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Provided below is general information regarding life insurance. Topics range from
reasons to buy life insurance to the differences between term and whole life
policies. If any of your questions are not answered after reviewing this section,
feel free to contact us.
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General
Information Topics |
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Life Insurance is a policy that will pay a specified
sum to beneficiaries upon the death of the policyholder. Life
insurance is a contract between the policyholder and the life
insurance company. If the policyholder dies while the contract
is in place, the life insurance company must pay off the beneficiaries
of the life insurance policy. Such payments are income-tax free.
The "cash benefits" provided by the insurance company to the
beneficiaries must not only compensate for the income loss due to the
death of the policyholder, but must also pay for the expenses
associated with the death (i.e. funeral costs, taxes, etc.) as well as
for the future needs of the policyholder's family.
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Because your
life changes, your life insurance coverage must change as well.
Events throughout you lifetime such as marriages or children will result
in a need for change in your life insurance policy. For example,
if your family size increases, you may need to add additional
beneficiaries to your policy.
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Riders are attachments to a policy that modifies its conditions by
expanding or restricting benefits or excluding certain conditions from
coverage. Riders can also be optional benefits that provide the
policyholder with extra protection. Riders include Accidental
Death Benefit, 10-Year Term, Waiver of Premium, and Spouse and Child
Riders.
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People buy life insurance policies for a variety of reasons.
The most obvious, of
course, is to provide financial security for one's family in the tragic event of
the policyholder's death. By doing so, the policyholder ensures his or her family
with the capital necessary to take care of any unpaid bills and/or taxes following his or
her death. Therefore, the surviving family is not burdened by the policyholder's
death, and can continue their normal standard of living.
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| Other reasons to
buy life insurance include: |
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• protection against emergencies |
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• coverage of a particular need such
as paying off a mortgage or consumer
debt upon the insured's death |
| • additional income for the policy holders children's
education or for later years |
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• business insurance to compensate a
company's on the death of a key employee or to provide a surviving
partner the resources to buy out the deceased partner's share of the
business |
| • a continuous flow of funds to the policy holder's spouse
(and family) |
| • income protection when earning potential is severely
impaired (i.e. illness or accident) |
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• to provide funds to pay estate
taxes or other final obligations necessary to settle a deceased
person's estate |
| • set-up of a retirement fund |
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• to provide the funds necessary for
the deceased person's burial |
| • set-up of a saving plan for the future |
| • and many more...
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Choosing
the life insurance policy that is right for you is not an easy decision.
Therefore,
we have laid out the two basic types of life insurance policies: term life
insurance and permanent
(cash value) insurance..
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| •
term life insurance |
| • permanent
(cash value)
insurance |
| •
whole life insurance |
| •
universal life insurance |
| • variable life insurance |
| •
variable universal life insurance |
| •
survivorship universal life
insurance |
| 1.
Term Life Insurance*• • • • • •
• • • • • • • • • • • •
• • • • • • • • • • • • •
• • • • • • • • • • • • •
• • • • • • • • • • • • •
• • • |
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Term life insurance provides life insurance for a specified period of time.
These policies provide benefits in the event of death, but they generate no "cash
value". If you have a limited amount to spend, and only need insurance for a finite
period of time, you may be able to get more coverage by buying term insurance than by
buying cash value insurance. Keep in mind that the cost of term insurance increases as you
get older, which may make it more expensive than cash value insurance in the long run.
Today’s term policies usually have two sets of premiums - guaranteed maximum
premiums, and "current premiums", which are usually much lower, but which can be
changed by the company. The company cannot increase current premium above the guaranteed
maximum premiums shown in the policy.
When you buy term insurance you need to make a choice as to how long you want the
protection. You may renew the policy without a physical examination for the period of
years specified in the policy. Some term insurance can be converted to cash value
insurance up to a specified age with no physical examination. Premiums for the converted
insurance will most likely be higher than the premiums you would be paying for the term
insurance. |
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Term life insurance main points... |
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• variable coverage
and premiums |
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• specific
timeframes (i.e. 15 years) |
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• death during
coverage timeframe - beneficiary receives payment |
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• death not during
coverage timeframe - beneficiary receives nothing |
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• no cash value |
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• cannot be
borrowed against |
| 2.
Permanent (Cash Value) Insurance* • • • • • • •
• • • • • • • • • • • • •
• • • • • • • • • • • • •
• • • • • • • • • • • • •
• |
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Cash-Value Insurance combines death benefits with an accumulation feature. The buyer of a
cash value policy pays more in the early years than for term insurance, but the money not
needed to pay for the cost of the death benefit accumulates at interest. If the policy is
surrendered before the insured dies, there may be a cash value paid to the owner. Make
sure the agent/broker provides you with the method by which the cash value is determined
and that they obtain this information based on the policy’s guaranteed value. As a
general rule, it is not a good idea to buy cash value life insurance if you plan to
surrender early. If all premiums are paid,
cash value insurance usually lasts for the whole life of a person, and pays death benefits
to the beneficiaries named in the policy upon the death of the insured. The cash value can
be used as loan collateral for borrowing funds at the interest rate specified in the
policy. Any outstanding loans are deducted from policy proceeds at death or surrender.
Some of these products may enjoy tax advantages. A policy lapse or surrender may create a
taxable event and may generate a Form 1099. Be sure to check with your tax advisor.
Types of Permanent (Cash Value)
Insurance:
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 Whole Life Insurance |
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Whole Life Insurance (also known as straight life, ordinary life and traditional permanent
insurance) has guaranteed premiums and death benefits, and a minimum interest rate which
will be credited to the funds accumulated in the policy. On some whole life policies
higher interest rates may be credited to those funds depending on the future performance
of the company’s investments. |
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Whole life insurance main points... |
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• variable coverage
and premium plans |
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• general
timeframes (the insured's life) |
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• death during
insured's life - beneficiary receives payment |
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• have a cash value |
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• can be borrowed
against |
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Universal Life Insurance |
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Universal Life differs from whole life insurance in that it allows
the policy owner to vary, with limitations, the amount and timing of premium payments and
the death benefit. Cash values are accumulated by crediting premium payments and interest
to a fund from which deductions are made for expenses and cost of insurance. The rates at
which the interest is credited are declared by the company or may be specified in the
contract. Like term insurance, universal life insurance policies usually have two sets of
premiums - guaranteed maximum premiums, and "current premiums", which may be
lower, but which can be changed by the company, up to the maximum. They also include a
minimum interest guarantee. Because of its flexibility, a universal life policy can also
be structured to operate like term insurance. |
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Universal life insurance main points... |
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• (see "Whole life
insurance main points" above) |
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• premiums
split between
payment of policy and investments |
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• guaranteed minimum interest
rate on investments |
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Variable Life Insurance |
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Variable Life differs from whole life
insurance and universal life insurance in that policy owners direct the distribution of
their premium payments among several different accounts or funds rather than of the
company’s choosing. Typical account choices are: common stock, bond, mortgage, and
money-market accounts. With this type of policy, the death benefit and cash value benefits
vary in relation to the value of the investments underlying the policy. If the value of
the accounts increases, so will the benefits; if the value of the account decreases, so
will the benefits, subject to a minimum guarantee. Variable life insurance is more risky
to the policy owner than the other forms of cash value insurance, but there is a
possibility of greater returns. |
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Variable life insurance main points... |
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• (see "Whole life
insurance main points" above) |
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• (see "Universal life
insurance main points" above) |
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• death benefits and policy
value contingent on investment portfolio |
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Variable Universal Life Insurance |
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Variable Universal Life Insurance
combines the flexibility of universal life insurance with the investment account features
of variable life insurance. |
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Variable life insurance main points... |
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• (see "Whole life
insurance main points" above) |
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• (see "Universal life
insurance main points" above) |
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• (see "Variable life
insurance main points" above) |
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• you decide how to invest the
cash value of the policy |
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• no
guaranteed minimum interest rate on investments
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Survivorship Universal Life Insurance |
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Survivorship universal
life insurance
policies are whole life insurance policies taken out on two persons. Death benefits
are paid upon the death of the second person. Premiums tend to be lower for this
type of life insurance. |
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Survivorship universal life insurance main points... |
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• (see "Whole life
insurance main points" above) |
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• premiums tend to be lower
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Medical examinations are given to potential policyholders by insurance companies to
information the insurance company as to the state of the applicant's health.
Based
on such examination, the insurance provider adjusts the premiums according to the
risk. In other words, the healthier the individual, the lower his or her
premium. The worst the individual's health, the higher his or her premiums will
be. Term life insurance policies may not required medical
examinations for policy renewal.
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*information taken from the California
Department of Insurance (Chuck Quackenbush, Commissioner)
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