the company is obligated to pay a death benefit to your beneficiary as long as you have paid the premium that is due for the term of the policy (the stated term may be a year or longer). Like all insurance policies, it is considered a one-sided contract because you are not obligated to continue paying premiums. At the end of the term (the period for which you are insured), you renew your insurance by paying the new, increased premium the company requires. The rates depend on the type of term policy. Your premium dollars are paying for the pure cost of insurance and some policy expenses. The policy will lapse if you don't pay the premium.

But why buy term insurance if you have nothing to show for it at the end of the year? At least with a cash-value policy, you'll accumulate money that you can use in the future. The reason term insurance is an attractive option is that many people need a lot of insurance at low cost.

Term life insurance can be purchased as an individual policy, as group insurance through a professional or fraternal organization, or as a participant in your employer's group plan.

Employer-Sponsored Term Insurance

Your company may provide you with a base of group term life insurance, e.g., one or two times your salary or a flat amount, at no cost to you. The company may allow you to buy additional term insurance, up to five or six times your salary. These group rates are usually competitive and avoid the hassle of physical exams and medical questions if you apply during the initial enrollment period (when you are hired). The insurance is generally renewable until you retire. At retirement, company-provided life insurance is usually eliminated or reduced substantially.

Most employer plans also allow you to purchase life insurance on your dependants, up to a specified maximum. Your dependants are required to designate you as the beneficiary.

IMPORTANT NOTE: When you leave your company before retirement, your employer-sponsored term insurance is terminated. It is not portable as individual term insurance. However, you can usually convert it to a permanent insurance policy (assuming you need it), but the premiums are typically higher than those policies that require medical underwriting, that is, those requiring a blood test and a physical exam.

SUGGESTION: If you are in good health and in the market for a permanent policy, shop around.

IMPORTANT NOTE: If you're planning on leaving your job and you are not eligible for coverage with your new employer, apply for an individual policy before you leave or shortly thereafter. Most company plans will pay your beneficiary a death benefit if you die within 30 or 31 days after employment. The same also applies if you were carrying dependant life insurance for your spouse or children. Some company plans may even keep you on up to six months, so make sure you check with your employer. Avoid gaps in your coverage.

SUGGESTION: Compare the term rates that your company offers with those offered by private insurance carriers and those offered through associations. If you're in good health as you get older, it may be advantageous to buy additional coverage on your own.

Cash Value Life Insurance

In addition to a death benefit, cash value ("permanent") life insurance policies provide you with a vehicle for saving over time. The premiums may be level or variable; the policy may pay dividends; and the amount of savings may vary with the performance of investments that the company makes. It all depends on which type of cash value insurance you purchase. See the sections Whole-Life Insurance, Universal Life Insurance, and Variable Universal Life Insurance.

The following types of cash value insurance are available:

  • Whole life insurance
  • Universal life insurance
  • Variable life insurance
  • Variable universal life insurance

Each type of policy works under its own set of goals and serves different objectives. Familiarize yourself with the different life insurance products before making your decisions.

Securities, insurance products and advisory services offered through Cetera Investment Services LLC (doing insurance business in CA as CFGIS Insurance Agency), member FINRA/SIPC. Cetera is under separate ownership from any other named entity.

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