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Insurance Agency and Brokerage Serving Pennsylvania & New Jersey |
Life Insurance
Coverage
It's not for those that
die, it's for the ones that live. There are many
different kinds of Life Insurance.
What are the principal
types of life insurance?
There are
two major types of life insurance - Term and
whole life. Whole life is sometimes called
permanent life insurance, and it encompasses
several subcategories, including traditional
whole life, universal life, variable life and
variable universal life. In 2003, about 6.4
million individual life insurance policies
bought were term and about 7.1 million were
whole life.
Universal
Life
A flexible premium policy that
combines protection against premature death with
a type of savings vehicle, known as a cash value
account, that typically earns a money market
rate of interest. Death benefits can be changed
during the life of the policy within limits,
generally subject to a medical examination. Once
funds accumulate in the cash value account, the
premium can be paid at any time but the policy
will lapse if there isn't enough money to cover
annual mortality charges and administrative
costs.
Term Life
A
form of life insurance that covers the insured
person for a certain period of time, the "term"
that is specified in the policy. It pays a
benefit to a designated beneficiary only when
the insured dies within that specified period
which can be one, five, 10 or even 20 years.
Term life policies are renewable but premiums
increase with age.
Key Person
Life
Insurance on the life or health
of a key individual whose services are essential
to the continuing success of a business and
whose death or disability could cause the firm a
substantial financial loss.
Buy / Sell
Life
An agreement among part-owners
of a business which says that under stated
conditions, i.e., disability or death, the
person withdrawing from the business or his
heirs are legally obligated to sell their
interest to the remaining part-owners, and the
remaining part-owners are legally obligated to
buy at a price fixed in the agreement.
First-to-Die
Life
As the name implies,
"first-to-die" or "joint-life" insurance
policies pay out the face amount when the first
named insured dies. This reduces the cost of
paying premiums on two separate policies, when
the insurance proceeds are most needed when only
the first insured dies.
Split Dollar
Life
This agreement splits the
premiums, cash values and death benefits of a
life insurance policy between two parties. The
policy holder contributes a gift (payment) each
year to increase the economic benefit. It is
important to have as it free's up dollars
otherwise paid currently in gift taxes for use
in other more productive ways (ie.
investments).
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
one to 30 years. Most term policies have no
other benefit provisions.
There are two basic types of term life insurance policies - level term and decreasing 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, 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 they keep 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 policyowner 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 - universal
life insurance and variable universal life
insurance.
What are the types of
term insurance policies?
Term
insurance comes in two basic varieties - level
term and decreasing term. These days, almost
everyone buys level term insurance. The terms
"level" and "decreasing" refer to the death
benefit amount during the term of the policy. A
level term policy pays the same benefit amount
if death occurs at any point during the
term.
Common types of level term are:
Yearly
renewable term, once popular, is no longer a top
seller. The most popular type is now 20-year
term. Most companies will not sell term
insurance to an applicant for a term that ends
past his or her 80th birthday.
If a policy is "renewable," that means it
continues in force for an additional term or
terms, up to a specified age, even if the health
of the insured (or other factors) would cause
him or her to be rejected if he or she applied
for a new life insurance policy. Generally, the premium for the policy is
based on the insured person's age and health at
the policy's start, and the premium remains the
same (level) for the length of the term. So,
premiums for 5-year renewable term can be level
for 5 years, then to a new rate reflecting the
new age of the insured, and so on every five
years. Some longer term policies will guarantee
that the premium will not increase during the
term; others don't make that guarantee, enabling
the insurance company to raise the rate during
the policy's term. Some term policies are convertible. This
means that the policy's owner has the right to
change it into a permanent type of life
insurance without additional evidence of
insurability. "Return of Premium" What are the different types of
permanent
policies? Why should I purchase permanent
insurance? There are a number of different types of
permanent insurance policies, such as whole
(ordinary) life, universal life, variable life,
and variable/universal life. In a permanent
policy, the cash value is different from its
face value amount. The face amount is the money
that will be paid at death. Cash value is the
amount of money available to you. There are a
number of ways that you can use this cash
savings. For instance, you can take a loan
against it or you can surrender the policy
before you die to collect the accumulated
savings. There are unique features to a
permanent policy such as:
In
most types of term insurance, including
homeowners and auto insurance, if you haven't
had a claim under the policy by the time it
expires, you get no refund of the premium. Your
premium bought the protection that you had but
didn't need, and you've received fair value.
Some term life insurance consumers have been
unhappy at this outcome, so some insurers have
created term life with a "return of premium"
feature. The premiums for the insurance with
this feature are often significantly higher than
for policies without it, and they generally
require that you keep the policy in force to its
term or else you forfeit the return of premium
benefit. Some policies will return the base
premium but not the extra premium (for the
return benefit), and others will return
both.
Whole or
ordinary life
This is the most
common type of permanent insurance policy. It
offers a death benefit along with a savings
account. If you pick this type of life insurance
policy, you are agreeing to pay a certain amount
in premiums on a regular basis for a specific
death benefit. The savings element would grow
based on dividends the company pays to you.
Universal or adjustable
life
This type of policy offers you
more flexibility than whole life insurance. You
may be able to increase the death benefit, if
you pass a medical examination. The savings
vehicle (called a cash value account) generally
earns a money market rate of interest. After
money has accumulated in your account, you will
also have the option of altering your premium
payments - providing there is enough money in
your account to cover the costs. This can be a
useful feature if your economic situation has
suddenly changed. However, you would need to
keep in mind that if you stop or reduce your
premiums and the saving accumulation gets used
up, the policy might lapse and your life
insurance coverage will end. You should check
with your agent before deciding not to make
premium payments for extended periods because
you might not have enough cash value to pay the
monthly charges to prevent a policy lapse.
Variable life
This
policy combines death protection with a savings
account that you can invest in stocks, bonds and
money market mutual funds. The value of your
policy may grow more quickly, but you also have
more risk. If your investments do not perform
well, your cash value and death benefit may
decrease. Some policies, however, guarantee that
your death benefit will not fall below a minimum
level.
Variable-universal
life
If you purchase this type of
policy, you get the features of variable and
universal life policies. You have the investment
risks and rewards characteristic of variable
life insurance, coupled with the ability to
adjust your premiums and death benefit that is
characteristic of universal life insurance.
A permanent life
policy provides lifelong insurance protection.
The policy pays a death benefit if you die
tomorrow or if you live to be a hundred. There
is also a savings element that will grow on a
tax-deferred basis and may become substantial
over time. Because of the savings element,
premiums are generally higher for permanent than
for term insurance. However, the premium in a
permanent policy remains the same, while term
can go up substantially every time you renew
it.