Life Insurance Policies Explained
Life insurance is an essential part of financial planning. One reason most people buy life insurance is to replace income that would be lost with the death of a wage earner. The cash provided by life insurance also can help ensure that your dependents are not burdened with significant debt when you die.
When you buy life insurance, you want a policy which fits your needs without costing too much. Your first step is to decide how much you need, how much you can afford to pay and the kind of policy you want. Then, find out what various insurance companies charge for that kind of policy. If you compare Surrender Cost Indexes and Net Payment Cost Indexes of similar competing policies, your chances of finding a relatively good buy will be better than if you do not shop.
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Six Types of Life Insurance
Regardless of how fancy
the policy title or sales presentation might appear, all life
insurance policies contain benefits derived from one or more
of the three basic kinds shown below. Some policies due combine
more than one kind of life insurance and can be confusing.
Term Life Insurance
Endowment Life Insurance
Whole Life Insurance
Variable Life Insurance
Universal Life Insurance
Variable Universal Life Insurance
Term Life Insurance
Term life insurance is death protection for a term of one or
more years. Some companies are offering policies with terms up
to thirty years. Premiums on term insurance remain level during
the life of the policy. Term Life Insurance has no cash value account.
Death benefits will be paid only if you die within that term of
years. Term insurance generally provides the largest immediate
death protection for your premium dollar.
Some term life insurance policies are renewable for one or more additional
terms even if your health has changed. Each time you renew the policy for a
new term, premiums will be higher. You should check the premiums at older ages
and the length of time the policy can be continued.
Some term insurance policies are also convertible. This means that before
the end of the conversion period, you may trade the term policy for a whole
life or endowment insurance policy even if you are not in good health. Premiums
for the new policy will be higher than you have been paying for the term insurance.
Life Insurance "Endowment"
An endowment insurance policy pays
a sum or income to you, the policyholder, if you live to a certain
age. If you were to die before then, the death benefit would
be paid to your beneficiary. Premiums and cash values for endowment
insurance are higher than for the same amount of whole life insurance.
Thus endowment insurance gives you the least amount of death
protection for your premium dollar.
Whole Life Insurance
Whole life insurance gives death
protection for as long as you live. The most common type is called straight
life or ordinary life insurance, for which you pay
the same premiums for as long as you live. These premiums can
be several times higher than you would pay initially for the
same amount of term insurance. But they are smaller than the
premiums you would eventually pay if you were to keep renewing
a term insurance policy until your later years.
Some whole life policies let you
pay premiums for a shorter period such as 20 years, or until
age 65. Premiums for these policies are higher than for ordinary
life insurance since the premium payments are squeezed into a
shorter period.
Although you pay higher premiums,
to begin with, for whole life insurance than for term insurance,
whole life insurance policies develop cash values which
you may have if you stop paying premiums. You can generally either
take the cash, or use it to buy some continuing insurance protection.
Technically speaking, these values are called nonforfeiture
benefits. This refers to benefits you do not lose or forfeit when
you stop paying premiums. The amount of these benefits depends
on the kind of policy you have, its size, and how long you have
owned it.
A policy with cash values may also
be used as collateral for a loan. If you borrow from the life
insurance company, the rate of interest is shown in your policy.
Any money which you owe on a policy loan would be deducted from
the benefits if you were to die, or from the cash value if you
were to stop paying premiums.
Variable Life Insurance
Variable life insurance, provides
permanent protection for you and death benefits to your beneficiary
upon your death. The value of the death benefits may fluctuate
up or down depending on the performance of the investment portion
of the policy. Most variable life insurance policies guarantee
that the death benefit will not fall below a specified minimum,
however, a minimum cash value is seldom guaranteed. Variable
is a form of whole life insurance and because of investment risks
it is also considered a securities contract and is regulated
as securities under the Federal Securities Laws and must be sold
with a prospectus.
Universal Life Insurance
Universal Life insurance is a variation
of Whole Life. The insurance part of the policy is separated
from the investment portion of the policy. The investment portion
is invested in bonds and mortgages, the investment portion of
Universal Life is invested in money market funds. The cash value
portion of the policy is set up as an accumulation fund. Investment
income is credited to the accumulation fund. The death benefit
portion is paid for out of the accumulation fund. Unlike Whole
Life Insurance, the cash value of Universal Life Insurance grows
at a variable rate. Normally, there is a guaranteed minimum interest
rate applied to the policy. No matter how badly the investments
go by the insurance company, you are guaranteed a certain minimal
return on the cash portion. If the insurance company does well
with its investments, the interest return on the cash portion
will increase.
Variable-Universal Life
Variable universal life insurance pays your beneficiary a death benefit. The amount of the benefit
is dependant on the success of your investments. If the investments
fail, there is a guaranteed minimum death benefit paid to your
beneficiary upon your death. Variable universal gives you more
control of the cash value account portion of your policy than
any other insurance type. A form of whole life insurance, it
has elements of both life insurance and a securities contract.
Because the policy owner assumes investment risks, variable universal
products are regulated as securities under the Federal Securities
Laws and must be sold with a prospectus.
Rates and coverage vary form state
to state. Shop around on your own and talk to an independent
insurance agent to make sure you get a plan that's right for
you. It's amazing how much rates may vary from company to company
for the same coverage.
For more information
or a quote on life insurance fill out our free
life insurance quote request form.
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