Life Insurance – Group Coverage

What is Life Insurance? Let’s Examine the Different Types of Life Insurance

by William F. Schaake, CIC, CRM, CLCS, ACA Certified

Term Life

Term life insurance provides a life insurance benefit payable to the insured’s beneficiaries if the insured dies within the terms and conditions of the policy. It is contracted for a limited period, such as 5, 10, 20, or 30 years at a fixed rate of premium payments. Once the term period expires, the terms and conditions, including the premium, is subject to change. Many types of term insurance are convertible to a permanent policy during the term or upon expiration of the original policy.

Term insurance policies are generally the least expensive type of life insurance as the plans ordinarily do not build up cash value. Because of the lower cost of insurance, term insurance is often utilized for specific planning purposes such as to protect the financial loss of mortgagor during the loan period or to cover the loss of income of the family bread winner while the children are in school.

Term insurance is often defined as temporary insurance because of the expiration and lack of equity buildup.

Endowment Life

Endowment life insurance mature or endow at a specified maturity date if the insured is alive but if the insured dies, the death benefits are paid to the beneficiaries. These policies are generally a type of whole life contract and typically cost more than most other type of policies.

Universal or Adjustable Life

Universal life insurance provides a death benefit paid to the beneficiaries upon the death of the insured within the terms and conditions of the policy similar to an annual increasing premium term policy. This is coupled with a cash account that accumulates interest on a tax deferred basis. The premium payments are generally level but can be flexible and are usually guaranteed to remain so for the duration of the contract. The withdrawals up to the cost basis are ordinarily tax free. Loans may be drawn on the funds while the insured is alive.

Universal life policies are a form of permanent protection with certain guarantees that make it appealing for estate planning and wealth accumulation. Providing the premiums are paid on time and the terms and conditions of the policy are met, universal life insurance policy generally provide a guaranteed death benefit usually to expire at the age of 120 or less and a guaranteed premium cost. The cash value on a universal life policy is usually not guaranteed nor is the monthly adjusted interest payment.

The premium cost of a universal life policy is normally more expensive than a term but less expensive than a whole life policy with a comparable death benefit. The accumulated cash within the policy can normally be applied to reduce or pay up the premium which adds to its flexibility.

Variable Life

A type of permanent life insurance that builds cash value and provides a death benefit payable to the beneficiaries of the insured subject to the terms and conditions of the policy. Similar to whole life, variable life provides a guaranteed death benefit, and the premium is usually fixed for the duration of the contract which is appealing for estate planning.

Variable life insurance provides several investment options through sub-accounts such as stocks, bonds, and money markets that allow the owner to move money from one account to another. The accumulated cash value is determined by the performance of the investments within these accounts. These accounts are generally managed by the insurance company and are valued like mutual funds but do not trade on exchanges. The potential for greater returns generates interest from savvy investors or those that are more risk tolerant and seek potentially greater returns. The investment returns accumulate on a tax deferred basis. Loans may be drawn on the funds while the insured is alive and may be used to pay the premium.

Although the investments within the accounts fluctuate and can periodically show a loss, the death benefit is normally guaranteed not to drop below the initial amount or minimum chosen.

Due to the investment risks, variable life policies are considered security contracts and are regulated under state and federal securities laws. Agents must be registered representatives of a broker/dealer licensed by the NASD and registered with the SEC to sell variable life insurance.

Variable-Universal Life

A type of permanent life insurance that builds cash value and provides a death benefit payable to the beneficiaries of the insured subject to the terms and conditions of the policy. Like universal life, variable universal life provides a guaranteed death benefit, and the premium is usually fixed but can be flexible for the duration of the contract which is appealing for estate planning and wealth accumulation.

Variable universal life insurance provides several investment options through sub-accounts such as stocks, bonds, and money markets that allow the owner to move money from one account to another. The accumulated cash value is determined by the performance of the investments within these accounts. These accounts are generally managed by the insurance company and are valued like mutual funds but do not trade on exchanges. The potential for greater returns generates interest from savvy investors or those that are more risk tolerant and seek potentially greater returns. The investment returns accumulate on a tax deferred basis. Loans may be drawn on the funds while the insured is alive and may be used to pay the premium. The death benefit is generally not guaranteed and may fluctuate with the investment results of the sub-accounts. If the return is not large enough to pay the cost of the insurance, the policy can collapse, or additional funds required to keep the insurance in force. Since the cost of insurance increases each year, it is important to allow the investments accumulate to support the insurance expense.

Whole or ordinary life

Whole life insurance provides a death benefit paid to the beneficiaries upon the death of the insured within the terms and conditions of the policy. The premium payments are generally level and are usually guaranteed to remain so for the duration of the contract. Most whole life policies build cash value by the accumulation of interest and dividends in the investment component as well as a portion of the premium being applied to purchase paid up insurance units. The gains in the policy accumulate on a tax deferred basis. The withdrawals up to the cost basis are ordinarily tax free. Loans may be drawn on the funds while the insured is alive.

Whole life policies are a form of permanent protection with certain guarantees that make it appealing for estate planning and wealth accumulation. Providing the premiums are paid on time and the terms and conditions of the policy are met, whole life insurance policy generally provide a guaranteed death benefit not to expire at a guaranteed premium cost with guaranteed dividends payable by the insurance.

The explanations written by William F. Schaake, CIC, CRM, herein is intended to provide a basic understanding of the terms and concepts. This information provided is not intended to provide legal advice or opinions. Please check with your legal counsel and the terms and conditions of your insurance contract. © 03/19/2012-2024