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CHOOSING THE AMOUNT
You should elect an amount necessary to meet the needs you are trying
to satisfy.
CHOOSING THE TYPE OF LIFE INSURANCE
There are two basic types of life insurance, term insurance and cash
value insurance. There are many variations on them.
Term Policies provide life insurance for a specified
period of time. These policies provide benefits in the event of death,
but they generate no "cash value". If you have a limited amount to spend,
and only need insurance for a finite period of time, you may be able
to get more coverage by buying term insurance than by buying cash value
insurance. Keep in mind that the cost of term insurance increases as
you get older, which may make it more expensive than cash value insurance
in the long run. Today's term policies usually have two sets of premiums
- guaranteed maximum premiums, and "current premiums", which are usually
much lower, but which can be changed by the company. The company cannot
increase current premium above the guaranteed maximum premiums shown
in the policy.
When you buy term insurance you need to make a choice as to how long
you want the protection. You may renew the policy without a physical
examination for the period of years specified in the policy. Some term
insurance can be converted to cash value insurance up to a specified
age with no physical examination. Premiums for the converted insurance
will most likely be higher than the premiums you would be paying for
the term insurance.
Cash-Value Insurance combines death benefits with an
accumulation feature. The buyer of a cash value policy pays more in
the early years than for term insurance, but the money not needed to
pay for the cost of the death benefit accumulates at interest. If the
policy is surrendered before the insured dies, there may be a cash value
paid to the owner. Make sure the agent/broker provides you with the
method by which the cash value is determined and that they obtain this
information based on the policy's guaranteed value. As a general rule,
it is not a good idea to buy cash value life insurance if you plan to
surrender early.
If all premiums are paid, cash value insurance usually lasts for the
whole life of a person, and pays death benefits to the beneficiaries
named in the policy upon the death of the insured. The cash value can
be used as loan collateral for borrowing funds at the interest rate
specified in the policy. Any outstanding loans are deducted from policy
proceeds at death or surrender. Some of these products may enjoy tax
advantages. A policy lapse or surrender may create a taxable event and
may generate a Form 1099. Be sure to check with your tax advisor.
Some of the most popular types of cash value insurance are described
below:
Whole Life Insurance (also known as straight life,
ordinary life and traditional permanent insurance) has guaranteed premiums
and death benefits, and a minimum interest rate which will be credited
to the funds accumulated in the policy. On some whole life policies
higher interest rates may be credited to those funds depending on the
future performance of the company's investments.
Universal Life differs from whole life insurance in
that it allows the policy owner to vary, with limitations, the amount
and timing of premium payments and the death benefit. Cash values are
accumulated by crediting premium payments and interest to a fund from
which deductions are made for expenses and cost of insurance. The rates
at which the interest is credited are declared by the company or may
be specified in the contract. Like term insurance, universal life insurance
policies usually have two sets of premiums - guaranteed maximum premiums,
and "current premiums", which may be lower, but which can be changed
by the company, up to the maximum. They also include a minimum interest
guarantee. Because of its flexibility, a universal life policy can also
be structured to operate like term insurance.
Variable Life differs from whole life insurance and
universal life insurance in that policy owners direct the distribution
of their premium payments among several different accounts or funds
rather than of the company's choosing. Typical account choices are:
common stock, bond, mortgage, and money-market accounts. With this type
of policy, the death benefit and cash value benefits vary in relation
to the value of the investments underlying the policy. If the value
of the accounts increases, so will the benefits; if the value of the
account decreases, so will the benefits, subject to a minimum guarantee.
Variable life insurance is more risky to the policy owner than the other
forms of cash value insurance, but there is a possibility of greater
returns.
Variable Universal Life Insurance combines the flexibility
of universal life insurance with the investment account features of
variable life insurance.
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