The three basic types of life insurance
Are term insurance, whole life insurance and endowment insurance. A life insurance company
may combine features from these basic forms into a policy
specifically designed to meet the expected needs of the market.
When reviewing a life insurance product to purchase, an applicant
should make certain that the producer identifies the type of policy
that is the basis for the coverage offered and what additional
features may have been added for the presentation.
Term life insurance. — The two basic characteristics of term
insurance are :
1) it is only temporary protection because coverageterminates at the end of the policy term and
2) there is no cash value or savings element. Term life insurance is less costly than either whole life or endowment contracts. It is often used to provide financial protection
for a specific period of time when the loss of the insured would
create a serious financial problem for the survivors. For example, a
five-year term policy on the father covering the years a child is in
There are several types of term life insurance policies that have
different and specific uses:
Straight or Level Term.
— Policy is in force for a limited period of
time with the same annual premium.
— Can be renewed for additional periods
without evidence of insurability. Premiums will probably increase
— May be exchanged for permanent life
insurance at times stated in the policy with no evidence of
— The face value increases at stated times
during the policy term.
— The face value decreases at stated times
during the policy year. For example it could be used to pay off a
mortgage upon the death of the insured.
— Premiums are based on a low rate schedule but
insured must periodically demonstrate evidence of insurability.
Frequently a term policy can be presented that combines some of
the other types of term policies such as a level term policy that is
both renewable and convertible.
Whole life insurance.
This form of life insurance has a level premium and provides lifetime protection. The two basic types are ordinary life and limited pay life insurance.
Ordinary life insurance. — This form has a level premium which is
paid from the date purchased until death or age 100 when the face
amount is paid to the policyholder.
Limited payment life insurance.
— This is a form of whole life
insurance. The premiums are level but are paid only for a stated
number of years. Typical plans are 1) single pay life, 2) twenty paylife and 3) life paid up at age sixty-five. The fewer number of years
that premiums are paid the higher will be the annual premium
Limited payment life insurance is more popular than an ordinary
life policy. A feature used today is a limited payment life policy that
requires premiums to be paid for only a few years and then the
premiums are paid from the interest earned on the cash reserve
and/or by borrowing from the cash reserve.
Endowment insurance. — Endowment policies pay the face
value to the named beneficiary if the insured would die prior to a
stated date. If the insured lives beyond that date the policy proceeds
are paid out to the policyholder as monthly income.
“Hybrid” types of life insurance policies. — These are policy
forms, which are designed for particular needs or groups. These
policies may use features from both term life and whole life
insurance in their construction and have features that may modify
premium, face amount, policy reserves, loan values and procedures.
Universal life insurance. — This policy has a flexible premium
deposit fund that is combined with monthly renewable term
insurance. The initial premium less administrative expenses is
credited to the premium deposit fund and becomes the policy’s initial
cash value. Depending on the plan premium payments may be
Monthly a mortality charge is deducted from the premium deposit
fund to purchase the pure term insurance protection. The remaining
cash value is credited with a current rate of interest. Because of its
design, universal life insurance can be viewed as a combination of a
savings plan that earns interest and low cost renewable term
An annual disclosure statement is required to be provided to the
insured which shows the amount used to purchase pure protection,
the increase in savings and the administrative charges. The policy
has a guaranteed minimum rate of interest paid on the cash value
stated in the policy. With some policies an excess rate of interest
may be paid.
The policies have considerable flexibility depending on the plan.
Premiums may be increased or decreased or not paid if the cashvalue will cover mortality costs and expenses. The death benefit may
be increased or decreased. Policy loans and cash withdrawals may
be permitted based on policy provisions. The death benefit may be
reduced by the amount of a withdrawal. Some policies have a
surrender charge for cash withdrawal.
Variable life insurance.
— Under this policy form, the face amount
of insurance varies based on the investment experience of a
separate account maintained by the insurance company. Premiums
are invested in equities or similar investments. If the investment
experience is favorable the face amount of insurance is increased. If
it is unfavorable the face amount is decreased but never less than
the original face amount.
Variable-Universal life insurance.
— This policy has features of both variable and universal life insurance. It combines the flexibility of the universal life policy with the opportunity to select the type of
investment to be used. If the investment goes well the value
increases but if it does not then the value declines.
The basic characteristics of this type of policy are those of a
universal life policy with two major differences. First, there is no
guarantee on the accumulation of cash value as it is determined by a
separate account held by the insurance company. Second, the policy
owner selects the type of separate investment account desired. For
example: stocks, bonds, fixed income or other type of investment.
Adjustable life insurance.
— This whole life policy permits changes
to the amount of life insurance, period of protection, amount of
premium, and duration of the premium-paying period. It is also called
“life cycle” insurance since changes in the policy can be used to
conform to different periods in an insured’s life.
Modified life insurance.
— This is a whole life policy with premiums
that are reduced for an initial period of time (three to five years) and
then increased after that. It can be used by an insured that expects
to have a higher income at a later date but needs coverage today.
The approach used can vary. One method is to use a term policy for
the first few years that automatically converts into an ordinary life
policy. A second approach is to redistribute the premiums by
charging a low initial premium, which is increased each year for five
years and then remains level thereafter.
The Family policy.
— This policy insures all family members under
a single contract. It is generally sold in units that are based on the
amount of insurance for the head of the family. For example, a unit
can consist of $5000 of ordinary life insurance on the insured, $2000
of term insurance to age sixty-five on the spouse and $1,000 of term
insurance on each child to a stated age which then usually can be
converted to a whole life policy. Coverage is provided based on a
single premium for all of the family members. Coverage may also be
provided for any future newborn children as well.