Life Insurance Policy

Life insurance is designed to provide for the financial needs of your dependents if you’re not there to help them yourself. In the event of your passing, the proceeds from your life insurance are paid directly to your named beneficiaries. These beneficiaries can then use that money for whatever purpose they choose, such as:

Day-to-day living expenses

Paying the mortgage, credit card debt and other bills

Paying for your children’s education

Paying for your funeral and related expenses.

Life insurance is an important component of a sound financial plan, and takes away some of the uncertainty in taking care of your family, no matter what happens.

Types of Life Insurance

Life insurance policies fall within two main categories:

Term Life Insurance

Permanent Life Insurance.

Term life insurance, also known as temporary life insurance, provides coverage for a specified period of time, for example 20 years. At the end of the policy period, a term life insurance policy expires if it is not renewed.Unlike term life insurance, permanent life insurance does not expire and the insurance company cannot cancel the policy for any reason, except if there is fraud in the insurance application.Three types of permanent life insurance are widely available:

Whole Life Insurance

Universal Life Insurance

Variable Life Insurance

Each type of life insurance is discussed in more detail below.

Term Life Insurance

Term life insurance is the most common type of life insurance. It is also the least expensive and easiest to understand and manage. A term life insurance policy provides coverage for a fixed period of time. Common coverage periods are 10 years, 15 years, 20 years, and 30 years.

Term life insurance premiums are lowest when you are younger, but increase as you get older, based on expected mortality rates.

Term life insurance is normally renewable for an additional period beyond the end of the initial coverage period without the need to provide any additional evidence of insurability. However, it should be noted that renewal premiums usually increase as you get older due to the higher probability of mortality as you age.

Unlike other forms of life insurance, a term life insurance policy has no cash value – i.e. it cannot be surrendered for cash while the insured person is still living. Its sole purpose is to provide a benefit in the event of the death of the insured. For this reason, term life insurance is considered to be a pure form of life insurance.

Whole Life Insurance

Whole life insurance is a form of permanent life insurance, providing lifelong coverage and accumulating additional cash value over time. A whole life insurance policy has a maturity date, typically the date the insured reaches age 95 or 100. The benefit is paid out at the earlier of the death of the insured or the maturity date.

A whole life insurance policy remains in force until maturity, unless you decide to cancel your policy or fail to pay the required premium. Eventually the insurance company will be required to pay the benefit, even if the insured is still living at the maturity date. Contrast this with term insurance, for which a benefit is only payable if the insured passes away during the policy period.

Whole life insurance premiums are fixed throughout the life of the policy. The higher costs of insurance as you age are effectively “smoothed” throughout the policy period. Therefore, compared to term life insurance, whole life insurance premiums are usually higher in the beginning, but as you get older the reverse occurs.

Because the premiums are “smoothed” over the expected life of the insured, premiums paid during the early years exceed the insurance company’s cost of insurance. As a result, the policy accumulates a cash value based on the excess premiums paid.

Upon maturity of the policy, the cash value of the policy is equal to the death benefit.

At any time prior to maturity (subject to certain restrictions), the policyholder may:

Surrender the policy prior to maturity for the accumulated cash value less any applicable surrender charges.

Make a withdrawal from the cash value. Note that any withdrawal will decrease the death benefits.

Use the policy as security to borrow money, often at relatively low interest rates.

Universal Life Insurance

Universal life insurance is a form of permanent life insurance, providing lifelong coverage and a cash value that grows tax-deferred at a competitive rate of interest. Similar to a whole life insurance policy, a universal life insurance policy stays in effect until it matures, unless you cancel your policy or do not pay the premiums.

One of the primary advantages of a universal life policy is that it has a flexible premium with an adjustable benefit. The amount of the death benefit can be increased (subject to insurability) or decreased without having to surrender the policy and obtain a new one. You can select the premium you would like to pay, and the death benefit is adjusted to reflect the premium level. Alternatively, you may select a death benefit amount and the premium is adjusted to reflect the amount of the benefit.

A universal life insurance policy has a cash account that can grow over time. If the premiums paid are greater than the cost of insurance and other policy charges (if any), cash value accumulates. This cash value is invested by the insurance company and each month interest the account is credited with interest. The rate of interest earned is determined by the insurance company and may be linked to a financial index, for example a bond index. All interest earned is tax deferred.

At any time prior to maturity (subject to certain restrictions), the policyholder may:

Surrender the policy prior to maturity for the accumulated cash value less any applicable surrender charges.

Make a withdrawal from the cash value. Note that any withdrawal will decrease the death benefits.

Use the policy as security to borrow money, often at relatively low interest rates.

Variable Life Insurance

Variable life insurance is a form of permanent life insurance, providing lifelong coverage plus a savings account that can be used to invest in stocks, bonds and mutual funds. A variable life insurance policy has a variable benefit that changes based on the investment performance of your savings account. The higher your investment earnings, the greater the benefit.

Similar to whole life insurance and universal life insurance, a variable life insurance policy stays in force until it matures; unless you choose cancel your policy or you do not pay the required premiums. Therefore, unlike term insurance, the insurance company will have to pay the benefit at some point in the future.

A variable life insurance policy has a cash account that can grow over time if the premiums paid exceed the cost of insurance and other policy charges (if any). Other types of life insurance with a cash account earn a rate of interest specified by the insurance company, but a variable life insurance policy puts you in control of how your cash account is invested. It is possible to accumulate greater returns more quickly than with other types of life insurance, depending on your appetite for investment risk. All investment earnings are tax deferred.

At any time prior to maturity (subject to certain restrictions), the policyholder may:

Surrender the policy prior to maturity for the accumulated cash value less any applicable surrender charges.

Make a withdrawal from the cash value. Note that any withdrawal will decrease the death benefits.

Use the policy as security to borrow money, often at relatively low interest rates.

 

Leave a Reply

Your email address will not be published. Required fields are marked *