Life & Term Life Insurance

Basic Types of Life Insurance and Variable Life Insurance

Term Life Insurance
Term insurance is, by definition, temporary insurance. Each year, a premium is paid to cover the risk of death during that year. Term insurance has no cash value. The only way to collect anything is to die during the term. If death occurs, the beneficiary generally collects the face amount (death benefit) of the policy free of income tax. Historically, term insurance premiums increased each year, as the risk of death became greater. This type of coverage is still available and is commonly referred to as annually renewable term (ART). Many insurance companies now also offer level premium term. This type of coverage has premiums that are designed to remain level for a period of 5, 10, 15 or even 20 years. These policies have become very popular because they are very inexpensive and can provide relatively long term coverage. But, be careful! Most level premium term policies contain a guarantee of level premiums, however some policies don't provide such guarantees. Without a guarantee, the insurance company can surprise you by raising your premiums, even during the time in which you expected your premiums to remain level. Needless to say, it is important to make sure that you understand the terms of any insurance policy you are considering.

Whole Life Insurance
Whole Life Insurance is a form of permanent insurance, and is designed to stay in force throughout one's lifetime. It is well suited to needs that do not diminish over time, such as paying estate settlement costs and taxes. Generally, the premiums for this type of policy remain the same throughout the life of the insured. During the early years of the policy, premiums are higher than those of term insurance policies. As a result, and by design, these policies develop cash values which can be accessed by the owner of the policy through surrenders or policy loans. This cash value accumulates on a tax-deferred basis, and at a rate based upon numerous factors including the investment experience of the insurance company.

Universal Life Insurance
Universal Life Insurance differs from Whole Life in that these policies distinguish and itemize the protection element, the expense element, and the cash value element. By separating the three elements, the insurance company can build more flexibility into the policy. This flexibility allows (within certain guidelines) the policy owner to modify the face amount or the premium in response to changing needs and circumstances. Here's how these policies work: Premiums are credited to the policy as they are paid. Most plans deduct certain administrative charges from the premium before crediting the balance to the policy value as net premiums. Each month, the insurance company deducts certain amounts from the policy value to cover the costs of mortality (death benefits), as well as for any riders and/or supplemental benefits. Each month, interest is credited to the policy based upon the cash value in the policy and based on a current declared interest rate as determined by the insurance company. This rate can and will change periodically. Most policies also have a decreasing surrender charge which is deducted from the cash value if the policy is surrendered. This feature allows the insurance company to recover certain expenses which are associated with the issue of the policy. The surrender value is the cash value less any applicable surrender charge.

Survivorship or "2nd-to-die" Life Insurance
This type of coverage is generally offered either as Universal Life or Whole Life and pays a death benefit at the later of two insured individuals, usually a husband and wife. It has become extremely popular with wealthy individuals since the mid-1980's as a method of discounting their inevitable future estate tax liabilities which can, in effect, confiscate an amount to over half of a family's entire net worth! Ever since Congress instituted the unlimited marital deduction in 1981, most individuals have taken advantage of their ability to arrange their affairs in a manner such that they delay the payment of any estate taxes until the second spouse's death. These "2nd-to-die" contracts allow the insurance company to delay the payment of the death benefit until the second spouse's death, thereby creating the dollars needed to pay the taxes exactly when they are needed. This coverage is widely used because it is generally much less expensive than individual coverage on either spouse.

What is Variable Life Insurance?
Variable life is closer to traditional whole life than is universal life in that premiums are fixed, and there is a guaranteed death benefit. Variable life brings with it an added twist that the policy owner is the one who has to take the investment risk. The owner selects which group of investment accounts to direct the actual funds to. The owner typically selects from 3 to 8 different accounts made available by the insurance company, and allocates assets according to his or her risk tolerance. The policy owner picks between a stock fund, bond funds, and other investment options. Because of possible variations in cash value, there is no guaranteed minimum cash value.

Investment Performance
When investment performance is good, the cash value and death benefit both increase. However, when performance is below expectations, the death benefit may decrease, but not lower than the amount of coverage that was declared when the policy was originally issued. Should performance results be zero or a negative return, the policyholder may have to pay additional premiums to keep the life insurance contract in force. The advantage to policy owners is that good investment performance can lead to greater benefit. On the downside, the policy owner must also bear any losses. The investment flexibility of variable life provides incentive for policy owners not to withdraw funds from the policy.

Summary
Variable life policies are suitable for people who have a keen interest in how the portfolio that backs the policy is being invested, and want to assume the risk. Stocks have outperformed inflation long-term, but short-term is more difficult to predict. For this reason, most variable policies offer more conservative short-term money market options. Variable life policies can provide extra benefit, but this also comes with and added risk. Past Performance does not guarantee future results.