- Types of Life Insurance
to pay the premiums, you are able to lock in coverage at a level premium rate. Part of that
premium accrues as cash value. As the policy gains value, you may be able to borrow up to 90%
of your policy's cash value tax-free.
The main drawback of whole life is the premium inflexibility, and the internal rate of return in the
policy may not be competitive with other savings alternatives. Riders are available that can allow
one to increase the death benefit by paying additional premium. The death benefit can also be
increased through the use of policy dividends. Dividends cannot be guaranteed and may be
higher or lower than historical rates over time. Premiums are much higher than term insurance in
the short-term, but cumulative premiums are roughly equal if policies are kept in force until
average life expectancy.
Cash value can be accessed at any time through policy "loans". Since these loans decrease the
death benefit if not paid back, payback is optional. Cash values are not paid to the beneficiary
upon the death of the insured; the beneficiary receives the death benefit only. If the dividend
option: Paid up additions is elected, dividend cash values will purchase additional death benefit
which will increase the death benefit of the policy to the named beneficiary.
Universal Life is similar to whole life with the added benefit of potentially higher earnings on the savings component. Universal life policies are also
highly flexible in regard to premiums and face value. Premiums can be increased, decreased or deferred, and cash values can be withdrawn. You
may also have the option to change face values. Universal life policies typically offer a guaranteed return on cash value, usually at least 4%. You'll
receive an annual statement that details cash value, total protection, earnings, and fees.
Universal life policies guarantee, to some extent, the death proceeds, but not the cash function - thus the flexible premiums and interest returns. If
interest rates are high, then the dividends help reduce premiums. If interest rates are low, then the customer would have to pay additional premiums
in order to keep the policy in force. When interest rates are above the minimum required, then the customer has the flexibility to pay less as
investment returns cover the remainder to keep the policy in force.
And universal life has a more flexible death benefit because the owner can select one of two death benefit options, Option A and Option B.
• Option -A- pays the face amount at death as it's designed to have the cash value equal the death benefit at age 95.
• Option -B- pays the face amount plus the cash value, as it's designed to increase the net death benefit as cash values accumulate.
Example for Option -A- for Universal Life Insurance Example for Option -B- for Universal Life Insurance
The universal life policy addresses the perceived disadvantages of whole life. Premiums are flexible. The internal rate of return is usually higher
because it moves with the financial markets. Mortality costs and administrative charges are known. And cash value may be considered more easily
attainable because the owner can discontinue premiums if the cash value allows it.
The disadvantages to this type of life insurance include higher fees and interest rate sensitivity. Universal policies include up-front fees as well as
ongoing administrative fees totaling as high as 5% to 7% of your premiums. You may also find your premiums increasing when interest rates decline.
Term Insurance Term life insurance or term assurance is the original form of life insurance and is considered to be pure insurance protection
because it builds no cash value. This is in contrast to permanent life insurance such as whole life, universal life, and variable universal life.
Term life insurance provides coverage for a limited period of time, the relevant term. After that period, the insured can either drop the policy or pay
annually increasing premiums to continue the coverage. If the insured dies during the term, the death benefit will be paid to the beneficiary.
Term insurance is often the most inexpensive way to purchase a substantial death benefit on a coverage amount per premium dollar basis.
Term insurance functions in a manner similar to most other types of insurance in that it satisfies claims against what is insured if the premiums are up
to date and the contract has not expired, and does not expect a return of Premium dollars if no claims are filed. As an example, auto insurance will
satisfy claims against the insured in the event of an accident and a home owner policy will satisfy claims against the home if it is damaged or
destroyed by, for example, an earthquake or fire. Whether or not these events will occur is uncertain, and if the policy holder discontinues coverage
because he has sold the insured car or home the insurance company will not refund the premium. This is purely risk protection.
Declining Balance Term insurance, a variation on this theme, is often used as mortgage insurance since it can be written to match the
amortization of your mortgage principal. While the premium stays constant over the term, the face value steadily declines. Once the mortgage is paid
off, the insurance is no longer needed and the policy expires. Unlike many other policies, term insurance has no cash value. In this sense, it is "pure"
insurance without any investment options. Benefits are paid only if you die during the policy's term. After the term ends, your coverage expires unless
you choose to renew the policy. When buying term insurance, you might look for a policy that is renewable up to age 70 and convertible to permanent
insurance without a medical exam.
Variable Life generally offers fixed premiums and control over your policy's cash value. Your cash value is invested in your choice of stock, bond, or
money market funding options. Cash values and death benefits can rise and fall based on the performance of your investment choices. Although
death benefits usually have a floor, there is no guarantee on cash values. Fees for these policies may be higher than for universal life, and
investment options can be volatile. On the plus side, capital gains and other investment earnings accrue tax deferred as long as the funds remain
invested in the insurance contract.
Endowments are policies in which the cash value built up inside the policy, equals the death benefit (face amount) at a certain age. The age this
commences is known as the endowment age. Endowments are considerably more expensive (in terms of annual premiums) than either whole life or
universal life because the premium paying period is shortened and the endowment date is earlier.
Glossary
Riders: Amendment to the insurance policy added at the same time the policy is issued. These riders change the basic policy to provide some feature desired by the policy
owner.
Joint life: Either a term or permanent policy insuring two or more lives with the proceeds payable on the first death.
Survivorship life or second-to-die life: Life insurance policy insuring two lives with the proceeds payable on the second (later) death.
Single premium whole life: Life insurance policy with only one premium which is payable at the time the policy is issued.
Modified whole life: A whole life policy that charges smaller premiums for a specified period of time after which the premiums increase for the remainder of the policy.
Face Value: The original death benefit amount.
Convertibility: Option to convert from one type of policy (term) to another (whole life), usually without a physical examination.
Cash Value: The savings portion of a policy that can be borrowed against or cashed in.
Premiums: Monthly, quarterly, or yearly payments required to maintain coverage.
Beneficiary: The individual(s) or entity (e.g., trust) that is designated as benefit recipient.
Paid Up: A policy requiring no further premium payments due to prepayment or earnings.
highly flexible in regard to premiums and face value. Premiums can be increased, decreased or deferred, and cash values can be withdrawn. You
may also have the option to change face values. Universal life policies typically offer a guaranteed return on cash value, usually at least 4%. You'll
receive an annual statement that details cash value, total protection, earnings, and fees.
Universal life policies guarantee, to some extent, the death proceeds, but not the cash function - thus the flexible premiums and interest returns. If
interest rates are high, then the dividends help reduce premiums. If interest rates are low, then the customer would have to pay additional premiums
in order to keep the policy in force. When interest rates are above the minimum required, then the customer has the flexibility to pay less as
investment returns cover the remainder to keep the policy in force.
And universal life has a more flexible death benefit because the owner can select one of two death benefit options, Option A and Option B.
• Option -A- pays the face amount at death as it's designed to have the cash value equal the death benefit at age 95.
• Option -B- pays the face amount plus the cash value, as it's designed to increase the net death benefit as cash values accumulate.
Example for Option -A- for Universal Life Insurance Example for Option -B- for Universal Life Insurance
The universal life policy addresses the perceived disadvantages of whole life. Premiums are flexible. The internal rate of return is usually higher
because it moves with the financial markets. Mortality costs and administrative charges are known. And cash value may be considered more easily
attainable because the owner can discontinue premiums if the cash value allows it.
The disadvantages to this type of life insurance include higher fees and interest rate sensitivity. Universal policies include up-front fees as well as
ongoing administrative fees totaling as high as 5% to 7% of your premiums. You may also find your premiums increasing when interest rates decline.
Term Insurance Term life insurance or term assurance is the original form of life insurance and is considered to be pure insurance protection
because it builds no cash value. This is in contrast to permanent life insurance such as whole life, universal life, and variable universal life.
Term life insurance provides coverage for a limited period of time, the relevant term. After that period, the insured can either drop the policy or pay
annually increasing premiums to continue the coverage. If the insured dies during the term, the death benefit will be paid to the beneficiary.
Term insurance is often the most inexpensive way to purchase a substantial death benefit on a coverage amount per premium dollar basis.
Term insurance functions in a manner similar to most other types of insurance in that it satisfies claims against what is insured if the premiums are up
to date and the contract has not expired, and does not expect a return of Premium dollars if no claims are filed. As an example, auto insurance will
satisfy claims against the insured in the event of an accident and a home owner policy will satisfy claims against the home if it is damaged or
destroyed by, for example, an earthquake or fire. Whether or not these events will occur is uncertain, and if the policy holder discontinues coverage
because he has sold the insured car or home the insurance company will not refund the premium. This is purely risk protection.
Declining Balance Term insurance, a variation on this theme, is often used as mortgage insurance since it can be written to match the
amortization of your mortgage principal. While the premium stays constant over the term, the face value steadily declines. Once the mortgage is paid
off, the insurance is no longer needed and the policy expires. Unlike many other policies, term insurance has no cash value. In this sense, it is "pure"
insurance without any investment options. Benefits are paid only if you die during the policy's term. After the term ends, your coverage expires unless
you choose to renew the policy. When buying term insurance, you might look for a policy that is renewable up to age 70 and convertible to permanent
insurance without a medical exam.
Variable Life generally offers fixed premiums and control over your policy's cash value. Your cash value is invested in your choice of stock, bond, or
money market funding options. Cash values and death benefits can rise and fall based on the performance of your investment choices. Although
death benefits usually have a floor, there is no guarantee on cash values. Fees for these policies may be higher than for universal life, and
investment options can be volatile. On the plus side, capital gains and other investment earnings accrue tax deferred as long as the funds remain
invested in the insurance contract.
Endowments are policies in which the cash value built up inside the policy, equals the death benefit (face amount) at a certain age. The age this
commences is known as the endowment age. Endowments are considerably more expensive (in terms of annual premiums) than either whole life or
universal life because the premium paying period is shortened and the endowment date is earlier.
Glossary
Riders: Amendment to the insurance policy added at the same time the policy is issued. These riders change the basic policy to provide some feature desired by the policy
owner.
Joint life: Either a term or permanent policy insuring two or more lives with the proceeds payable on the first death.
Survivorship life or second-to-die life: Life insurance policy insuring two lives with the proceeds payable on the second (later) death.
Single premium whole life: Life insurance policy with only one premium which is payable at the time the policy is issued.
Modified whole life: A whole life policy that charges smaller premiums for a specified period of time after which the premiums increase for the remainder of the policy.
Face Value: The original death benefit amount.
Convertibility: Option to convert from one type of policy (term) to another (whole life), usually without a physical examination.
Cash Value: The savings portion of a policy that can be borrowed against or cashed in.
Premiums: Monthly, quarterly, or yearly payments required to maintain coverage.
Beneficiary: The individual(s) or entity (e.g., trust) that is designated as benefit recipient.
Paid Up: A policy requiring no further premium payments due to prepayment or earnings.
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