People Buy Life Insurance:
- For the Death Benefit:
- To replace earning power at death
- To pay for cash needs that arise at death
- As a Disciplined Savings Program*:
- To help pay for educational costs
- To supplement retirement income
- To take advantage of business opportunities
- For financial emergencies
- Because of the Risk of Waiting:
- Insurability may be impaired or lost
- Premiums are lower now than they will be at a higher age
- To begin building cash values that may be used in the future for collateral
- For the Tax Advantages:
- Death proceeds are received free of income tax
- Cash value accumulations are tax deferred
- Cash value loans or withdrawals* are free of tax, as long as the policy stays in force
- Accelerated death benefits are received free of income tax
- In Recognition of Personal Responsibility to:
- Mortgage company
- For the Flexibility:
- Benefits may be available regardless of whether the policy owner lives, quits, dies or becomes disabled
- Life insurance is portable; benefits are not lost due to job changes
* Withdrawals and loans will reduce the policy’s death benefit and cash value available for use.
- For the Death Benefit:
WHAT KIND OF INSURANCE SHOULD I BUY
The most basic feature of a life insurance policy is the death benefit: the lump-sum payment your beneficiaries would receive if you were to die. It’s the core reason to own life insurance – but not the only one.
Some types of life insurance offer other features that can play an important role in your financial strategy such as the ability to accumulate cash value that grows over time.
Term life insurance provides protection for a specific period of time – the “term” – and is designed for temporary circumstances. It makes the most sense when you need for coverage will disappear at some point, such as when your children graduate from college or when a debt is paid off. The most common term policies provide coverage for 20 years, but they can run the gamut from one-year policies to terms of 30 years or even longer. Typically term insurance offers the greatest amount of coverage for the lowest initial premium and is a good choice for young families on a tight budget.
Permanent insurance offers lifelong protection, and you can accumulate cash value on a tax-deferred basis. This cash account can be used for a variety of purposes from helping you out of a tight financial spot, to providing funds to take advantage of an opportunity, to supplementing your retirement income. The downside? Initial premiums are considerably higher than what you would pay for a term policy with the same face amount.
Permanent insurance falls into four categories. Whole life is the simplest and most common option. Premiums remain the same for life, and the death benefit and rate of return on your cash value are guaranteed. With variable life you can seek potentially better returns by allocating your fixed premiums among investment sub-accounts, typically comprised of stocks and bonds. Universal life offers the flexibility of varying the amount of your premium payments. It also offers the certainty of a guaranteed minimum death benefit as long as your premiums are sufficient to sustain it. If you do not maintain the minimum premiums, your death benefit can be reduced. Variable universal life premium payments are also adjustable, subject to the minimum needed to keep the policy in force, and you can allocate them among investment sub-accounts that offer varying degrees of risk and reward.
WHAT KIND IS RIGHT FOR ME?
Term Permanent Length of coverage A specified term, Typically 10, 20 or 30 years. Until age 100 or later as long as premiums are paid. Premiums Considerable lower than permanent insurance, when initially purchased. Initially higher than term premium, but often level for life Cash Value None. Accumulates over time on a tax-deferred basis. Key Advantage Typically offers the highest death benefit. Offers lifelong protection and tax-deferred savings.
Provided for educational purposes only courtesy of the Life and Health Insurance
Foundation for Education (LIFE). www.lifehappens.org (2012)
Term Life Insurance
Term life insurance is the variety of life insurance which most people envision and which best meets most buyer’s needs. It provides coverage only for a limited number of years, and the policy owner pays an unchanging premium for the duration of the term of coverage. (The alternative to term life insurance is permanent life insurance, which encompasses whole life insurance and universal life insurance.)
A standard term life insurance policy guarantees fixed premiums. That means that the size of payments made to the life insurance company does not change over time. The policy owner makes payments, all of equal amount, at equal intervals of time (monthly, quarterly, semi-annually, or yearly, depending on the company and policy). The policy owner is free to discontinue payments at any time; if he/she does so, however, the policy will terminate (i.e. the life insurance company is no longer obliged to pay a death benefit).
A standard term life insurance policy guarantees a fixed death benefit. That means that the death benefit will be of a certain amount regardless of how long the policy has been in force. The insurance company will pay the same amount if the insured dies during the first day of coverage as if he/she dies during the 29th year of coverage.
Term life insurance policies provide temporary coverage. For example, a 20-year policy is intended to provide coverage for 20 years and no longer.
You might imagine that your life insurance is simply gone at the end of your term of coverage: if the insured is still alive, your beneficiary gets nothing. That’s not a bad thing; after all, a healthy, living person is preferable to a cash payment. However, there are usually alternatives to letting your coverage simply cease.
Most term life insurance policies simply don’t terminate after the “term of coverage.” You can keep paying premiums and keep enjoying coverage. However, after the specified term of coverage, the rates you pay are no longer fixed at the level they were. Your contract will probably stipulate new rates much, much higher than you were originally paying. This alternative may be worth the higher rates, however, if your insured is ill and not far from death. Continuing your “temporary” life insurance is typically allowed only until the insured attains a certain, advanced age (often 90 years old).
Another option is conversion. Conversion means that your life insurance company will replace an existing term life insurance policy with a permanent life insurance policy of the same face amount death benefit). Life insurance companies tend to offer at least one, but it may not be a desirable one. For instance, your only option may be to convert to a permanent policy whose rates are guaranteed for only a decade. Moreover, you may not be able to exercise the conversion option at just any time. For instance, conversion may only be allowed during the first five years of your term life coverage.
A final option is renewal, but this option is comparatively rarer than the preceding options. Renewable life insurance can be replaced with a life insurance policy of the same type, face amount, and health class. Renewing life insurance spares you the hazard of being assigned to a more expensive health class. However, life insurance rates trend downward so long as life expectancy trends upward, so unless the health of your insured has deteriorated, you may find better life insurance rates by starting the application process anew.
Whole Life Insurance
Whole life insurance is the priciest of the three principal types of life insurance (term, whole, and universal), but it guarantees a death benefit, guarantees a cash value growth rate, and guarantees a fixed premium. Buyers are attracted to the guaranteed death benefit and the minimal risk of lapse. Unlike universal life insurance (the other variety of permanent life insurance) in order to prevent this policy lapsing, the policy owner has only to make regular payments of a fixed premium, just as though this were a simple term life insurance policy.
Universal life insurance
Universal life insurance is permanent life insurance which offers the policyholder the most flexibility but also requires the most vigilance in order to keep the policy on track. It is more expensive than term life insurance but less expensive than whole life insurance. With universal life insurance, there is no set schedule of payments and the growth of cash value is not fixed. In order to ensure that the policy remain in force, the policy holder must attend to the amount of cash value saved up and at all times maintain enough to meet the insurer’s charges.
Definitions for Term Periods
YRT (Yearly renewable term): This policy renews every year and although the face amount remains the same, the premium increases annually. This is initially the least expensive form of term but expensive in later years.
10 Year Term: The face amount stays level for 10 years. The premium remains stable for 10 years. After 10 years, you can renew with evidence of insurability for another 10 Year term at a higher rate. This is the most popular form of Term.
15Year Term: The face amount stays level for 15 years. The premium remains stable for 15 years. After 15 years, you can renew with evidence of insurability for another Term period at a higher rate.
20Year Term: The face amount stays level for 20 years. The premium remains stable for 20 years. After 20 years, you can renew with evidence of insurability for another Term Period at a higher rate. This Term Plan is very popular amongst families with young children.
25Year Term: The face amount stays level for 25 years. The premium remains stable for 25 years. After 25 years, you can renew with evidence of insurability for another Term Period at a higher rate.
30Year Term: The face amount stays level for 30 years. The premium remains stable for 30 years. After 30 years, you can renew with evidence of insurability for another Term Period at a higher rate. This plan is popular for young people that want to lock in their premium for a long period of time.
ROP: Return of Premium: This plan returns a portion of the premiums paid back to the insured if they outlive the term period. This plan is usually available for 20 or 30 year term. The premium is higher than a standard guaranteed renewable term for 20 or 30 years. This plan is popular with people that want to see a “return” on their policy. This is a return of premiums, and does not include interest.