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Term insurance pays if the death occurs during the "term" of the policy, generally five to 30 years. Two types of term insurance are available.
- Level term where the death benefit stays the same throughout the duration of the policy as does the payment.
- Decreasing term means that the death benefit drops over the course of the policy's term. This type is commonly used to insure that a mortgage will be paid off in the case of a primary income earner.
Whole Life Insurance
Whole Life Insurance is life insurance that continues in force for as long as the premiums are paid. The insurer looks at your current age, health, and lifestyle, the reviews longevity charts that predict your length of life. If you enjoy dangerous sports, your policy will cost you more. The insurer creates a level premium which is higher than necessary to cover expected losses when you are young, then lower than necessary as the policy gets close to the end. Some whole life policies offer investment options. Others offer variable premiums. Variable life, universal life, and variable-universal life are potential options for to consider as a part of your personal financial planning. You may also want to consider term insurance when you are young and need a lower premium for larger benefits, which then converts to whole life insurance when your income will allow for more investment.
Universal Life Insurance (UL)
Like Whole Life, Universal Life Insurance (UL) includes a savings element that grows, tax-deferred. A portion of the premium is invested by the insurance company in very conservative vehicles such as bonds or treasuries. If the insurance company does well with these investments, the interest rate return on your accumulated cash value will be higher than the policy guarantee (usually around 4%). It works like this:
From each premium payment, an expense charge (usually 5%) is deducted. The balance (95%) is added to the policy Account Value.
Next, the actual cost to the insurance company for all insurance benefits and expenses related to the policy for that premium period are deducted from the Account Value.
The Account Value earns interest in that premium period which is credited to the account (but not less than the minimum).A major potential advantage of UL is that if the company does very well with its investments, you may have excellent growth in the cash value of the policy. UL is also more flexible than whole life in that the death benefit and commonly the premium payment are flexible. Unlike other whole life policies, you can increase (subject to insurability) or decrease the death benefit without surrendering the policy or getting a new one. Also you may choose from a variety of premium payments options.
On the other hand there are some added risks to a UL policy. In a whole life policy, the death benefit is guaranteed to be paid if all premium payments are made. In a UL the policy will lapse if the cash value combined with premium payments are not enough to cover the cost of insurance. Insurance companies are not interested in having policies lapse, so generally there are multiple safeguards against this happening.
Many people use UL Insurance as a source of cash payments to the owner of the policy, including loans, withdrawals, collateral assignments, split dollar agreements, pension funding, and tax planning. Ask your Ted Papanickolas Insurance Services Insurance professional more about how this works.