Life Insurance Basics
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What Is Life Insurance?
Life Insurance is insurance that provides protection against the economic loss caused by the death of the person insured. There are several types of Life Insurance, each having different characteristics. Some of the key types of Life Insurance are: Term Life, Whole Life, Burial Insurance, Survivorship Life, Universal Life, and Variable Life Insurance.
Term Life Insurance
Term Life Insurance is the lowest cost and simplest product available. Term insurance is a life insurance contract that provides protection for a limited number of years. The death benefit is only payable if death occurs during the agreed-upon term. If the insured survives the time period, the policy expires. This means it has no cash value. However, some policies have a convertible feature permitting a policyowner to exchange a term policy for a cash value policy without evidence of insurability. Term is basically designed to provide a maximum amount of protection for a temporary period of time.
Advantages/Disadvantages of Term Insurance
Term insurance is ideal for families where protection is needed, but a minimum outlay of funds is necessary. Term also works well as a supplement to cash value insurance. Another common purpose of term insurance is to purchase it as protection against debts such as mortgages, auto loans or education loans.
On the negative side, term insurance provides only temporary protection, and there may come a time when an insured has no protection after the term policy ends.
Whole Life Insurance
Life insurance that remains in force during the insured's entire lifetime, provided premiums are paid as specified in the policy. Whole life insurance also builds a savings element (called the cash value) as a result of the level premium approach to funding the death benefit.
Burial Insurance
Burial Insurance, or Final Expense Life Insurance, is essentially a whole life product with small face values and ($5,000 to $25,000) and hassle free underwriting. The application process is simple and does not have the associated medical requirements of other policy types. This type of life insurance is also referred to as a simplified issue or guaranteed issue policy.
Survivorship Life Insurance
A type of whole life insurance which insures two people and pays benefits only after the second person dies. It is generally designed to provide funds to pay estate taxes.
Universal Life Insurance
An unbundled whole life insurance product in which the mortality, investment, and expense factors used to calculate premium rates and cash values are expressed separately in the policy. In a universal life insurance policy, any applicable expense charges are deducted from the premium and the remainder of the premium is then credited to the policy's cash value. Each month the insurer deducts the mortality costs from the cash value and credits the remainder of the cash value with interest.
Variable Life Insurance
A form of whole life insurance under which the death benefit and the cash value of the policy fluctuate according to the investment performance of a separate account fund. Most variable life insurance policies guarantee that the death benefit will not fall below a specified minimum. A minimum cash value is seldom guaranteed. Because the policy owner assumes investment risk under variable life insurance policies, these products are considered securities contracts. In the United States, variable life insurance policies must be registered with the Securities and Exchange Commission (SEC), and only agents who have passed the National Association of Securities Dealers (NASD) examination may sell this product.
Life Insurance:
Term Life
Universal Life
Variable Life
Whole Life
Burial