Life Insurance
Life
There are two major types of individual life insurance which are Term and Whole Life policies. The Whole Life is sometimes called permanent life insurance available in different contracts called traditional whole life, universal life, variable life and variable universal life.
Term
Term Insurance is the simplest form of life insurance. It pays only if death occurs during the term of the policy, which is usually from 1 to 30 years. Some terms offer a guaranteed renewable feature. It is the most inexpensive life insurance to buy. Most term policies have no other benefit provisions.
There are two basic types of term life insurance policies the level term and decreasing term:
- Level term means that the death benefit stays the same throughout the duration of the policy term.
- Decreasing term means that the death benefit drops, usually in one-year increments, over the course of the policy's term.
Whole Life/Permanent
Whole life or permanent insurance pays a death benefit whenever you die even if you live to 100! There are three major types of whole life or permanent life insurance which are traditional whole life, universal life, and variable universal life, and there are variations within each type.
In 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 the company keeps 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 policy owner 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.
In the 1970s and 1980s, life insurance companies introduced two variations on the traditional whole life product, the universal life insurance and variable universal life insurance.
- Universal Life policies - give you the flexibility to choose the amount of protection that best suits your family or business. It allows you to increase or decrease coverage as insurance needs change. Increased coverage may be subject to underwriting requirements. You may not decrease your coverage below the required minimum. A decrease may result in a surrender charge being applied against the policy's cash value. With universal life insurance, you control the amount and frequency of payments. You have the option to increase the premium or make lump sum contributions, subject to limits as specified in the policy. The extra dollars grow tax-deferred, and may increase the cash and death benefit values. On the other hand, in a temporary cash crunch, you can pay less than the scheduled premium and let the policy's accumulated cash value pay the remainder of the monthly charges. Universal life products can be customized with innovative policy features to fit your lifestyle.
- Variable Universal Life policies - combines insurance protection with investment opportunity. Variable Universal Life has the same premium flexibility as Universal Life, but offers a range of investment choices. Premium payments are flexible. After initial payment, you make additional premium payments at virtually any time and in any amount (subject to certain minimums and maximums). Your policy continues as long as there is enough cash value to cover monthly insurance charges. You can invest premiums in one or more underlying portfolios offering different levels of risk and growth potential. Investment portfolios provide long-term growth potential, tax-deferred earnings, and the ability to make tax-free transfers among the investment portfolios. In addition to the variable investment portfolios, many insurance companies also offer a fixed interest account providing a minimum guaranteed rate for a specific period of time. You can choose one of two death benefit options of a level benefit equal to the policy's original face amount, or a variable benefit equal to the original face amount plus any existing policy account value.
Special Note: This summary outlines in general terms the coverages afforded under some policies. Examine the policy carefully for any exclusions, limitations, or any other terms or conditions that may specifically affect coverage. The terms and conditions of the policy prevail.