Premium Payment Modes in Life Insurance
In life insurance, the recurrence of your premium payments affects the cost. It is less expensive to pay your policy annually than monthly, quarterly, or semi-annually due to administrative costs. Also, the type of policy you choose, such as an increasing term life or universal life policy, may have varying premium payments, which are flexible, increasing, or decreasing. Let’s look at different types of life insurance policies and their premium payment modes.
Universal Life
Universal life insurance policies are permanent policies with savings and investment features that allow policyholders to increase or reduce premiums or skip paying premiums altogether. Once the investment and savings feature of the policy grows cash value, it can be used to cover the premiums. These policies are designed for your changing life insurance needs over time.
Decreasing and Increasing Term Life Insurance
A decreasing term policy is a type of life insurance designed to cover financial obligations, such as credit card debt. Premiums decrease over time as the debt is paid until your balance is zero. An increasing term policy is the opposite of a decreasing term policy. The premiums increase over time, usually to cover inflation.
Limited Payment Life and Single Premium Life
Limited payment life insurance policies are whole life policies that provide a level death benefit, but the premium payments are made to pay off the policy in 10, 15, or 20 years. Premiums may be higher toward the end of the payment period. Single premium life is a form of life insurance that is paid off in one lump sum. Both methods continue to grow cash value after premiums cease.
Modified and Graded Premium Whole Life
Modified and graded premium whole life policies both have lower premiums at the beginning of the policy period, usually within the first 5 to 10 years. After that time, the premium rate rises. The difference between them is that a modified premium policy increases once and remains level, a graded premium policy increases with a series of steps until it levels off.
Current Assumption Whole Life Insurance
Current assumption whole life insurance premiums are based on the insurer’s actual mortality, interest, and expense experience. If their actual experience is good, then premium rates are lower, and vice versa. Premium rates may change due to the redetermination process of the company’s actual experience, usually on the policy’s anniversary date.
Indeterminate Premium Whole Life
These whole life insurance policies are issued with two premium rates: a lower fixed rate and a guaranteed maximum rate. The policyholders of these types of policies pay the lower fixed rate for a period of time, then the premium increases or decreases based on the current mortality, investment earnings, and expenses. However, the premium due for one year does not go above the guaranteed maximum rate.
Equity Indexed Life Insurance
Equity indexed life insurance is permanent life insurance whose cash value is attached to an equity index. This type of policy can come in one of two forms, universal life or whole life.
With the universal life form, premium payments are flexible. When it is in the form of whole life premiums are fixed.
Ordinary Whole Life and Term Life
These two types of policies, in their basic forms, have level monthly premiums throughout the life of the policy. The premium is agreed upon by you and the insurance company and is dependent on underwriting factors and the amount of coverage, also known as the death benefit. Whole life policies are permanent coverage and more expensive than term life, which lasts for a period of time.