Life Insurance- Life Insurance I. Life Insurance Policies: Life insurance policies contain seemingly countless provisions, clauses and options that determine the type and scope of coverage as well as what will happen if premium payments lag or a claim is made. It is important to understand the provisions of the policy you have or any one you're considering.
Incontestable Provision: With this provision, the insurance company may not contest any claims following a specific period of time from the initiation of the policy. Of course, this is not a license to commit fraud, and the discovery of fraud will lead the company to contest any claims and possibly pursue criminal charges.
Suicide Provision: With this provision, suicide within a specific period of time after the initiation of the policy will result only in the return of premiums plus interest. After that period, a claim on a death due to suicide will lead to a full payout.
Reinstatement Clause: With this provision, if premiums are not paid in a timely fashion and the policy lapses, it may be reinstated within a specific period of time if the policy holder remains insurable. This option must be weighed against the potential benefits and downsides associated with a new policy. These might include changes in premium costs and the resetting of provisions for contestability and suicide.
Excluded Risks: Depending on the policy, death under circumstances like war or an aviation accident may or may not be covered. Be sure that all risks you are looking to protect against are covered in your policy. |
Settlement Options: There are a variety of options available for payout. The simplest is a lump sum payment of the value of the policy. It is also possible to leave the entire settlement with the insurance company and collect interest, retaining the right to withdraw principal funds at any time. Payment schedules are also available based on payment amount or duration. In either case, interest will accrue on the money that remains with the insurance company. There are also a range of options that pay benefits over the entire life of the beneficiary. Any decision on settlement options must take into account the current and future financial prospects of the beneficiary and his or her dependents, so the best option will vary from case to case.
|Types of Policies|
Term life insurance covers the insured for what is usually a relatively short period of time. All of the money from the premium is used to pay for the insurance itself. Therefore, at the end of each term, the policy must be renewed. The policy does not accrue equity for the insured. There is no penalty for not renewing a term life policy because the insurance company is not in possession of an asset. If the insured dies during the term of the policy, the policy pays off at its face value. Term life policies are generally tax-free and may even allow for a partial payout upon diagnosis of a terminal disease. |
For young people, term life insurance is often the cheapest option. However, the price will increase as you age because health problems show up over time, and, for the simple reason that the older you are, the higher the chance that the insurance company will have to pay a settlement. Another downside is that if health problems materialize and your policy is non-renewable, your premiums may increase or you may no longer qualify for insurance. This problem can sometimes be avoided by paying higher rates for renewable term life, allowing you to renew the same policy without re-qualifying. A policy may also be designated convertible, which means that the insured can convert the policy to permanent life at a later time.
Another choice related to term life is the option for level or decreasing term. Level term pays the same amount of money upon death at any point during the policy. Decreasing term pays less and less as the term progresses. The latter is most effective for protection against a mortgage or any other steadily decreasing financial obligation. Level term life is not to be confused with level premium term life, which specifies that premiums will not increase over the course of the term in exchange for slightly higher premiums early in the term.
People choose term life when they need insurance for only a short period of time, or they need insurance, but cannot afford the premiums associated with permanent insurance. Some people choose term life and then invest the difference between the premium and a permanent life premium on their own. These people are confident that their investments will outperform those of the insurance company.
|Cash Value (also called Permanent Life)
Cash value insurance is an umbrella term for a variety of plans that combine a death benefit similar to a term life plan with tax-sheltered savings arrangements. Permanent life policies, as their name implies, are meant to be held and paid into for the duration of the insured's life. Because of this, there are significant fees associated with setting up the policy. Despite these fees, the tax advantages can make permanent life a valuable investment over a long period of time. The policy is always renewable and premiums are fixed and calculated based on the age of the insured when the policy is initiated. If the death benefit is paid early in the policy, the money will come mostly from the insurance policy, and, if the death benefit is paid late in the policy most of the money will come from the savings account. As the savings become more and more significant, less insurance is needed to hold down the cost of insurance as the holder ages. |
The cash value portion of the policy is invested in a savings account. Accordingly, value accrues in the policy over time. This portion of the money paid by the insured was originally intended to pay insurance premiums in retirement. Because the account is an asset belonging to the policy holder, however, it is assignable, meaning that it can be transferred to another person or used as collateral for a loan. Policies may even be converted to an annuity to provide income during retirement. Any balance remaining in the account when a settlement is paid is passed on to the beneficiary of the policy. Removing money from the account before settlement for expenses other than the insurance premium is not recommended because taxes and fees will be incurred.
|Despite potential benefits, cash value plans must be carefully investigated because their value to insurance companies exceeds term life, and unscrupulous agents may attempt to push them on customers more suited to term life.|
|Whole Life Whole life is the most basic form of cash value life insurance. The insurance company essentially makes all of the decisions regarding the policy. Regular premiums both pay insurance costs and cause equity to accrue in a savings account. A fixed death benefit is paid to the beneficiary along with the balance of the savings account. Premiums are fixed throughout the life of the policy even though the breakdown between insurance and savings swings toward the former over time. Management fees also eat up a portion of the premiums. The insurance company will invest your money primarily in fixed-income securities, meaning that your savings investment will be subject to interest rate and inflation risk.|
|Single Premium Life
Single premium life is the simplest form of whole life insurance. In exchange for a lump sum, an insurance company provides an insurance contract that requires no future payments in order to remain valid. The death benefit paid by this contract depends on the same factors that determine term life rates (age, health, etc.) as well as the amount paid for the contract. The money is invested in a savings account, and interest accumulates in the account. Fees are charged when money is removed from the account prematurely, but loans may be taken out against the saved equity. |
|Universal Life Universal life was created to provide more flexibility than whole life by allowing the holder to shift money between the insurance and savings components of the policy. Additionally, the inner workings of the investment process are openly displayed to the holder. Details of whole life investments tend to be quite scarce. Premiums, which are variable, are broken down by the insurance company into insurance and savings. Therefore, the holder can adjust the proportions of the policy based on external conditions. If the savings are earning a poor return, they can be used to pay the premiums instead of injecting more money. If the holder remains insurable, more of the premium can be applied to insurance, increasing the death benefit. As opposed to whole life, the cash value investments grow at a variable rate that is adjusted monthly. There is usually a minimum rate of return. These changes to the interest scheme allow the holder to take advantage of rising interest rates. The danger is that falling interest rates may cause premiums to increase and even cause the policy to lapse if interest can no longer pay a portion of the insurance costs.|
|Variable Life Variable life is still another version of whole life that allows investors to select investment vehicles for the savings portion of their policy. Options range from low-risk fixed income funds to high-yield stock and bond funds. These accounts are typically accompanied by higher fees. Returns are generally not guaranteed and investment risk is assumed by the policy holder instead of the insurance company. Premiums remain fixed under this arrangement. As would be expected, the better the investments perform, the larger the death benefit will be. However, the death benefit will not drop below a certain minimum, regardless of investment performance.|
|Variable Universal Life
Variable universal life adds to the flexibility of universal life by allowing the holder to choose among investment vehicles for the savings portion of the account. The only differences between this arrangement and investing individually are the tax advantages and fees that accompany the insurance policy.
Borrowing Against Your Life Insurance
Because permanent life insurance policies result in the accrual of equity in a savings account, that account becomes an asset that may be used to acquire a loan. Unlike most loans, these are not accompanied by a schedule for repayment, and repayment is actually not required. If the loan is not repaid, the amount will simply be subtracted from the policy, reducing the death benefit. A loan against a life insurance policy is not the same as a withdrawal of funds from the account, and for that reason, the insurance company may charge interest on the money you receive from the loan. Despite this fact, a loan against your policy may still affect the dividend earned on your account. |
It is usually possible to borrow up to the cash value of the policy. Interest rates vary widely for these loans and unexpected fees may appear during the borrowing process that will add to this baseline rate, so some policies may be more suitable for borrowing than others.
If you are not making sufficiently high payments on the loan to cover interest owed on the money, the interest will be added to the loan, and interest will continue to accrue at an even greater rate. If the cash value of the account is exceeded, the policy will eventually lapse. Obviously, this should be avoided, so it is important to devise a schedule for managing loan repayment on your own if you want to keep the policy and maintain the death benefit for your beneficiaries. The cost of interest on the loan may often be exceeded by the interest earned on the money remaining in the savings account. Applying these dividends to the loan interest can be an effective way to keep the loan balance in check.
Viatical Settlements / Accelerated Benefits
|Choosing a Policy:|
The correct amount of life insurance varies not only from one person to another, but also from one period in a given person's life to another. Insurance companies publicize a range of estimates for the proper size of a death benefit, ranging from 5 to 10 times annual salary, but it is almost always more appropriate to carefully calculate your individual needs, boost your estimate to account for uncertainty and purchase the right amount of insurance for your situation.
consider is how much money you need to leave for your dependents. Obviously, this will be affected primarily by the cost of living for those dependents. They will need to pay your medical and funeral expenses, settle debts, acquire new benefits if your employer provided them, and maintain their current lifestyle. Remember also that some of these expenses are ongoing, and a subset of those will change in magnitude over time, complicating the calculation. However, a difficult calculation now is undoubtedly preferable to being underinsured or paying for coverage that you and your dependents do not need. If you are a primary caregiver for dependents, child-care expenses may arise following your death. If you have no dependents and no one relies on your income other than you, you probably do not need life insurance yet. Setting aside a small savings for funeral and estate expenses should suffice. |
The size of the benefit required by your dependents can be reduced by your other savings. Also, Social Security money is paid to your dependents if you been employed for a sufficient period of time. If your spouse is also a wage earner, you may be able to be more conservative with your insurance estimate due to the costs than can be deflected by that continued source of income. A separate analysis of life insurance coverage should be performed for you and your spouse, however, because each of your deaths would probably affect the family finances differently. Also, if your spouse is not currently employed but is employable, a conservative estimate of the money that he or she could earn by returning to the workforce may be an appropriate consideration for lowering your own death benefit.
Choosing between term and cash value is the next step in the process of purchasing life insurance. As it happens, term life is simply the better choice for the majority of people. Term plans are significantly cheaper; cash value plans can be 5 to 10 times as expensive. They are also simpler, and this simplicity provides an added value in that comparison shopping can be based on quality of insurer and price since most term policies from different insurers will be very similar. Additionally, when you no longer require insurance because you no longer have dependents, term life coverage is easily dropped. |
Term length is an important consideration. Under normal circumstances premiums will increase over the course of the term as you age. However, you may take the option to pay a bit more in the early years of the term and get a level-term policy. Here, the cost of the policy is spread evenly over the course of the term. Longer term policies often carry a lower premium because you are agreeing to lock yourself into the insurer for a longer period of time. Shorter term policies provide you with the flexibility to reduce your death benefit (and, accordingly, your premium) when the term expires. The most important characteristic to include in your term life policy is renewability without a medical exam. Although it will raise premiums in the short-term, your ability to continue to get term life insurance as you age or your health declines depends upon the renewability of your contract. Some term life policies are convertible, meaning that they can be made into cash value policies with the same insurer at the discretion of the holder if that option becomes financially favorable. Often, however, the tax advantages offered by cash value policies can be more easily capitalized on in retirement plans.
Cash value policies must be held for life if they are to be a successful investment. The setup and initial fees make allowing the policy to lapse or closing the account very unfavorable financially. Cash value policies can be a good option for people who are concerned about getting coverage late in life or for people who are interested in a forced incentive to save for retirement or their estate. Once you reach a certain age, insurance companies may no longer provide you with term life insurance. If you think you will still need insurance at that age (many people do not), permanent life may be a consideration for you. One problem with cash value policies is that the substantially higher premiums often cause people to purchase a policy that is too small for their needs, leaving them underinsured.
|Lowering Your Premiums: When it comes to life insurance, there aren't too many things you can do to make yourself more insurable and lower your premiums, but one thing you can do can make a big difference: if you are a smoker, quit. That single lifestyle change will save you hundreds of dollars per year. Staying away from dangerous sports and other unhealthy activities can help as well. If you do engage in any of these activities, however, do not try to slip it past the insurance company. They can challenge a claim filed on false pretenses and pay nothing to your heirs if the evidence falls in the insurer's favor. Other than changing the way you live your life, the best way to save money is to shop around before purchasing a policy. A little time spent on investigation now could save you money for years to come.|
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