About Life Insurance
What are the three most popular types of insurance policies that you can own today?
- Term Life-insurance
- Whole Life Insurance
- Universal Life Insurance
What is Term Insurance?
Term insurance, as the name implies, is bought for a specific term of time, after which the policy expires. Its coverage is temporary and pays no dividends or interest to the policy owner. This type of policy is called non-participating because it pays no dividends or interest.
Term insurance has the lowest premium payment. It is used to give protection for the least amount of premium cost. The initial premium remains level for the duration of the policy. The choices are 10 year, 15 year, 20 year, and 30 year level term products.
What is Whole Life Insurance?
Whole Life (WL) insurance is a permanent plan of insurance that covers the policy owner for their entire life. The premiums are fixed in value at the time of the ownership and are determined by the age of the owner. The younger the owner the smaller the premium values. The policy accumulates cash value (just like a savings account) through the accumulation of dividends and interest that the policy earns. This policy type is called 'participating' because it pays interest and dividends. The earnings of the policy can be significant over a long period of time and can be calculated by your insurance agent.
What is Universal Life Insurance?
Universal Life (UL) is a permanent plan of insurance that insures the policy owner for their entire life. One portion of the premium buys only life insurance coverage (death benefit amount) and the second portion goes directly into a cash accumulation value (savings) for the policy owner. The policy is considered to be 'flexible' in that premiums can be increased to either increase the cash value of the death benefit as determined by the policy owner. Of if desired, the premiums can be skipped for a duration of time should the policy owner desire to use their premium money instead for other uses such as college education for their children, or emergencies like paying the home mortgage principle and interest payments.
What is Life Insurance?
Life insurance is a pooling together of all of the premiums paid by a group of policy owners for their mutual benefit. This money is used to provide a death benefit to the beneficiaries of any policy owner who has paid the premiums and kept the policy in force. Some of the premium also goes to the administer of the policy. For Whole Life (WL) and Universal Live (UL) policy owners, at the end of each year money not spent on death benefits is returned to the surviving owners in the form of cash credit to their policy values.
What happens to the money in the pool that's not used each year?
For Whole Life Insurance Policy owners, most of it is returned to the policy owner in the form of dividends and cash value. That is, each year after the policy administration expenses and death benefits are paid, the remaining portion of the pool of money is returned to you the the policy owner. This becomes the cash value and is credited to your policy each year. And the insurance company pays you interest on the balance of your cash value each year the policy is in force. In effect, it's your savings account with the insuring company. And at the same time you are also insured with a permanent, participating life insurance policy that you own.
For Universal Life Policy owners, the money in the pool that is leftover is invested by the company in very prudent investments. The earnings that those investments earn are returned to the policy owners each year and is called the "cash value." The cash value continues to accumulate in value each year with the addition of new earnings as well as interest on the old earnings, currently paying 3.0% to 5.0% depending on the Insurance company and current economic conditions. And these earnings are taxed deferred until the money is withdrawn (cashed-in) by the policy owner. So in the case of Universal Life you have the best of two worlds, savings that are tax deferred and life insurance. See your agent for more details.
What are some of the other benefits of owning life insurance?
If the owner should die, the death benefit passes to the beneficiaries completely free of an Estate Tax, Federal Income Tax, State Income Tax or any Local Tax. It also does not have to go through Probate Court, but passes quickly and directly to the beneficiaries.
For permanent policies (Whole Life and Universal Life)
The policy owner can borrow up to 50% of the cash value of a policy at an interest rate which is well below the rate at which other lending institutions can loan money. See your insurance agent for specific interest rates.
The policy can be 'cashed in' if required, although taking a loan against the cash value of the policy is a better business decision.
Each year the company sends the policy owner a statement showing how much money has been paid in additional dividends and interest.
For a Whole Life Policy the dividends are never taxable. But the additional interest credited to your policy cash value each year is taxable. Interest paid on whole life policies are usually less than UL policies.
Many different options, called riders, can be added to your policy for a nominal cost to further enhance the policy's benefits. Please call me for a thorough understanding of these special riders.
I hope this has answered some of your questions on life insurance and that I have been successful in showing you some of the advantages in owning your very own Life Insurance Policy. Please call me if you have any further questions. My number is 919-783-0010.