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.
Six Basic Kinds 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.
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Insurance
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.
