Finding the Right Life Insurance Policy

Following is an excerpt from Ratings’ Consumer Guide to Term Life Insurance. rates the financial strength of 900 life insurers nationwide to help consumers find sound companies to do business with. Ratings has been recognized as the most conservative grader of life insurance financial strength by a leading consumer publication and was singled out as the only ratings agency that doesn’t accept payment from any of the companies it rates.

American Life Insurance Company, a unit of AIG (Stock Quote: AIG), is the largest life insurer in the U.S., with nearly twice as much premium volume as the next largest insurer, Northwestern Mutual.  There are many companies in excellent financial shape that you should consider when you’re shopping for life insurance.  Go to to look up your specific company.

Life insurance comes in many flavors, each designed to suit a specific need.  For instance, there are policies that will pay off the balance on your mortgage.  There are policies that will provide your family with a specified income stream for a fixed number of years after your death.  There are policies where the benefit goes up in value as you get older.  And there are even policies where the benefit goes down in value as you get older. 

When you boil it all down, though, there are really only two fundamental types of life insurance policies:  permanent life and term life.

Permanent Life
As the name would suggest, permanent life is a lifetime insurance policy.  You might also think of it as life insurance with a savings account built in.  With permanent life, a portion of the premiums you pay to the insurance company go toward establishing a “cash value” which can be withdrawn if you cancel the policy or may potentially be used to pay for future premiums on the policy.  And unless you exhaust your cash value, your beneficiaries are guaranteed to receive the death benefit when you pass.

So in a way, a permanent life policy is like an investment with a life insurance component.  It is particularly useful for individuals who are concerned about their ability to pay premiums in later years or for those lacking the discipline to establish a separate savings plan.

Term Life
Term life, on the other hand, provides insurance coverage for only a specified period of time.  The death benefit is only paid if you die during that specified term and have paid the required premiums.  At the end of the term, however, the policy expires and you walk away with nothing to show.  There is no cash value built up and your insurance coverage ceases to exist unless you purchase another policy.

In other words, term life insurance provides temporary coverage.  If you live past the end of the term, you will have made years of premium payments but receive no money in return from the insurer.  Of course, if you were to die at the beginning of the term, you would have paid very little in the way of premiums and yet the insurance company would have to pay your beneficiaries the full policy benefit.

At first blush, term life insurance may not sound as appealing as permanent life.  That is, until you get to the cost.  The premiums for a term life policy can be considerably less expensive than those for a permanent life policy.  That’s because with term life, you’re not contributing anything extra to build up a cash value.  Instead, you’re only paying for the insurance coverage plus the insurer’s administrative expenses.