Life Insurance Policies Explained

A Life Insurance is a written agreement that pays a predetermined monetary benefit at a cost specified in that contract upon the death or the occurrence of a stipulated condition to a person or persons specified in that contract.  

Apart from the death of a cover person, some example conditions that may cause additional benefits to be paid by the insurance company include terminal illness or critical illness, disability, loss of limb and or eyesight. 

To properly understand Life Insurance, one needs to understand key terms and features that make up an insurance policy agreement. Some of these key terms are as follows. 

The predetermined monetary benefit paid by the insurance company is called the Face Value or death benefit. This amount may decrease or increase over time depending on the policy type.

The Company guaranteeing the financial benefit written within the insurance contracts is called the insurer, and the person to whom death, terminal illness or other stipulated condition occurs which causes the entitlement of specified benefit is called the insured.      

The person or persons entitled to benefit after the death of the insured is called the beneficiary. Important to note about beneficiaries is that there are different types. These include primary beneficiary, secondary beneficiary and tertiary beneficiary.  The key to understanding the different types beneficiaries is the respective precedence to which they are entitled to receive inherited benefits. The order of precedence for inheritance within a policy is as follows: Primary beneficiary, Secondary beneficiary and then Tertiary beneficiary. Inheritance only moves to the next group of beneficiaries at the demise of all the previous group of beneficiaries.

It is also important to differentiate between the payer and the owner of a life insurance policy, As each role can be assigned to different individuals or entities within a policy and has different rights and or obligations. Hence have ramifications to you as a consumer. The person or entity paying the premium or cost of the policy is the Payer. The Owner on the other hand of the policy has controlling interest and all rights to designate all benefit of the contract.  It is important to note that these roles can also be designated to the same person or entity.

The cost paid to the insurance company for the insurance policy is called the premium. This cost can be paid at a different frequency. Monthly, Quarterly, Semiannually, Annually and as a lump sum or single payment.

The Main Types of Life Insurance
Life insurance contracts fall into two main Categories. These are Permanent Life Insurance and Temporary Life Insurance. Permanent life insurance is designed to provide coverage that lasts for the insured entire life span and may accumulate cash value over time with premium expenses that typically do not change.

Temporary Life Insurance provides coverage for a limited period and does not build cash value. They typically have their premiums that change at the end of the covered period or throughout the covered period depending on the type of temporary policy.

One way to differentiating between both is the concept of buying a House vs Renting a house. When we buy a house, you make payment and have the opportunity to live in that home and use its amenities and at some point, you own that home and is entitled to all its value. 

When you rent a home, you have the opportunity live in that home and use its amenities and at some point, at the end of your lease you must leave that rental property and are no longer entitled to its value or amenities. So too with Life Insurance When you buy a Permanent Life Insurance Policy you are entitled to all the amenities and value while you maintain that policy. With Temporary policies, however, you are only entitled to benefits and amenities for the period you maintain the policy after which, you lose all rights to that policy.

Permanent Life Insurance policies are typically more expensive than term policies and typically of several different types. These are:

 
Variable Universal Life insurance (VUL) is a policy option designed to last the insured life span and offers a death benefit with an invested cash value option, which is invested directly in the Stock Market. This policy offers more premium payment flexibility than term, or whole life policies and may be changed by the customer when needed. 

Premium payments are paid into separately managed sub-accounts which are invested directly within the stock market and functions much like mutual funds do. From these sub-accounts, the insurer takes its mortality charges, administrative costs, and investment fees. Variable Universal Life insurance (VUL) offers growth over traditional whole life or universal policies however key attention must be placed on the charges, investment options, the consumer's life insurance needs and the consumer future goals.

It is important to note that changes in premium payment made when consumers utilize the premium flexibility option can affect the policy performance. Typically, a reduction in premium may reduce the policy face amount or if premium paid is below the required minimum may cause the policy to lapse. An increase in premium may increase the policy face amount and the performance of the policy cash investment account. This type of policy may accumulate or lose its value depending on the performance of its invested sub accounts. 

Whole Life Insurance is a policy option designed to last the insured life span and offers a death benefit with a cash value option that the policy owner can borrow against provided the policy premiums are paid.

When a Whole Life Insurance policy premium is paid a portion goes to paying policy expenses such as mortality charges, and administrative costs. The other portion of the premium paid is deposited in the policy cash account which is the invested directly within the insurance company general account. Return from this investment is credited to the policy cash value. Some Whole Life policies Face amount increase over time as interest is earned on the invested cash value.

This type of policy has premiums that remain the same for life of the policy. Some whole life policies pay dividends. This can be applied to the policy or taken by the consumer hence has the effect of reducing the policy premium. The death benefit or face value and rate of return on the accumulated cash value has a minimum guaranteed value within Whole life policies.
 

Universal Life Insurance (UL) is a permanent insurance option and can last the insured life span. It offers a death benefit and has a cash value. This policy offers premium payment flexibility and may be changed by the customer when needed. 

Premium payments are paid into separately managed sub-accounts which are indexed to a fund or investment traded within the stock market. It allows the customer to use the interest from his accumulated savings to help pay premiums over time. 

From these sub-accounts, the insurer takes its mortality charges and administrative costs. Within the Universal Life Policy, the insurance company issuing the policy sets an interest rate minimum, and If the insurance company's investments outperform this set rate of return, the excess return is then applied to the cash value of the policy. As the cash value accumulates the policyholders can access by a loan a portion of the balance without affecting the guaranteed death benefit or without or tax implications.

Universal Life insurance (UL) offers growth over traditional whole life policies and key attention must be placed on the charges, the rate of return within these policies, the consumer's life insurance needs, and the consumer’s future goals.

It is important to note that changes in premium payment made when consumers utilize the premium flexibility option can affect the policy performance. This type of policy may also accumulate or lose its value depending on the performance of its sub accounts and cash is withdrawn may incur a tax liability for the policy owner.

Term Life Insurance also is known as a temporary policy last for a temporary period and are typically more affordable. These policies provide no cash value option and provide a death benefit for the insured for a period specified. There are several types:

Level Term policies which provide coverage for a level period example, 10 years, 20 years, 30 years or more. The cost or rates to maintain that policy does not change for the term or period and the policy offers no cash value. After the end of the covered period, the premium rates increase drastically often becoming unaffordable to the average consumer.

A renewable term is another type of term policy which provides a death benefit without a cash value option and the cost or rates change when the policy renews getting moderately more expensive at renewal. Two popular types are Yearly renewable term, and Five-year renewable term. As an example, a five-year renewable term renews every five years the policy stays in force and the premiums change to a new higher rate for the consumer to pay. 

Increasingly these types of policies are adding new innovative features such as the return of all premiums paid at the end of the term period or features that allow the consumer to convert portions of the face value over time or all of its face value to a whole life policy.