Let’s go to life insurance class
Life Insurance Basics
Life insurance companies are great at coming up with new kinds of policies. But try to remember that whatever the name of the policy-;universal life, variable life, Whole Life, Irreplaceable Life, The Income Answer, The Life Solution-; the fact is they are all variations on the two basic kinds of life insurance: term insurance and cash-value insurance (also called permanent or whole life).
Term Insurance
This is as simple as life insurance gets and is the easiest to understand. You insure your life for a fixed period-;one year, five years or more-;and pay an annual premium based on your age. The older you get, the more it costs. The younger you are, the premiums are lower. Many companies won’t sell term policies that run past a certain age limit, usually 65 or 70. But by that time term insurance is very expensive anyway, because life expectancy is comparatively short. Besides, as we’ve seen above, your need for insurance often diminishes as you reach retirement age.
A term insurance policy has no savings or investment features built into the rates, making it the purest form of life insurance and thus the cheapest for a given amount of coverage. Term insurance comes in different varieties based on age, health and benefit amount.
Annual renewable term
This is the most common form of term insurance. You buy a series of one-year policies and the insurance company guarantees you the right to renew the coverage each year without having to undergo an additional medical exam. As you grow older, your premium rises, but at least you don’t have to get another medical exam..
Guaranteed-level term
Instead of rising each year, premiums start out a little higher but stay level for five, ten, 15 or even 20 years. At the end of the period, you have usually paid less than you would have under an annual renewable term policy. Insurance companies developed guaranteed-level term policies to discourage policy hopping.
Declining, Decreasing or Reducing Term
Coverage periodically drops according to a fixed schedule over ten, 15, 20 or more years. Mortgage insurance policies, which pay the loan balance when the policyholder dies, are a common form of decreasing term.
Convertible Term
For a higher premium, the policy can be converted into a cash-value policy without your having to meet medical standards at the time of conversion. Most companies offer policies that are both convertible and renewable up to specified ages or for fixed periods.
Enough about term, let’s discuss cash value policies.
Whole Life Insurance
This is also called permanent or cash-value insurance. In its basic form, it charges you the same premium, based on your age when you sign up, for as long as the policy remains in force. Because the premium remains level as you grow older, it is set to exceed the company’s cost of insuring your life during the early years. The surplus and interest it earns go into a reserve fund, part of which pays the agent’s commission and the company’s administrative costs. The rest gets credited to your account, where it earns dividends. After a couple of years your reserve begins to build, creating a cash value that you can draw on in one or more ways.
You can use your accumulated cash value by borrowing against it while the policy stays in force; by directing the company to use it to purchase a paid-up insurance policy; by directing the company to use it to pay your premiums; or by surrendering the policy and taking the money. When you die, the company pays your beneficiary the policy’s face amount (less any policy loan balance), not the face amount plus cash value.
Insurance companies offer a variety of cash-value policies, ranging from the standard whole life policy (sometimes called straight or ordinary life) to specially designed contracts in which the premiums or face amounts change according to a set schedule, investment results or some other factor.
Creative Variations
One variant essentially combines into one policy coverage of two people-;husband and wife. This product is often used for estate planning purposes. For more about it, see Second to Die Life Insurance. To read about a special kind of trust used with life insurance to minimize estate taxes, see Irrevocable Life Insurance Trusts.
There are many other creative policy names and themes created all the time by the hundreds of insurance companies out there, in fact, you can even sell shares of your life insurance policy to investors in certain situations. Life insurance is an asset only when it is not term insurance. Remember, any solid estate plan has a life insurance component.
In Abundance,
Anson Massey
Decoding Money Secrets 