PRODUCTS & SERVICES > Life Insurance

Insurance companies sell life insurance under dozens of different formulations. Mortgage insurance, credit life insurance, accidental death insurance, key man coverage, travel insurance, funeral insurance -- all of these and more are specialized forms of life insurance. There are so many different configurations it is enough to make your head spin.

The simplest way to deal with all the noise of the sophisticated names and the marketing plans is to cut down to the most basic element of the policy -- what causes the insurance company to pay up? Any time the pay-off comes when someone dies, you are dealing with life insurance.

Any life insurance policy has:

• an "owner" who is paying for the policy
• the "insured" that the policy covers
• the "death benefit" that stipulates how much is to paid in the event of an untimely demise while the policy is in force
• and the "beneficiary" who gets the money

Life insurance, then, is a form of insurance that pays a fixed amount of money to beneficiaries if a specific person dies during the period where the policy is in force and premiums have been fully paid. In all of the above forms of life insurance, the only differences are who the beneficiary is and how the person covered has to die. With mortgage insurance, for instance, the beneficiary is the bank that gave you the mortgage, which is why they try to make you buy the stuff. With travel insurance, the hitch is that you have to die while you are traveling -- if you die five minutes after you deplane, on your way back to your house, you many not be covered at all.

Term Life Insurance

Term life insurance is a temporary form of life insurance that lasts over a given period of time specified by the policy. The simplest type of life insurance, term simply requires that you pay a set premium on some sort of a regular basis to be covered. The amount of that premium depends on both the amount of money stipulated as the death benefit and the statistical likelihood that you will die. Term life insurance is a wager between you and the company that is covering you that you will not die during the period you are covered. Unlike most wagers, however, this is one you actually want to lose. If you "win" the wager, some beneficiary gets the death benefit... meaning you have, unfortunately, died. If you "lose" the wager, the company keeps your premiums and you go on and live your life.

Just because nothing that involves insurance can ever be simple, there are three main types of term life insurance. The first, level term, is the most commonly advertised. This is a form of term insurance that locks in the premium costs for up to twenty years in some cases. The "level" is because the costs stay level instead of rising as you get older. Level term is often the most cost effective form of term insurance, as it allows you to lock in a price in today's dollars that will not change as long as you pay the premiums on time. The amount of the premiums is determined by how much coverage you get and what sort of condition you are in when you sign up.

Annual renewable term (ART) is a type of policy where as you get older and the likelihood of you dying increases, the premiums also increase. Although, just like level term, the policy renews each year as long as you pay the premiums, the premium gets bigger by an amount specified in the contract. These policies tend to be much cheaper than level term in the early years but get much more expensive as time passes. Although you should not throw out annual renewable term from your insurance deliberations completely, simply adding up what you would pay over the lifetime of both types of policies should give you a decent indication of which will be cheaper for you.

The final type of term insurance, called decreasing term, is actually like annual renewable term, except instead of the premium going up each year as you get older, the death benefit shrinks by a given amount. With decreasing term you end up paying the same each year but the amount of coverage you can buy with that money shrinks at a predictable rate. Again, depending on how much this costs relative to your other choices and what the benefit is, it can actually make sense for some individuals. Take a family where the burden on the parents to provide in case of death diminishes over time as the children get older and can support themselves. When you are down to only providing for a spouse as the kids finally leave the nest, the smaller death benefit might actually be just right.

Permanent Insurance - Whole Life

Guess what this life insurance product is designed to do? That's right, it's designed to last for your entire lifetime. It works like this: The company charges you more up front than you would pay for a term life insurance contract. They invest the extra dollars (usually very conservatively) and let long-term growth of the extra money (the cash value) accumulate tax-deferred. In later years when the cost of the policy would normally go up on a term contract, they use the extra money to offset the premiums that would otherwise have to increase. This is how premiums are guaranteed to remain level over a lifetime.

Pros:

Premiums remain level throughout the life of the policy and since the policy is designed to last a lifetime, your rates won't go up in the later years just when your income might be going down. Most people drop their term insurance in later years not because they don't need the insurance, but because they can't afford the higher premiums that result when the guaranteed rate period is over.

Cons:

If you don't need life insurance you can usually find another place to put your money and it will grow just as fast or faster because none of the money goes toward term insurance cost. It is also important to understand whether your contract is "participating" or "non-participating." This means if people live longer (a good thing for both you and the company alike) do the extra profits go to the company or back to the policyholder? A participating policy will often generate more cash value and even more face value of insurance for every dollar of premium put into the contract.

Appropriate Uses:

Final expense policies using whole life are appropriate since they provide a guaranteed death benefit at the time when your beneficiaries most need the money, that is, when you are dead. Also, a quality whole life product is an excellent choice for estate planning purposes when the estate is highly illiquid (closely held businesses, farm operations , rental properties) and a definite amount of cash must be available quickly to settle estate obligations without holding a "fire sale" of the assets in question.

Universal Life

Universal life insurance is the king of flexible policies that allows you to vary your premium payments. You can also adjust the face amount of your coverage. Increases in coverage may require proof that you qualify for the new death benefit. The premiums you pay (less expense charges) go into a policy account that earns interest. Charges are deducted from the account. If your yearly premium payment plus the interest your account earns is less than the charges, your account value will become lower. If it keeps dropping, eventually your coverage will end. To prevent that from happening you may need to start making premium payments or increase you premium payments or lower your death benefits. Even if there is enough in your account to pay the premiums, continuing to pay premiums yourself means that you build up more cash value.

Variable Life

Variable life is a kind of insurance where the death benefits and cash values depend on the investment performance of one or more separate accounts, which may be invested in mutual funds or other investments allowed under the policy. When buying this kind of policy, be sure to get the prospectus from the company and STUDY IT CAREFULLY. You will have higher death benefits and cash value if the underlying investments do well. Your benefits and cash value will be lower or may disappear if the investments you chose didn't do as well as you expected. You may pay an extra premium for a guaranteed death benefit.

Life Insurance Illustrations

You may be thinking of buying a policy where cash values, death benefits, dividends or premiums vary based on events or situations the company does not guarantee (such as interest rates). If so, you may get an illustration from the agent or company that helps explain how the policy works. The illustration may show how the benefits (that are not guaranteed) will change as interest rates and other factors change. The illustration will show you what the company does guarantee. It will also what you what could happen in the future. Remember, nobody knows what will happen in the future. You should be ready to adjust your financial plans if the cash value doesn't increase as quickly as shown in the illustration. You may be asked to sign a statement that says you understand that some of the numbers in the illustration are not guaranteed.