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Life InsuranceLife Insurance Coverage What are the principal types of life insurance? Term Life InsuranceTerm Insurance is the simplest form of life insurance. A form of life insurance that covers the insured person for a certain period of time, the "term" that is specified in the policy. It pays a benefit to a designated beneficiary only when the insured dies within that specified period which can be five, 10, 20 or even 30 years. Term life policies are renewable but premiums increase with age, and you may have to go through a health screen at each renewal period to qualify. What are the types of term insurance policies?Term insurance comes in two basic varieties - level term and decreasing term. The terms "level" and "decreasing" refer to the death benefit amount during the term of the policy. A level term policy pays the same benefit amount if death occurs at any point during the term. In 2003, virtually all (97 percent) of the term life insurance bought was level term. Common types of level term are: * yearly- (or annually-) renewable term Yearly renewable term, once popular, is no longer a top seller. The most popular type is now 20-year term. Most companies will not sell term insurance to an applicant for a term that ends past his or her 80th birthday. If a policy is "renewable," that means it continues in force for an additional term or terms, up to a specified age, even if the health of the insured (or other factors) would cause him or her to be rejected if he or she applied for a new life insurance policy. Generally, the premium for the policy is based on the insured person's age and health at the policy's start, and the premium remains the same (level) for the length of the term. So, premiums for 5-year renewable term can be level for 5 years, then to a new rate reflecting the new age of the insured, and so on every five years. Some longer term policies will guarantee that the premium will not increase during the term; others don't make that guarantee, enabling the insurance company to raise the rate during the policy's term. * Some term policies are convertible. This means that the policy's owner has the right to change it into a permanent type of life insurance without additional evidence of insurability. "Return of Premium" Why should I purchase permanent insurance? Term is best used, to protect your family while aquiring assets. If you have a plan and expect to have enough assets in the future to retire or live comfortably on, you can pick a term policy with a period of coverage to get you to that point in your life where you don't need coverage anymore. Term is the lowest cost form of insurance because it is pure insurance, with no savings or cash value. You pass on, they pay. Many people choose a term policy along with a savings account to put money away. Speak with your agent to select the best option for your situation. Permanent Life InsuranceWhole life or permanent insurance pays a death benefit whenever you die - even if you live to 100! What are the different types of permanent policies?Whole or ordinary lifeIn the case of traditional whole life, both the death benefit and the premium are designed to stay the same (level) throughout the life of the policy. The cost per $1,000 of benefit increases as the insured person ages, and it obviously gets very high when the insured lives to 80 and beyond. The insurance company could charge a premium that increases each year, but that would make it very hard for most people to afford life insurance at advanced ages. So they keep the premium level by charging a premium that, in the early years, is higher than what's needed to pay claims, investing that money, and then using it to supplement the level premium to help pay the cost of life insurance for older people. By law, when these "overpayments" reach a certain amount, they must be available to the policyowner as a cash value if he or she decides not to continue with the original plan. The cash value is an alternative, not an additional, benefit under the policy. This is the most common type of permanent insurance policy. It offers a death benefit along with a savings account. If you pick this type of life insurance policy, you are agreeing to pay a certain amount in premiums on a regular basis for a specific death benefit. The savings element would grow based on dividends the company pays to you. Universal or adjustable lifeThis type of policy offers you more flexibility than whole life insurance. You may be able to increase the death benefit, if you pass a medical examination. The savings vehicle (called a cash value account) generally earns a money market rate of interest. After money has accumulated in your account, you will also have the option of altering your premium payments - providing there is enough money in your account to cover the costs. This can be a useful feature if your economic situation has suddenly changed. However, you would need to keep in mind that if you stop or reduce your premiums and the saving accumulation gets used up, the policy might lapse and your life insurance coverage will end. You should check with your agent before deciding not to make premium payments for extended periods because you might not have enough cash value to pay the monthly charges to prevent a policy lapse. Why should I purchase permanent insurance?A permanent life policy provides lifelong insurance protection. The policy pays a death benefit if you die tomorrow or if you live to be a hundred. There is also a savings element that will grow on a tax-deferred basis and may become substantial over time. Because of the savings element, premiums are generally higher for permanent than for term insurance. However, the premium in a permanent policy remains the same, while term can go up substantially every time you renew it. There are a number of different types of permanent insurance policies, such as whole (ordinary) life, universal life. In a permanent policy, the cash value is different from its face value amount. The face amount is the money that will be paid at death. Cash value is the amount of money available to you. There are a number of ways that you can use this cash savings. For instance, you can take a loan against it or you can surrender the policy before you die to collect the accumulated savings. There are unique features to a permanent policy such as:
Depending on the policy, you may be able to withdraw some of the money. You also may have these options:
Other uses for Life InsuranceKey Person LifeInsurance on the life or health of a key individual whose services are essential to the continuing success of a business and whose death or disability could cause the firm a substantial financial loss. Buy / Sell LifeAn agreement among part-owners of a business which says that under stated conditions, i.e., disability or death, the person withdrawing from the business or his heirs are legally obligated to sell their interest to the remaining part-owners, and the remaining part-owners are legally obligated to buy at a price fixed in the agreement. First-to-Die LifeAs the name implies, "first-to-die" or "joint-life" insurance policies pay out the face amount when the first named insured dies. This reduces the cost of paying premiums on two separate policies, when the insurance proceeds are most needed when only the first insured dies. Split Dollar LifeThis agreement splits the premiums, cash values and death benefits of a life insurance policy between two parties. The policy holder contributes a gift (payment) each year to increase the economic benefit. It is important to have as it free's up dollars otherwise paid currently in gift taxes for use in other more productive ways (ie. investments). |
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