General Information
What is life insurance?
Life insurance is a contract binding a life insurance company to compensate a beneficiary for the death of a person insured. If the insured dies, the company will provide a cash payment to the beneficiary. Life insurance is used to protect the economic value of a human life with regards to those who may be financially dependent upon it.
Types of life insurance
Term Life Insurance
Term life insurance provides protection for a specified period of time. A death benefit is paid to the beneficiary if the insured dies within a specified period of time while the policy is still in force. Many term life insurance plans can be converted to permanent life insurance plans without evidence of insurability. Two types of term life insurance are yearly renewable term and level premium term.
Yearly renewable term life insurance has premiums that are initially low; however, the premiums increase substantially as the insured gets older. These plans have diminished in popularity due to the introduction of level premium term life insurance.
Level premium term life insurance has premiums which remain level over a specified period of time. These plans have premiums that remain level for a period of 5, 10, 15, 20, 25, and 30 years. After the initial level period expires, the annual premium increases each year, subject to a guaranteed maximum.
Whole Life Insurance
Whole life insurance is permanent life insurance and provides protection for life. As long as premiums are paid, a death benefit is paid to the beneficiary. The premiums for whole life insurance policies are designed to remain level over time. In addition, these policies accumulate cash values on a tax-deferred basis. The rate of return on whole life insurance cash values is dependent upon a number of factors including the results of an insurance company’s investment performance. Cash values can be used for a variety of options:
The policy can be surrendered at anytime for the cash surrender value.
The policy owner can take out a loan and use the cash value as collateral.
The policy can be changed to a reduced death benefit amount that is paid up.
The cash values may be used to pay premiums for a certain period of time.
The cash surrender value can be used to supplement retirement income.
Whole life insurance policies are valuable because they provide permanent protection and accumulate cash values that can be used for emergencies or to meet specific objectives.
The cash values of whole life insurance policies may be affected by a life insurance company’s future performance. Some factors that influence a life insurance company’s performance are expenses, mortality experience, and investment performance.
Universal Life Insurance
Universal life insurance is permanent life insurance. As long as premiums are paid, a death benefit is paid to the beneficiary. These policies are different from whole life insurance policies because they offer the policy owner some flexibility to change the premium payments and death benefit. The death benefit may be increased subject to insurability or decreased, and the premiums can also be increased and decreased as well as skipped. Universal life insurance policies may be purchased with one of two different death benefit options. One is a level death benefit and the second is an increasing death benefit. Although premium payments are flexible, a universal life policy will usually have a target premium which is the suggested annual premium payment. The target premium for some companies is sufficient to keep the policy in-force to age 100; however, this is not guaranteed. Universal life insurance policies also accumulate cash values on a tax-deferred basis. These cash values tend to be interest-sensitive and can be used for a variety of options:
The policy can be surrendered at anytime for the cash surrender value.
- The policy owner can take out a loan and use the cash value as collateral.
- The policy can be changed to a reduced amount paid-up whole life policy.
- The cash values may be used to pay premiums for a certain period of time.
- The cash surrender value can be used to supplement retirement income.
Universal life insurance policies are valuable because they can provide permanent protection and accumulate cash values that can be used for emergencies or for meeting specific objectives. For those who prefer flexibility, universal life insurance provides more options than whole life insurance.
The cash values of universal life insurance policies may be affected by a life insurance company’s future performance. Some factors that influence a life insurance company’s performance are expenses, mortality experience, and investment performance.
Second-to-Die or Survivorship Life Insurance
A second-to-die life insurance policy insures the lives of two people, typically a husband and a wife. The death benefit is not paid to the beneficiary until the death of the second insured. These life insurance policies are generally available as either whole life insurance or universal life insurance policies, and premiums are often less expensive than buying two life insurance policies.
Second-to-die life insurance policies are effective tools often used by wealthy individuals in estate planning. They can be used to pay estate taxes. By removing the proceeds of a life insurance policy through the use of gifting policies and third party ownership, a life insurance policy can be used to pay for estate taxes. Careful planning by your tax and legal counsel, coupled with a properly structured second-to-die life insurance policy, can help you preserve your net worth.