Types Of Policies
|
| There are two basic types of life insurance policies -- term
insurance and whole life insurance. All other kinds of policies are variations
of these two types. |
| Term insurance offers protection that insures your
family for a specified and finite period of time -- usually one, five, 10 or 20
years, or up to age 65. A term insurance policy pays a benefit only if you die
during the period covered by the policy. If you stop paying premiums, the
insurance stops. At the end of the term, the coverage ends, but it can be
continued for another term if you have a "renewable" policy. Under such a
policy, you will not have to provide evidence of insurability to renew the
policy, but each time you renew, your premiums will be higher because you are
older. |
| If you have term insurance that is "convertible," you can
exchange it for a whole life policy without a medical examination, but you
should expect to pay a higher premium. The amount of the whole life insurance
premium remains the same for the rest of your life. |
| Term insurance is initially cheaper than other types of
policies that offer the same amount of protection. Therefore, it gives you the
greatest immediate coverage per dollar. For this reason, it is useful to those
consumers who need large amounts of coverage for a known period of time -- for
example, home buyers, parents of young children or people with high current
obligations. |
| Term insurance is also available in other forms. One common
type reduces coverage over time, paying less to the beneficiary as time passes.
It is often used to protect a long term decreasing debt, such as a home
mortgage. |
| Whole life insurance (often referred to as straight
life or permanent life) is protection that can be kept in force for as long as
you live. By choosing to pay a premium that does not increase as you grow
older, you average out the costs of your policy over your lifetime on a yearly
basis. |
The "cash value" is an important feature of whole life
insurance. This is a sum that increases over the years on a tax-deferred basis.
If you cancel your policy, you can get the cash value in a lump sum. You pay
taxes only if the cash value plus any policy dividends you may have received
exceed the sum of the premiums you have paid. Most policies contain a table
that enables you to tell how much cash value it has. You should consult your
producer or company for further information. Cash value has many uses. For
example:
-
Using your policy as collateral, you can borrow from the company up to the
amount of your current cash value. If you die and the loan has not been repaid,
the amount owed plus interest will be deducted from the death proceeds paid to
your beneficiary.
-
If you miss paying a premium, the company can -- with your authorization --
draw from the cash value to keep the policy in force.
-
If you wish to stop paying premiums, the accumulated cash value can be used to
fund a paid-up policy that provides a reduced level of protection, or the
policy can be continued as term insurance for a specific period of time.
-
You can use the cash value to purchase an annuity that provides a guaranteed
monthly income for life.
-
You can give the policy up completely and the insurance company will pay you
the cash value.
|
| There are several variations of whole life insurance. One is modified
life, with a premium that is relatively low in the first several years
but that increases in later years. It is intended for those who want whole life
insurance but wish to pay lower premiums in their younger years. |
| Limited-payment life remains in force for your entire
life, but premiums are paid over a shorter period than other whole life
insurance policies. For example, you might make payments for 20 years or until
age 65 rather than spreading them over your lifetime. Because the premiums are
paid within a shorter period, premium rates are higher than for other types of
whole life insurance. |
| A single-premium whole life policy provides protection
for the duration of the insured's life, in exchange for the payment of the
total premium in one lump sum at the time of application. |
| Combination plans are simply policies that combine
term and whole life insurance in one contract. Frequently, premiums for
combination plans do not rise as the insured grows older. |
| Universal life insurance is protection under which a
policyholder may pay premiums at any time, in virtually any amount, subject to
certain minimums. The policyholder can also change the amount of insurance more
easily than under traditional policies. In a universal life insurance policy,
the amount of the cash value reflects the interest earned at current interest
rates and the total amount and timing of premiums paid, minus the cost of
insurance and expense charges. The level of cash value is "interest-sensitive,"
which means that the amount you accumulate varies according to the general
financial climate. Rates are usually guaranteed for one year, and then a new
rate is determined. The rates used can be no lower than a guaranteed rate
specified in the policy (typically 4 or 4.5 percent). |
| Current assumption whole life insurance, which is also
known as fixed premium universal life or interest-sensitive whole life, is a
variation of universal life insurance. It involves fixed premiums and fixed
death benefits, and, as in other universal life policies, its growth in cash
value depends on market conditions. |
| Variable life insurance provides death benefits and
cash values that fluctuate according to the investment experience of policy
funds managed by the life insurance company. Policyholders decide where their
money will be invested. Some investment options commonly offered by insurance
companies include stock, bond or money market funds. Thus, policyholders have
the opportunity to obtain higher cash values and death benefits than with
policies calculating benefits based on a fixed rate of return. Conversely,
policy holders also assume the risk of poor investment performance. |
| Life insurance producers selling variable life must be
registered representatives of a broker dealer licensed by the National
Association of Securities Dealers and registered with the Securities and
Exchange Commission. If you are interested in a variable life policy, be sure
your producer gives you a prospectus that includes an extensive disclosure
about the policy. |
| Two types of variable life policies exist: Scheduled premium
variable life insurance and flexible premium variable life insurance.
Premium payments under a scheduled premium policy are fixed as to timing and
amount, while policyholders who own a flexible premium policy may change the
timing or amount (or both) of premium payments. |
| Second-to-die life insurance, which is also called
dual life or survivorship insurance, is primarily an estate planning tool that
pays a death benefit only upon the death of the insured who survives the
longest. Its main purpose is to pay estate taxes upon the death of the second
insured. Because it is based on joint life expectancy, its premium is less than
the total premiums for individual policies on the same lives. Second-to-die
life insurance can take the form of a variety of traditional or
interest-sensitive types of products. It may include premium flexibility to
allow vanishing premiums or a minimum annual premium. Second-to-die life
insurance has both personal and business applications. |
