Policy choices

ife insurance policies are divided into two main types:

• Term life insurance, which provides only a death benefit without any “cash values” (offering the least expensive cost per $1,000 of death coverage purchased).
• Permanent life insurance, which has a “cash value” account in which a return-on-investment component becomes an often complex and expensive part of the policy (most expensive cost per $1,000 of coverage).

Term life insurance

The easiest life insurance to understand: Term life insurance provides death benefit protection without any savings, investment or “cash value” components.

Term life insurance is available for set periods of time such as 10, 15, 25 or 30 years. With "annual renewable term life," your policy automatically renews and premiums increase each year. Choose "level term insurance" if you want your premium to stay the same for the duration of the policy. Also available is "decreasing term insurance," where premiums remain level but your death benefit declines over time. This is useful if you want to cover only a specific debt that decreases, such as a mortgage or business loan.

Quick facts

Americans purchased $3 trillion of new life insurance coverage in 2007. The average amount of the life insurance policy was roughly $167,700 in 2007. By the end of 2007, total life insurance coverage in the United States reached $19.5 trillion. Of new individual life policies purchased in 2007, 52 percent were term life insurance. The most common supplementary benefit is waiver of premium. Source: American Council of Life Insurers

As long as you pay your premiums, the company cannot cancel you.

Term life insurance is a popular choice because of the long rate-guarantee periods. However, if you get to the end of your policy term and still need life insurance, you'll need to shop for a new policy, which will then be priced based on your age and health status.

For more, read the basics of term life insurance.

Choosing an initial rate-guarantee period is easy: Match the period of time your dependents need your income to the available rate-guarantee periods. For example, if your children are young and you have decades to go on your mortgage, try 30-year term life. If your children are leaving the nest and your home is paid off or nearly paid off, 10-year term might fit the bill.

Other policy provisions that drive the popularity of term life insurance are guaranteed renewal and guaranteed convertibility.

• Guaranteed Renewal. Before you buy a term life policy, ask the agent or company to confirm to you that the policy contains a guaranteed renewable option, which grants you the right to continue coverage beyond the initial rate-guarantee period without a medical exam. This feature, found in most term life policies sold today, is extremely important should you become sick and uninsurable toward the end of your rate-guarantee period.

  For example, say that you’ve been paying $800 per year on a $500,000, 20-year level term life policy and develop cancer near the end of the 20-year period, thus making you uninsurable. Assuming that you want to continue the coverage, a guaranteed renewable clause would allow you to continue the coverage beyond 20 years on an annual renewable basis without an exam, albeit at a much higher annual premium of, say, $8,000 in year 21, $11,000 in year 22, and so on.

  You may have sticker shock right now but these premiums don’t look so high when you are very sick and uninsurable but still in need of coverage.

• Guaranteed Convertible. Another built-in feature of most term life policies is the right to convert your coverage to any permanent cash value policy that the company offers at current rates without having to take another physical exam. This feature may be useful in the future if you decide you want cash value life insurance.

If you'd like term insurance to cover you for a certain period of time but you're confident you'll outlive the policy, consider a "return of premium" (ROP) term life insurance policy. Under this type of policy, if no death benefit has been paid by the end of your insurance term, all your premiums are refunded (tax-free). Return of premium term life insurance generally costs 50 to 150 percent more than a comparable term policy but it provides a way to hedge your bets no matter what happens.

For more, read "return of premium" term life insurance basics.