LOOKING TO THE FUTURE
Life insurance is where the insurance company agrees to pay an amount of money upon the occurrence of the insured individual's death or other life changing event, such as terminal or critical illnesses.
The policy owner agrees to pay a premium at regular intervals or in other sums. In the United States, the most common type of life insurance pays a lump sum at the time of the insured's demise.
Temporary (Term) Life Coverage
Term life insurance coverage for a specific number of years for a predetermined premium.
These policies do not accumulate cash value over time as with other types of life insurance.
Term life insurance is generally considered "pure" insurance, in which the premium buys protection in the event of death and nothing else.
A few key factors when considering term insurance are: face value (protection or death benefit), premium to be paid, and length of coverage (term).
Insurance companies sell term insurance with different combinations of these three factors. The face value can remain constant or decline over time.
The length of coverage is generally for one or more years. The premium can remain level or increase with or without respect to the face value.
A common type of term insurance is called annual renewable, a one year policy, however the insurance company guarantees it will issue a policy of equal or lesser amount without
regard to the insurability of the covered person and with a premium set for the person's age at that time.
Another common type of term insurance is mortgage insurance, which is usually a level premium, declining face value policy. The face amount is intended to equal the amount of the mortgage on the
policy owner’s residence so the mortgage will be paid if the insured dies. A policy holder insures his or her life for a specified term.
If they die before that specified term expires, their estate or named beneficiary(ies) receive(s) a payout. If they do not die before the term expires, they receive nothing.
Historically, these policies would almost always exclude suicide. However, after a number of court rulings against the industry,
payouts do occur on death by suicide (except for in the unlikely case that it can be proven that the suicide was only to benefit from the policy).
Generally, if an insured person commits suicide within the first two years of coverage, the insurance company will return the premiums paid.
However, a death benefit will usually be paid if the suicide occurs after the two year period.
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Permanent
Permanent life insurance remains active until the policy matures, unless the owner fails to pay the premium when it is due, causing the policy expire or lapse.
The policy cannot be cancelled by the insurance company for any reason except application fraud and that cancellation must occur within a period of time defined by law (usually two years).
Permanent life insurance accumulates cash value that reduces the amount at risk to the insurance company and thus the expense as well over time.
This means that a policy with a million dollars face value can be relatively expensive to a 70 year old. The owner can access the money in the cash value by withdrawing money, borrowing the cash value, or surrendering the policy and receiving the surrender value.
Permanent life insurance can be divided into three categories: whole life, universal life, and endowment.
Whole Life
This insurance provides for a constant premium as well as a cash value guaranteed by the company. Whole life has the following primary advantages: guaranteed death benefits; guaranteed cash values;
fixed premiums; and mortality and expense charges will not cause the cash value of the policy to go down. Advantages also come with disadvantages as well being that premiums are fixed and not adjusted as well as the
rate of return in the policy may not be in line with other savings alternatives.
Premiums are much higher than term insurance in the short-term, but cumulative premiums are roughly equal if policies are kept in force until average life expectancy.
The cash value of such a policy may be accessed while the policy is active through "policy loans". Since these loans decrease the death benefit if not paid back, payback is optional.
Cash values are not paid to the beneficiary upon the death of the insured; the beneficiary receives the death benefit only.
Universal Life
Universal insurance is a relatively new concept intended to provide permanent insurance coverage with more flexibility in the premium payment and the potential for a higher rate of return.
There are several forms of these policies which include interest sensitive, variable and equity indexed universal life insurance.
A policy of this nature includes a cash account. Premiums will increase the cash account. Interest is paid to the policy on the account at a rate specified by the insurer.
This rate may have a guaranteed minimum (for fixed policies) or no minimum (for variable policies). Mortality charges and administrative costs are charged against, thus reducing, the cash account.
With all life insurance, there are two essential elements that construct the policy. There is a mortality element and a cash element.
The mortality element is the classical practice of placing the risk where the premiums paid by everybody else intend to cover the death benefit for those taht will die in a given period of time.
The cash element of all life insurance says that if a person is to reach a given age, which varies depending on state and company, then the policy matures and endows the face value of the policy.
Limited Life
Another form of permanent insurance is Limited Life, in which all the premiums are paid over a specified period of time and then after which no additional premiums are due to keep the policy active.
Common limited pay periods tend to include 10-year, 20-year and paid-up at age 65.
Endowments
Endowments are policies where cash value builds up inside the policy and equals the death benefit (face amount) at a predetermined age.
The age this commences is therefore known as the endowment age. Endowments are considerably more expensive (in terms of annual premiums) than either whole or universal coverage because the premium paying
period is shortened and the endowment date is earlier.
Accidental Death
Accidental death is a form of limited life insurance that is designed to cover the insured when they pass away due to an accident.
Accidents tend to include anything resulting from an injury - but do not typically cover any deaths resulting from health problems or suicide.
