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Types of Life Insurance
Term Life Insurance
Whole Life Insurance
Universal Life Insurance
Second to Die Insurance

Settlement Options
All Options

Riders
Waiver of Premium
Accidental Death

Insurance Terms
Beneficiary
Cash Surrender Value
Free Look Period
Illustration
Insurable Interest
Insurance Trust
Life Insurance Underwriting
Pre-Existing Condition
Suicide Clause
Surrender Charge


Types of Life Insurance

Permanent and term life insurance are the two basic types of life insurance. The primary difference between them is the period of time protection is offered. Permanent life insurance offers protection for your entire lifetime (owning), as long as you continue to pay for it. Term, on the other hand, only provides death benefit protection for a specified time period (renting), paying a benefit to your heirs if you die during that specified term.

Term Life Insurance

Term life insurance provides insurance protection for a specified period of time, and it pays the face amount benefit to a named beneficiary only if the insured dies during that period.

For example, assume Bob buys a 20-year, $250,000 level term policy on his life, naming his wife, Mary, the beneficiary. Assuming the premiums are being paid, if Bob dies at any time during the policy's 20 year period, Mary will receive the $250,000 death benefit (usually free from taxes). If Bob lives beyond the 20 year period, nothing is payable. The policy's term has expired.

Many term policies have a guaranteed rate period, assuring that your premium won't increase for 1, 5, 10, 20, even 30 years, depending on the term you choose. These same policies usually have a guaranteed renewability period as well, allowing you to renew your policy up to a certain age regardless of your health status and without any further proof of insurability.

Term life insurance is generally the least expensive and least complicated type of life insurance. These policies provide a low cost way to get maximum insurance protection for a set period at a fixed cost. Unlike permanent or whole life insurance however, term life insurance has no "accumulation" element, or cash value.

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Whole Life Insurance

Whole life insurance provides permanent life insurance protection for the "whole of life" - from the date of issue to the date of the insured's death, provided premiums are paid. The benefit payable is the face amount of the policy, which remains constant throughout the policy's life. The premiums of a whole life policy also remain level.

Unlike term insurance, which provides only death benefit protection, whole life insurance combines insurance protection with a savings or accumulation element. This accumulation, commonly referred to as the policy's cash value, builds on a tax-deferred basis over the life of the policy and is determined by the insurance company's expenses, mortality and investment performance. The cash value is often regarded as a "savings element" because it represents the amount of money the policy owner will receive if the policy is ever cancelled. Whole life insurance generally has a much higher premium than that of term life insurance.

Whole life is valuable because it provides protection for the entire lifetime of the insured as well as accumulating cash values, which can be used to supplement retirement income needs. Many people who have maxed out qualified retirement options such as their 401(k), find the tax-deferred savings element of whole life very attractive.

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Universal Life Insurance

Universal life insurance is a type of permanent life insurance with flexible premiums. This type of policy builds cash value on a tax-deferred basis and allows the policy owner to vary the amount and timing of the premium payments and change the death benefit periodically.

There are three steps to understanding universal life and how it functions:
    1. The policy owner selects an insurance amount and a death benefit option. There are two death benefit options available with universal life: a level death benefit and an increasing death benefit. With very few limitations, the amount of insurance and the death benefit option can be changed at any time to adapt to a policy owner's needs.
    2. The policy owner pays the initial premium. The insurer deducts from this amount an expense charge; the balance is deposited into the policy's cash value account where it earns a current rate of investment return. Any future premiums, the amount, frequency and timing of which the policy owner determines, are treated in the same manner.
    3. Each month, a charge for the cost of pure insurance (term) protection is deducted from the cash value account. As long as the account is sufficient to support these monthly charges, the insurance will remain in force. Thus the policyholder has flexibility in the way premiums are funded: premiums may be increased, decreased or even skipped.
This type of policy is attractive to someone who wants the advantage of permanent insurance and access to cash values along with flexible premiums.

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Second to Die Insurance

Second to die insurance is a permanent life insurance policy that covers two lives under one contract. The death benefit is paid on the death of the second person; nothing is paid at the death of the first person and premiums must continue to be paid until the death of the second party. Also known as a survivorship policy. Like whole life, second to die has level premiums, a tax deferred cash value and a guaranteed death benefit.

The primary purpose of second to die life insurance is for estate planning.

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Settlement Options

Settlement options are the various ways an insurance contract can pay a benefit to a beneficiary in the event of a death. The insured, or the beneficiary can determine a settlement option. They include:

Lump Sum Payment

The life insurance proceeds are paid to the beneficiary or beneficiaries in one lump sum.

Interest Only Option

Under the interest only option, the insurance company holds in trust the proceeds for a specified period of time and, at regular intervals, pays the beneficiary interest on the proceeds at a guaranteed rate. At the end of the period, the proceeds are paid in cash or under one of the other settlement options.

Fixed-Period Option

Under the fixed-period option the company pays the beneficiary equal amounts of money, composed of both principal and interest at regular intervals over a specified period of time. The amount of each installment is determined by the length of time the money is to be paid out.

Fixed-Amount Option

Under the fixed-amount option, the proceeds of the policy plus interest are used to provide a specific amount of income at regular intervals for as long as the proceeds last.

Life Income Option

Under a life income option, the beneficiary will receive a guaranteed income for life - no matter how long he or she lives.

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Riders

A rider is a provision attached to a policy that adds benefits not found in the original policy or that changes the original policy.

Waiver of Premium

A clause or rider on a life insurance policy that suspends the premium payments if the insured is disabled longer than a certain time period (usually six months) and as long as he or she continues to be disabled. The policy remains in force even though the insured is no longer paying the premiums. For permanent disabilities, some term policies can be converted to whole life policies and the insurance company will pay the premium.

Accidental Death

When combined with dismemberment insurance, this coverage may be called accidental death and dismemberment insurance (AD&D). It provides extra coverage in the event of death resulting from accidental injuries but not illness.

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Insurance Terms

Beneficiary

An individual designated in a will to receive an inheritance, or the individual designated to receive the proceeds of an insurance policy, retirement account, trust, or other asset upon the death of another individual.

Cash Surrender Value

The amount available to the policyholder if a cash value life insurance policy is surrendered (canceled). The cash surrender value is actually the cash value of the policy, minus any surrender charges imposed by the insurer and any policy loans and interest that were outstanding when the policy was canceled.

Free Look Period

The right of an insured to examine an insurance policy for a stated period, often 10 days, and if not satisfied, to return the policy and receive a full refund of the initial premium.

Illustration

A hypothetical projection showing how the cash value component of a cash value life insurance policy can be expected to perform, based on certain assumptions. The illustration, however, is no guarantee of actual performance.

Disability Insurance

Disability insurance is used to replace a persons income if they become sick or injured as a result of an accident or illness. The benefit is paid in monthly installments, usually beginning 90 days after the disability occurs and is paid for as long as the person remains disabled until the age of 65.

Insurance Trust

An insurance trust is created to hold one or more life insurance policies or proceeds, and may hold other assets as well. The trust is the owner of the policy and the beneficiary of the proceeds. Usually, life insurance trusts are established to avoid the imposition of estate taxes on the proceeds; therefore, most life insurance trusts are irrevocable. The creator of the trust may purchase new policies or transfer existing policies to the trust, or the trustee may be permitted to purchase the policies (but each of these alternatives results in different estate tax consequences).

Life Insurance Underwriting

The process by which an insurance company examines, accepts, or rejects insurance risks so as to charge the proper premium for the coverage and to spread the risk among a pool of insureds in a manner that is both fair to the insureds and profitable for the company. The company classifies the accepted applicants into different risk categories to charge the proper premium.

Pre-Existing Condition

An illness or medical condition for which a person was treated or advised within a specified time period before applying for an insurance policy. A pre-existing condition can result in the cancellation of the policy if it is not disclosed up front.

Suicide Clause

Provision in a life insurance policy that specifies that no death benefits will be paid if the insured commits suicide within a certain period after purchasing the policy (usually two years).

Surrender Charge

Fee charged by an insurer when a life insurance policy or annuity is surrendered prematurely for its cash value.

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