Life Insurance is a contract between an individual and a third party, generally a life insurance company, which provides for the transfer of financial risk associated with the loss of one’s life from the individual to the 3rd party for a fee, generally called a “premium”.
There are two distinct types of life insurance: Term insurance and Permanent insurance. Term insurance is the least expensive type of insurance as it involves simply the cost associated with the chance of dying in a given year or over a specified number of years. There is no equity build up associated with term insurance As long as the premium is paid on a timely basis and the policy is in force at the time of death, the benefit is payable. If the policy terminates for any reason, the owner will receive nothing from the policy other than having been covered for the period for which premiums were paid.
Term insurance is generally sold with a level premium for a set number of years. At the end of the level premium period, the cost escalates to a much higher level and increases on an annual basis for the remainder of the life of the policy. Some term policies are priced with annually increasing premiums from the date of issue and continuing for the life of the policy.
The cost of term insurance becomes prohibitive at older ages as the chances of dying increase. For this reason, most term policies are discontinued when the insured feels the financial cost associated with the risk of loss of life is no longer justified. Term insurance is ideal for younger people who have increased needs for protection and liquidity during their family and business building years when the cost of insurance is minimal.
The term policies most of my clients prefer have the following structure:
- Ten year Term
- Fifteen Year Term
- Twenty Year Term
- Twenty-Five Year Term
- Thirty Year Term
- Annually Renewal Term to Age 100
Representative Companies utilized for Term Insurance are:
Permanent insurance, as the name implies is life insurance that is usually maintained for life. The premium is designed to be level for life or for a number of years. The total cost of the policy is basically spread over one’s life so that the premium is greater than the actual cost associated with the chance of dying in the early years and lower than the cost in later years. The premium may be guaranteed at a level amount or projected not to change based on non-guaranteed assumptions in the policy.
Permanent insurance policies include an equity build up within the policy. The equity, or cash value as it is normally called, is returned to the policy owner in the event of termination of the contract or may be utilized within the policy, such as to increase the death benefit, for policy loans, pay premiums or withdrawn for the benefit of the policy owner. Some policies are structured to have significant equity values while others are designed to have minimal equity, if any at all.
The different types of permanent life insurance are:
- Whole Life
- Universal Life
- Variable Universal Life
- Indexed Universal Life
- Private Placement
Representative Companies utilized for Permanent Life Insurance are: