Life insurance may be divided into two basic classes – temporary and permanent or following subclasses – term, universal, whole life and endowment life insurance.
Term Insurance
Term assurance provides life insurance coverage for a specified term of years in exchange for a specified premium. The policy does not accumulate cash value. Term is generally considered "pure" insurance, where the premium buys protection in the event of death and nothing else.
There are three key factors to be considered in term insurance:
- Face amount (protection or death benefit),
- Premium to be paid (cost to the insured), and
- Length of coverage (term).
Various insurance companies sell term insurance with many different combinations of these three parameters. The face amount can remain constant or decline. The term can be for one or more years. The premium can remain level or increase. Common types of term insurance include Level, Annual Renewable and Mortgage insurance."
Level Term policy has the premium fixed for a period of time longer than a year. These terms are commonly 5, 10, 15, 20, 25, 30 and even 35 years. Level term is often used for long term planning and asset management because premiums remain consistent year to year and can be budgeted long term. At the end of the term, some policies contain a renewal or conversion option. Guaranteed Renewal, the insurance company guarantees it will issue a policy of equal or lesser amount without regard to the insurability of the insured and with a premium set for the insured's age at that time. Some companies however do not guarantee renewal, and require proof of insurability to mitigate their risk and decline renewing higher risk clients (for instance those that may be terminal). Renewal that requires proof of insurability often includes a conversion options that allows the insured to convert the term program to a permanent one that the insurance company makes available. This can force clients into a more expensive permanent program because of anti selection if they need to continue coverage. Renewal and conversion options can be very important when selecting a program.
Annual renewable term is a one year policy but the insurance company guarantees it will issue a policy of equal or lesser amount without regard to the insurability of the insured and with a premium set for the insured's age at that time.
Another common type of term insurance is mortgage insurance, which is usually a level premium, declining face value policy. The face amount is intended to equal the amount of the mortgage on the policy owner’s residence so the mortgage will be paid if the insured dies.
A policy holder insures his life for a specified term. If he dies before that specified term is up (with the exception of suicide see below), his estate or named beneficiary receives a payout. If he does not die before the term is up, he receives nothing. However, in some European countries (notably Serbia), insurance policy is such that the policy holder receives the amount he has insured himself to, or the amount he has paid to the insurance company in the past years. Suicide used to be excluded from ALL insurance policies[however, after a number of court judgments against the industry, payouts do occur on death by suicide (presumably except for in the unlikely case that it can be shown that the suicide was just to benefit from the policy). Generally, if an insured person commits suicide within the first two policy years, the insurer will return the premiums paid. However, a death benefit will usually be paid if the suicide occurs after the two year period.
Permanent Life Insurance
Permanent life insurance is life insurance that remains in force (in-line) until the policy matures (pays out), unless the owner fails to pay the premium when due (the policy expires OR policies lapse). The policy cannot be canceled by the insurer for any reason except fraud in the application, and that cancellation must occur within a period of time defined by law (usually two years). Permanent insurance builds a cash value that reduces the amount at risk to the insurance company and thus the insurance expense over time. This means that a policy with a million dollar face value can be relatively expensive to a 70 year old. The owner can access the money in the cash value by withdrawing money, borrowing the cash value, or surrendering the policy and receiving the surrender value.
The four basic types of permanent insurance are whole life, universal life, limited pay and endowment.
- Whole life coverage
Whole life insurance provides lifetime death benefit coverage for a level premium in most cases. Premiums are much higher than term insurance in the short term, but cumulative premiums are roughly equal if policies are kept in force until average life expectancy. Part of the insurance contract stipulates that the policyholder is entitled to a cash value reserve, which is part of the policy and guaranteed by the company. This cash value can be accessed at any time through policy "loans" and are received "income-tax free." Policy loans are open until the insured individual's death. If there are any unpaid loans upon death, the insurer subtracts the loan amount from the death benefit and pays the remainder to the beneficiary named in the policy.
While the marketing divisions of some life insurance companies often explain whole life as a "death benefit with a savings component," this distinction is artificial according to life insurance actuaries Albert E. Easton and Timothy F. Harris The cash value reserve builds up against the death benefit of the policy and reduces the "net amount at risk." The "net amount at risk" is the amount of pure insurance that the insurer must pay out if the insured individual dies before the insurance company has accumulated an amount of money equal to the death benefit. It is the difference between the current cash value amount and the total death benefit amount. Because of this relationship between the cash value and death benefit, it may be more accurate to describe the policy as a single, indivisible, product since no actual separation of the cash value and death benefit is possible. The insurer is actually setting aside money as a cash reserve to pay the future death benefit claim. This suggests that the cash value is technically part of the death benefit, which is "earned" as cash over time. The lack of separation between the cash value and death benefit also explains why insurers do not pay both the death benefit and the cash value to the beneficiary.
The primary advantages of whole life are guaranteed death benefits, guaranteed cash values, fixed and known annual premiums, and mortality and expense charges that will not reduce the cash value shown in the policy. The primary disadvantages of whole life are premium inflexibility, and the fact that the internal rate of return in the policy may not be competitive with other savings alternatives. Riders are available that can allow one to increase the death benefit by paying additional premium. One such rider is a paid-up additions rider.
The death benefit can also be increased through the use of policy dividends, though these dividends cannot be guaranteed and may be higher or lower than historical rates over time. According to internal documents from some life insurance companies, like Massachusetts Mutual, the internal rate of return and dividend payment realized by the policyholder is often a function of when the policyholder buys the policy and how long that policy remains in force. Dividends paid on a whole life policy can be utilized in many ways. First, if "paid-up additions" is elected, dividends will purchase additional death benefit which will increase the death benefit of the policy to the named beneficiary. Since this additional death benefit generates cash value, it also increases the cash value of the policy. Another alternative is to opt in for 'reduced premiums' on some policies. This reduces the owed premiums by the non-guaranteed dividends amount. A third option allows the owner to take the dividends as they are paid out (although some policies provide other/different/less options than these - it depends on the company for some cases). A final option is to invest the dividends in the insurance company's general or separate account.
- Universal life coverage
Universal life insurance (UL) is a relatively new insurance product intended to provide permanent insurance coverage with greater flexibility in premium payment and the potential for greater growth of cash values. There are several types of universal life insurance policies which include "interest sensitive" (also known as "traditional fixed universal life insurance"), variable universal life (VUL), guaranteed death benefit, and equity indexed universal life insurance.
A universal life insurance policy includes a cash value. Premiums increase the cash values, but the cost of insurance (along with any other charges assessed by the insurance company) reduces cash values. However, with the exception of VUL, interest is credited on cash values at a rate specified by the company and may also increase cash values. With VUL, cash values will ebb and flow relative to the performance of the investment subaccounts the policy owner has chosen. The surrender value of the policy is the amount payable to the policyowner after applicable surrender charges, if any.
Universal life insurance addresses the perceived disadvantages of whole life – namely that premiums and death benefit are fixed. With universal life, both the premiums and death benefit are flexible. Except with regards to guaranteed death benefit universal life, this flexibility comes at a price: reduced guarantees.
Depending on how interest is credited, the internal rate of return can be higher because it moves with prevailing interest rates (interest-sensitive) or the financial markets (Equity Indexed Universal Life and Variable Universal Life). Mortality costs and administrative charges are known. And cash value may be considered more easily attainable because the owner can discontinue premiums if the cash value allows it.
Flexible death benefit means the policy owner can choose to decrease the death benefit. The death benefit could also be increased by the policy owner but that would (typically) require that the insured go through new underwriting. Another example of flexible death benefit is the ability to choose option A or option B death benefits - and to be able to change those options during the life of the insured.
Option A is often referred to as a level death benefit. Generally speaking, the death benefit will remain level for the life of the insured and premiums are expected to be lower than policies with an Option B death benefit.
Option B pays the face amount plus the cash value. If cash values grow over time, so would the death benefit which is payable to the insured's beneficiaries. If cash values decline, the death benefit would also decline. Presumably option B death benefit policies require greater premium than option A policies.
- Limited-pay
Another type of permanent insurance is Limited-pay life insurance, in which all the premiums are paid over a specified period after which no additional premiums are due to keep the policy in force. Common limited pay periods include 10-year, 20-year, and paid-up at age 65.
Endowments
Endowments are policies in which the cash value built up inside the policy, equals the death benefit (face amount) at a certain age. The age this commences is known as the endowment age. Endowments are considerably more expensive (in terms of annual premiums) than either whole life or universal life because the premium paying period is shortened and the endowment date is earlier.
In the United States, the Technical Corrections Act of 1988 tightened the rules on tax shelters (creating modified endowments). These follow tax rules as annuities and IRAs do.
Endowment Insurance is paid out whether the insured lives or dies, after a specific period (e.g. 15 years) or a specific age (e.g. 65).
Accidental Death
Accidental death is a limited life insurance that is designed to cover the insured when they pass away due to an accident. Accidents include anything from an injury, but do not typically cover any deaths resulting from health problems or suicide. Because they only cover accidents, these policies are much less expensive than other life insurances.
It is also very commonly offered as "accidental death and dismemberment insurance", also known as an AD&D policy. In an AD&D policy, benefits are available not only for accidental death, but also for loss of limbs or bodily functions such as sight and hearing, etc.
Accidental death and AD&D policies very rarely pay a benefit; either the cause of death is not covered, or the coverage is not maintained after the accident until death occurs. To be aware of what coverage they have, an insured should always review their policy for what it covers and what it excludes. Often, it does not cover an insured who puts themselves at risk in activities such as: parachuting, flying an airplane, professional sports, or involvement in a war (military or not). Also, some insurers will exclude death and injury caused by proximate causes due to (but not limited to) racing on wheels and mountaineering.
Accidental death benefits can also be added to a standard life insurance policy as a rider. If this rider is purchased, the policy will generally pay double the face amount if the insured dies due to an accident. This used to be commonly referred to as a double indemnity coverage. In some cases, some companies may even offer a triple indemnity cover.
For car buyers, an effort needs to be made on the part of insurance companies to provide information on the different types of auto insurance available. These include bodily injury and liability, collision, comprehensive, full glace, liability, medical coverage, personal injury protection, and underinsured or uninsured motorist.
Liability insurance coverage is imperative to have as a driver. This insurance covers any injuries or damages to property that may occur during an accident. Two types of liability include bodily injury liability insurance and property damage liability insurance.
Medical insurance is different in that it focuses on the driver and passengers of the car. This will cover any medical treatment for the driver and the passengers. In addition, the medical insurance may or may not offer disability insurance and pain and suffering compensation.
Uninsured or under-insured drivers insurance will pay any costs that you or your passengers may experience if an accident should occur with a driver who is uninsured or underinsured.
Collision insurance deals with the cost of damage caused by a collision to your car that may affect the book value. Comprehensive deals more with damage caused by vandalism, natural disasters , theft or other kinds of damage.
There are several other types of car insurance. These include glass replacement insurance, towing insurance etc. These types of insurance are often not required and are not popular as they are often costly.
Now that you know what types of car insurance are out there, the next step is to find a credible insurance agent. The first place to investigate this is through family and friends. referrals will help you sort those agents that you want to investigate further. You will want to speak with several different agents before you make your final decisions. Ask any and all questions you may have. That is what the agent is there for.
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