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 from a term policy is to die during the term. If death occurs, the insurance company pays the face amount or "death benefit" to the beneficiary.

Many insurance companies offer level premium term insurance. This type of coverage has premiums that remain level for a period of 5, 10, 15, 20, 25 or even 30 years. These policies are inexpensive and can provide relatively long term coverage. Some 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. That's why, it's important to make sure that you understand the terms of any insurance policy you are considering.

Historically, term insurance premiums increased each year, as the risk of death became greater. While unpopular, this type of coverage is still available and is commonly referred to as annually renewable term (ART).

RETURN OF PREMIUM TERM LIFE INSURANCE (ROP)

Return of premium term insurance (ROP) is a relatively new type of coverage that generally combines low, term-like, premiums with a guaranteed refund of the premiums paid during the level term period, assuming the insured is still living at the end of the level term. These ROP plans are available in 15, 20, or 30-year term versions. Consumer interest in these plans has continued to grow each year, as they are often significantly less expensive than permanent types of insurance, yet, like many permanent plans, they still may offer cash surrender values if the insured doesn't die.

TO AGE 100 LEVEL GUARANTEED

These plans offer a guaranteed level premium to age 100, along with a guaranteed level death benefit to age 100. Most often, this is accomplished within a Universal Life policy, with the addition of a feature commonly known as a "no-lapse rider". Some, but not all, of these plans also include an "extension of maturity" feature, which provides that if the insured lives to age 100, having paid the "no-lapse" premiums each year, the full face amount of coverage will continue on a guaranteed basis at no charge thereafter.  

WHOLE LIFE INSURANCE

Whole Life Insurance is a form of permanent insurance, and is designed to remain in effect 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 much 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.

Cash values in whole life policies typically include two components. Each policy has a guaranteed cash value, which typically grows based on a pre-determined schedule during the life of the policy and which "endows" or equals the death benefit upon maturity of the policy (typically at age 100). In addition, most whole life policies have a non-guaranteed cash value element, typically made up of "dividends" or "excess interest" which can enhance the value of the policy over time.

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UNIVERSAL LIFE INSURANCE

Universal Life Insurance differs from Whole Life in that the 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, which 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 the 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. Also, 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 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 SECOND TO DIE

This type of coverage is generally offered either as Universal Life or Whole Life and pays a death benefit at the later death 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!

Congress instituted an unlimited marital deduction in 1981. As a result, most individuals arrange their affairs in a manner such that they delay the payment of any estate taxes until the second insured's death. These "2nd-to-die" contracts allow the insurance company to delay the payment of the death benefit until the second insured's death, thereby creating the necessary dollars 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.