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Types of Life
Insurance
In choosing the type of life insurance
policy you purchase, consideration must be given to the need which
is being filled: funding retirement needs, creation of an estate,
payment of estate settlement costs (federal and state death taxes,
last illness and burial costs, probate fees, etc.), business
buy-out, key-man coverage, etc.
|
Policy Type |
Features |
Consider the Need |
| Decreasing Term
|
Level premium, decreasing
coverage, no cash value. |
Suitable for financial
obligations which reduce with time such as mortgages or
other amortized loans. |
|
Annual Renewable
Term |
Increasing premium, level
coverage, no cash value |
Suitable for financial
obligations which remain constant for a short or
intermediate period such as income during a minor's
dependency. |
| Whole Life
|
Level premium, level
coverage, cash values. Cash value typically increases based
on insurance company's general asset account portfolio
performance. |
Suitable for long-term
obligations, such as surviving spouse lifetime income needs,
estate liquidity, death taxes, funding retirement needs,
etc. |
| Universal Life
|
Level or adjustable premium
and coverage, cash values. Cash values increase based on the
performance of certain assets held in the company's general
account. |
Suitable for long-term
obligations or sinking fund needs: estate growth, estate
liquidity, death taxes, funding retirement needs, etc. |
|
Variable Life and
Variable Universal Life
|
Level or adjustable premium,
level coverage (can be increased by positive investment
performance. Cash values are directed to a choice of
investment accounts (bond, stock, money market, etc.) by the
policy owner. |
Suitable for long term
obligations and those who are more active investors and for
estate growth and death tax liquidity. |
|
Single Premium
Whole Life |
Entire premium is paid at
purchase, cash values, level coverage. |
Provides protection as well
as being an outstanding asset accumulation vehicle. |
NOTE: Withdrawals and loans
may be available from permanent policies. There are different income
tax consequences if they are "modified endowment contracts"
Term Life Insurance
Term Life Insurance provides death protection for a stated time
period, or term.
- Good choice for
short-range goals
- Provides temporary life
insurance protection on a limited budget
- Premiums increase when
the policy is renewed
- Can be converted to a
permanent policy at any time prior to age 75 (subject to
established minimums)
|
Permanent Life Insurance
Permanent life insurance provides death protection for as long as
you live.
- Good choice for
long-range goals
- Guaranteed cash values
can provide money later on to help with temporary needs
or emergencies
- Level premiums
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Not
sure what type of insurance would be best for you?
When deciding which type of life insurance would best meet your
need, four basic features should be considered:
- Death Benefit
- Premium
- Cash Value
- Duration of Coverage
|
Note: A combination of term life
insurance and permanent life insurance is often appropriate.
Death Benefit
- Term life insurance
provides a death benefit for a stated period of time
- Permanent life insurance
provides a death benefit for as long as you live
|
Premium
- Permanent life insurance
premiums are generally level and payable for life
- Term life insurance
premiums will increase over time and are payable for a
specific period of time
- Term life insurance
premiums generally increase at each renewal
|
Cash
Value
Guaranteed Cash Values:
- Term life insurance does
not accumulate cash values
- Permanent life insurance
accumulates guaranteed cash values
- The growth in cash
values is tax-deferred under current federal income tax
law
- You may borrow against
the cash value as a policy loan at the current policy
loan interest rate
- Borrowed amounts reduce
the death benefit and cash surrender value
- Amounts withdrawn that
exceed the cost basis of the policy are federally income
taxable
|
Dividends:
- Term life insurance does
not earn dividends
- Permanent life insurance
policies may be eligible for dividends
- Dividends are a return
of premium and are based on actual mortality, expense,
and investment experience of the company
- Dividends are not
guaranteed, since actual experience is not known in
advance
|
Net Cost
of Insurance:
You can compare permanent life insurance and term life insurance by
taking into consideration both the premium payment and the
guaranteed cash value. This comparison is referred to as the Net
Cost of Insurance.
Total Premiums Paid - Guaranteed Cash Value = Net Cost of
Insurance
As an example, compare a term life insurance policy with a permanent
life insurance policy over a 20 year period.
| |
Total Premiums
Paid
|
- |
Guaranteed Cash
Value |
= |
Net Cost of
Insurance |
|
| Term1 |
$4,540 |
|
$0 |
|
$4,540 |
| Permanent2 |
$29,200 |
|
$26,883 |
|
$2,317 |
1Select
Term-20 policy -- 35 year old male, non-tobacco, $100,000 worth of
coverage
2Whole Life Policy -- 35 year old male, non-tobacco,
$100,000 worth of coverage
(Note: These figures do not recognize that, because of interest, a
dollar in the future has less value than a dollar today.)
Duration of Coverage
If your need for life insurance is to provide protection for a
specific period of time, like providing protection for educational
expenses in the event of your premature death, then you may want to
consider term insurance. Other examples of temporary needs are:
- Use of death benefit to
pay off home mortgage
- Use of death benefit to
pay off an automobile loan
|
If your need for life insurance is long
term, such as paying bills at death or providing money for your
loved ones, then you may want to consider permanent insurance. Other
examples of permanent needs are:
- Use of death benefit to
pay final expenses
- Use of death benefit to
provide money for a favorite charity
- Use of death benefit to
pay estate taxes
- Fund a business buy/sell
agreement or provide key person protection
|
Note: The longer period of time that
insurance protection is needed, the more consideration you should
give to permanent life insurance.
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