Life Insurance 101
Life Insurance Types
TERM LIFE INSURANCE
Designed to provide coverage for a specific period of time such as for 10 years or 20 years, this type of insurance is typically the lowest-cost option for young adults. A basic policy will provide the chosen beneficiaries with a death benefit that is paid on a tax-free basis. The death benefit amount is specified in the policy and the death must occur during the time of coverage.
There are policies with smaller coverage amounts that can be Simplified Issue - meaning that no medical exams are required. However, in most cases, you may be subject to Medical Underwriting that could require a medical exam and even a motor vehicle background check. Family history can also play a factor in determining eligibility.
Medical exams are typically done at the expense of the insurance company.
Premium Rate Determination
Generally, premium rates are based on your health status, coverage amount, length of the term policy, smoking status, and gender.
If you are relatively healthy and barring any other significant factors, your premium for a Medically Underwritten Policy can be significantly less than a Simplified Issue Policy.
Common Marketing Method
Some insurance agents market this type of insurance as "mortgage insurance". The intent is to provide coverage for the length of the mortgage. Sometimes the solution for this is structured as a combination of term and whole life.
Note that many of these mortgage insurance policies are sold as Simplified Issue, which is not necessarily a good thing. Make sure you ask your agent about this.
At the end of the term period, typically, you can renew the policy and keep it in force by paying a new premium. That premium can be SIGNIFICANTLY higher than the previous premium and it may continue to increase annually.
Some term life policies can not be renewed beyond a certain age.
Some term life policies allow you to convert them to either Universal Life or Whole Life Policies. The conversion privilege may only be available for a portion of the term policy so make sure to check your policy specifics.
Learn the basics with the help of:
Free Life Insurance Buyer's Guide
Free Life Insurance Buyer's Guide
(Prepared by the National Association of Insurance Commissioners)
Below you will see a general description of the most common life insurance types. Determining how much life insurance or what type you need is a subjective matter. A licensed agent can help you with your life insurance needs analysis.
Life insurance agents can help you with more advanced life insurance concepts such as Wealth Accumulation and Retirement Planning, Funding a Buy/Sell Agreement, Key Person Life Insurance, or a Section 162 Executive Bonus.
UNIVERSAL LIFE INSURANCE
These are very popular policies to market - they blend a bit of Term Life & Whole Life. These policies feature Flexible Premiums and Cash Value Accumulation. Note that while these policies build cash value, the underlying cost of providing the death benefit increases over time and this cost can erode the cash value when the ongoing premium is insufficient to cover the insurance cost.
Cash Value Accumulation
These policies provide a fixed or indexed level of interest on premium funds that are over and above the cost of insurance and policy fees or expenses. The cash value can be withdrawn or utilized to pay ongoing premiums. Check your specific policy details for rules and restrictions on the utilization of cash value in the policy.
The policy is structured such that the amount of your periodic premium payment can fluctuate - you can choose to pay a different amount from one payment to the next. You may even be able to skip some premium payments if there is enough cash value in place.
Some policies have this feature where you know the minimum periodic payment amount that is needed to maintain the policy in force - "guaranteed for 'X' number of years." Even if there is insufficient cash value in the policy, the policy death benefit will remain in effect as long as you continue to pay the minimum No-Lapse premium amount.
Indexed Universal Life Insurance Policies offer a return on your premium that is based on the performance of an outside index like the S&P 500 (TM). However, before you apply the indexed return, you first have to subtract policy fees/expenses and the cost of actually insuring you. While you won't incur market losses during bear markets, the ongoing cost of insurance could quickly erode and leave a policy subject to lapsing (expiring). It is very important that you utilize a good funding structure on these policies.
When structured and funded properly, Indexed Universal Life Policies can be a useful tool for Wealth Accumulation and Retirement Planning.
WHOLE LIFE INSURANCE
Whole Life Insurance is also known as Permanent Insurance. It is designed to provide you with coverage for the entirety of your life, there is no expiration date- as long as you pay your premiums.
Whole Life Insurance Features
- Premiums never increase, the rate that you pay when you sign up is the rate that you pay for life (there are some variations as to how many times/how long you must pay the premiums).
- Guaranteed renewable, the policy can't be cancelled by the insurer- as long as you pay your premiums.
- Cash value build up, the policy builds a cash value that can be accessed via policy loans or by surrendering the policy.
- Death benefit is paid income-tax free
Whole Life Insurance Policies can be Fully Underwritten, Guaranteed Issue, or Simplified Issue. The younger and healthier that you are, the better the rate available to you. Each carrier has its own set of eligibility (underwriting) requirements. Both Guaranteed Issue and Simplified Issue policies do not require Medical Exams to qualify. Guaranteed Issue policies are offered to anybody but are the highest cost policies available.
Some "participating" or "mutual" insurers offer dividends from the excess returns on capital from investments that are funded by your life insurance premiums. If the carrier offers dividends then one of the choices that you need to make is what to do with those dividends. A common option is to buy paid-up additional insurance. In effect, you increase your death benefit and you increase your cash value accumulation.
Common Marketing Methods
Simplified Issue and Guaranteed Issue Policies are often targeted to older adults as Final Expense Life Insurance. They generally are designed to cover funeral costs, debts, legacy gifting, and other smaller end-of-life costs. See More Information on Final Expense Insurance.
Wealth Transfer is another use for whole life insurance policies because of the tax-free death benefit. It can be quite advantageous to one's heirs to receive funds on a tax-free basis as opposed to having Uncle Sam take a large portion through estate or probate taxes/fees. Typically, Single Premium Life Insurance is used for this purpose. On such a policy, you make a single premium payment to fund the whole life policy.
LIFE INSURANCE CONSULTATION REQUEST