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Types of Individual Life Insurance

 Term Life Insurance

Term life insurance provides protection for a specific period of time. Money is paid to the beneficiary if the insured dies while their policy is still in force. Premiums are generally more affordable because the insured pays only what is necessary to cover the cost of the death benefit. There is no cash or equity building up inside of the policy. The chance of outliving the term must be considered when buying a term policy. When the term expires, the premium will increase in order to account for the insured's newly attained age.

The two most common types of term life insurance are Annual Renewable Term and Guaranteed Level Premium Term.

Annual Renewable Term life insurance offers premiums that are initially very low; however, the premiums are set to increase as the insured gets older. Generally these premiums get to be too expensive as the insured gets older. These plans have been used less and less since the introduction of guaranteed level premium term life insurance.
 

Guaranteed Level Premium Term life insurance policies have premiums that are guaranteed to remain level over a specified period of time. These policies are offered in periods of 5, 10, 15, 20, 25, and 30 years. Once the initial level period expires, the annual premium increases each year. Although each year's increase is subject to a guaranteed maximum, people generally opt not to renew these policies because they are too expensive.
 

In general, term life insurance is right only when life insurance needs are temporary. If the needs of the insured happen to be long-term but their budget does not allow for higher premiums, term insurance can also be suitable. At the end of the term it is important to remember that the premium will increase to account for the newly acquired age. If a policy is guaranteed renewable, the option of the renewing the contract without proving insurability (without taking another medical exam) is available. If the policy is convertible, the option to convert it to a form of permanent insurance, usually universal life, without proving insurability, is available. Upon conversion, the premiums adjust to reflect the newly attained age and the new permanent contract.

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Whole Life Insurance

Whole life insurance is permanent life insurance and that provides protection for life, no matter how old you might be when you die. As long as premiums are continue to be paid, the death benefit is guaranteed to be paid to the designated beneficiary. Premiums are designed to remain level over time. One of the most attractive features of a whole life policy is the fact that these policies accumulate cash values on a tax-deferred basis. The rate of return on the cash value account depends upon the results of the insurance company's investment performance, expenses and mortality. Cash values can be used for a variety of options:

The policy owner can take out a loan against the death benefit which does not need to be repaid.

  • The cash value can be used as collateral when buying a house.
  • Cash values can be used to pay premiums.
  • Cash surrender value can be used to supplement retirement income.

 

Whole life insurance policies are considered to be the most comprehensive types of policies because they provide permanent protection and accumulate cash values that can be used to meet specific objectives. Whole life insurance also tends to be the most expensive form of life insurance available. The guaranteed cash values can provide money later on in life to help with temporary needs or emergencies. Premiums generally are level and payable for life: Since premiums are level, the younger you are when you purchase a whole life policy, the less expensive the annual premiums will be.

Whole life insurance policies can earn dividends. Dividends result when the insurance companies actual life insurance costs turn out to be less than what they assumed when setting premiums. When this happens, the insurance company may return a portion of your life insurance premium to you as a dividend. Dividends are not guaranteed, since actual costs cannot be predicted in advance.

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Universal Life Insurance

Universal life insurance is a commonly used form of permanent life insurance. It is also known as Flexible Premium Adjustable Life Insurance. These policies are different from whole life insurance policies because they offer the policy owner flexibility. The option to change premium payments and the amount of death benefit is available. The death benefit may be increased up to the amount that the insured was originally underwritten for or decreased to any desired amount. Premiums can also be increased in order to over fund the cash value account, decreased as desired, as well as skipped in the event of an emergency. Universal life insurance policies may be purchased with either a level death benefit or an increasing death benefit. Universal life policies have what is known as a target premium which is the suggested annual premium payment. The target premium for some companies is sufficient to keep the policy in-force to age 100; however, this is not guaranteed. Universal life policies also accumulate cash values on a tax-deferred basis. These cash values are interest-sensitive and can be used for a variety of options:

  • The policy can be surrendered at anytime for the cash surrender value.
  • The policy owner can take out a loan against the death benefit which does not need to be repaid.
  • The cash value can be used as collateral when buying a house.
  • The cash values may be used to pay premiums.
  • The cash surrender value can be used to supplement retirement income.

 

Universal life insurance policies are valuable because they can provide permanent protection and accumulate cash values that can be used for emergencies or for meeting specific objectives. For those who prefer flexibility, universal life insurance provides more options than whole life insurance.

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Variable Universal Life Insurance

Variable universal life insurance is another form of permanent life insurance. Variable Universal Life is identical to Universal Life with one main exception; the cash value varies with the investment results of the mutual funds chosen by the policy owner. The policy owner is given a choice of investment options which are usually stock, bond and money market funds. Unlike universal life insurance policies which have guaranteed cash values, the cash values of variable universal life insurance policies are not guaranteed.

Variable universal life insurance policies are useful because they can provide permanent protection and accumulate cash values; however, these policies carry much more risk than traditional whole life and universal life insurance policies. Individuals considering the purchase of a variable universal life insurance policy should be working with an experienced investment advisor.

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