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 The purpose of life insurance is to protect against the risk that a person will die too soon. Types of Life Insurance Term Life insurance is the simplest type of life insurance plan. It provides insurance protection for a specified period (or term) and pays a benefit only if the insured dies during that period. Many people find that term insurance is a common-sense answer to a number of tough questions. Questions such as:
The two most common types of term insurance are level and decreasing. Level term does just as its name implies, it provides a level amount of protection for the specified term. Decreasing term, just as its name implies, provides a smaller amount of protection each year. Below is a graphic representation showing the differences between these two types of insurance.  Whole life insurance provides permanent protection for the whole of life - from the date of issue to the date of the insured's death - provided premiums are paid. The benefit payable is the face amount of the policy, which remains constant throughout the policy's life. Premiums are set at the time of policy issues and also remain level for the policy's life. Features of Whole Life: Unlike term insurance, which provides only death protection, whole life insurance combines insurance protection with a savings or accumulation element. This accumulation, commonly referred to as the policy's cash value, builds over the life of the policy. This is because whole life insurance plans are credited with a certain guaranteed rate of interest; this interest is credited to the policy regularly and grows over time. The amount of a policy's cash value depends on a variety of factors, including:
Generally, the larger the face amount of the policy, the larger the cash values; the shorter the premium-payment period, the quicker the cash values grow; and the longer the policy has been in force, the greater the build-up in cash values. Universal life insurance is a variation of whole life insurance, characterized by considerable flexibility. Unlike whole life, with its fixed premiums, fixed face amounts and fixed cash value accumulations, universal life allows its policy-owner to determine the amount and frequency of premium payments and to adjust the policy face amount up or down to reflect changes in needs. Consequently, no new policy need be issued when changes are desired. Another factor that distinguishes universal life from whole life is the fact that partial withdrawals can be made from the policy's cash value account. (Whole life insurance allows a policyowner to tap cash values only through a policy loan or a complete cash surrender of the policy's cash values, in which case the policy terminates.) Also, the policy owner may surrender the universal life policy for its entire cash value at any time. However, the company probably will assess a surrender charge unless the policy has been in force for a certain number of years. Check out our Sample Universal Life Insurance Rates Universal life insurance offers three death benefit options Option I: The beneficiaries will recieve the face amount of the policy, less any loans or charges outstanding. Option II: The beneficiaries will receive the face amount of the policy, plus the cash value of the policy, less any loans or charges outstanding. Option III: The beneficiaries will receive the face amount of the policy, plus the total premiums paid, less any loans and charges outstanding Innovation in LIFE INSURANCE that allows policyholders to invest the cash value of the policy in stock, bond, or money market portfolios. Investors can elect to move from one portfolio to another or rely on the company's professional money managers to make such decisions for them. As in WHOLE LIFE INSURANCE, the annual premium is fixed, but part of it is earmarked for the investment PORTFOLIO. The policyholder bears the risk of securities investments, meaning that cash values and death benefits will rise if the underlying investments do well, and fall if the investments drop in value. Some insurance companies guarantee a minumum death benefit for an extra premium. When portfolio investments rise substantially, policyholders can use a portion of the increased cash value to buy additional insurance coverage. Policyholders can borrow against the accumulated cash value or cash in the policy. As in an INDIVIDUAL RETIREMENT ACCOUNT, earnings from variable life policies are tax deferred until distributed. Income is then taxed only to the extent it exceeds the total premiums paid into the policy. Death benefits are not taxed as individual income but as taxable estate income, which carries an exclusion of $1,000,000 in 2003 and gradually increases to $3.5 million in 2009 and is repealed in 2010. This provision of the Economic Growth and Tax Relief Reconciliation Act of 2001 will expire on December 31, 2010. Unless Congress extends the law, the Estate Tax Exemptions will be reinstated at $625,000 on January 1, 2011. Variable life insurance is different from UNIVERSAL LIFE INSURANCE. Universal life allows policyholders to increase or decrease premiums and change the death benefit. It also accrues interest at market-related rates on premiums over and above insurance charges and expenses. |
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