Life Insurance
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Types of Life Insurance


        Life Insurance can be broken down into 4 types of policies; Term Plans, Whole Life, Universal Plans and Annuities. The following generally describes how each differ and introduces some additional life insurance terms.
Term insurance
        Term life insurance provides coverage for a specified period of time, such as 1, 5, 10, 20 or 30 years, or up to a certain age, such as 65 or 70. If the insured dies during the term of the policy, the face amount is paid to the beneficiary. If the insured lives until the end of the term, no benefit is paid and both coverage and premium payments end.

        Term insurance can be offered in many forms. Level term means that the death benefit remains the same for the term of the policy. Increasing term or decreasing term means the death benefit changes on predetermined schedule during the term of the policy. In addition, any form of term plan can have Level, Increasing or decreasing premiums over the term of the policy. Renewable term insurance gives the policyowner the option to renew the policy at the end of the term, at a higher premium rate to reflect their increased age. Convertible term gives the policyowner the right to convert the term policy to a whole life insurance plan. Many of these term plans can be combined, for example a person can own renewable and convertible level term insurance.

        The important point to remember about term insurance is that it has no cash build up while the insured is alive; it only pays a benefit upon death. It also does not necessarily cover a person for their entire life; at some point, the term of the coverage expires. People usually buy term insurance when they need temporary insurance protection, such as to cover a mortgage loan, or when they plan to convert it at a later date.

Whole Life Insurance
        Generally, there are two major differences between term and whole life insurance. First, whole life insurance (also referred to as permanent insurance) provides coverage for the insured’s entire life, while term insurance provides coverage for a predetermined period. The other difference is that whole life pays a death benefit when the insured dies, and it also accumulates cash value while the person is living. The cash value is available for use by the policyowner in the form of policy loan while the policy is in force, or as a cash payout if the policy is ever surrendered or terminated.

        Cash value builds in a whole life policy according to predetermined, guaranteed schedule, usually expressed as an interest rate such as 4%. The longer a whole life policy stays in force the larger the cash value will be. When a whole life policy’s cash value is sufficient to consider the policy as paid-up, premium payments are no longer needed.

Universal Life

        Universal Life is a form of whole life insurance with several unique features. Premiums are paid into the policy’s accumulation account and increase the cash value at a faster rate than whole life because it pays a current rate of interest. This rate of return on the accumulation account can be adjusted periodically by the insurance company to reflect current economic trends. There is a guaranteed rate which is usually very conservative, such as 4%, but the current rate (actual rate) can be considerably higher.

        With some universal plans, another difference is that the insured can decrease or skip premiums and the policy can still remain in force. This is allowed because of the policy’s rapid cash buildup. They can also increase premiums to allow the accumulation account to grow more rapidly, subject to limits set by the IRS. Most Universal plans also allow face value changes, which are not generally allowed on whole life plans.

Annuities

        Annuities are defined as an agreement where a person makes periodic deposits into a fund with and insurance company, in return for interest earnings and the promise to pay a monthly income for a specified period of time. They differ from life insurance in that the value of the annuity at any time is not more than the total of deposits plus interest earned. The similarity comes from the lifetime payout options, which can provide total payments greater than the total fund value if the annuitant outlives the insurance company’s assumptions.

        Generally, deposits of any amount and at any frequency can be paid into an annuity. The payout amount is determined by the value of the annuity when it annuitizes (payout begins). However, there are some single premium annuities which do not allow additional deposits.

Other Coverages

        Insurance companies develop life insurance products with many variations of the above concepts, but they will generally fall into these basic categories. Most policies offer optional riders and benefits which can increase the death benefit under certain circumstances, or cover risks other than death.


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