Welcome to S.I.P.S. ‘N’ TIPS where I share saving, investing, and protecting wealth (along with other fun life wealth tips). This first segment will open with a discussion about life insurance.
Life insurance was developed to protect the life of an individual in case that individual should die, as long as premiums are up to date.
TERMINOLOGY
First, it is important to understand the language of life insurance.
The “death benefit” or “face value”is the amount of money that will be delivered to the beneficiary upon the death of the insured.
The “insured” is the one whose life is being covered.
The “insurer” is the company to whom premiums are paid and that will pay the death benefit upon the death of the insured. •The premium is the amount of money paid each month, each quarter, or sometimes biannually or yearly to the insurance company for the insurance policy.
The premium is determined by the age, health, risky activities and coverage goals of the insured.
The payor is the one who pays the premiums.
The owner is the one who controls the policy. The owner, insured and payor can be the same person.
The beneficiary is the one who receives the face value upon the death of the insured.
Riders are extra benefits that can be added to a policy at a certain cost that is added to the premium. The best way to explain a rider is to compare it to a car purchase. If you want to buy a car, the car salesman will show you the basic, no frills, version of a particular kind of car you want. You can purchase extra enhancements for your car like leather seats or roadside service. These extras in the insurance world would be called “riders”. These riders include such things as disability or adding a child to the policy or no lapse guarantee or chronic care or critical care.
TYPES OF INSURANCE
There are three fundamental types of insurance: term, whole life, and universal life. Each has its own unique qualities and its own unique purposes, depending on the budget and the particular situation of the individual.
TERM:
“Term insurance” is often called pure insurance. It is available to about age 80. No cash accumulates inside of a term policy. There are different types of term insurance including increasing term, level term and decreasing term. Term insurance is only purchased for a specific period of time, much like you sign a lease for an apartment for a specific period of time. This period of time is called the “term”. The term is usually for 5, 10, 15, 20, 25 or 30 years. The most notable feature of term insurance is that it is the cheapest of the three types of insurance. Once a term has expired, a new term can be purchased. The premium payment is set and remains the same for the duration of the term. However, with each renewal for a new term, the premium becomes considerably more expensive. A few types of term insurance are available with riders called “Living Benefits”. These living benefits include chronic care or critical care riders.
WHOLE LIFE:
The second form of insurance is called “Whole Life Insurance”. Whole life insurance is permanent. Permanent means there are no terms involved. Whole life insurance, therefore, lasts for the whole life of the insured, usually until age 100. The face value is guaranteed to be paid out upon the death of the insured or upon the insured reaching age 100. Once the premium is set, the premium amount remains the same, it will not change for the duration of the whole life policy. Whole life premiums are more expensive than term premiums. Part of the premiums go into an account that accumulates over time. This is known as the cash value. Cash does accumulate tax-free inside of a whole life policy. The cash grows at a fixed rate. The insured can tap into the cash value by borrowing or partial withdrawal. This loan accumulates interest. If not paid back, the loan amount plus interest will be deducted from the face value upon the death of the insured and the beneficiaries will be paid the balance.
UNIVERSAL LIFE:
The third type of insurance is “Universal Life Insurance”. Universal life insurance is also permanent and set to last usually to age 120, the age however, can be adjusted.
One of the unique features of the universal life insurance policy are the flexible premiums. These premiums also are more expensive than those of term life insurance. The premiums can be adjusted to a minimum or maximum. The insured will often pay the maximum over the initial years of the policy so that cash can accumulate quicker and premiums can be paid from this cash value. Another unique feature of universal life insurance is that the face value can increase overtime, with the cash accumulation being added to the face value yearly depending upon how the policy is structured. Like whole life insurance, part of the premiums of universal life insurance goes into an account that accumulates cash value overtime. This cash can grow in indexed accounts (not tied to the stock market) or variable accounts (tied to the stock market). Generally, cash growing in an index account benefits from market growth, but it is protected from market loss. The cash accumulation is tax free. This cash accumulation can be used as a surrender value. This is when the insured decides he/she no longer wants the policy and gives it back to the company. The company will then give the insured the cash accumulated called the surrender value. Cash value can also be borrowed for loans and paid back or not. Finally, the cash accumulation can also be used to pay for premiums. The insured has to make sure the cash accumulation does not run below the cost of insurance or the policy will lapse. Most universal life policies provide for such riders as chronic care, critical care, and long-term care.