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Life Insurance: Types Of Available Policies

Permanent Insurance

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The distinguishing feature of "permanent insurance" is that the insurance premium purchases more than just pure life insurance. For example, the policy may have a savings feature under which part of the premium pays for pure life insurance and the other part goes into a savings feature. This savings feature is known as a "cash value." You can borrow against "cash value" at a preset rate of interest.

Permanent Life Insurance is generally issued for the insured's entire lifetime, as opposed to term insurance which is issued for a specified number of years.

There are various types of permanent insurance -- all of which are a variation on the basic theme of pure life insurance plus bells and whistles of one sort or another. Some of the more common include:

Whole Life

A whole life policy is issued for the insured's entire life. This kind of policy can also be issued only until the insured reaches a specified age such as 95 or 100. In these instances, if the insured lives to the age mentioned in the policy, the insurance company will treat the situation as if the insured died at that age and will pay the face amount of the policy.

A whole life policy will indicate the premiums, death benefit, and cash values for the duration of the policy. There can be a number of variations of whole life policies. These may include:

  • Participating Whole Life: A participating whole life policy is one which "participates" in the insurer's earnings -- such as through a dividend. How the participation is determined is defined in the policy. Dividends are not guaranteed. Instead, they are based on the economic health of the insurance company.

Dividends can generally be paid in cash, be used to reduce the premiums, to purchase additional insurance without medical questions, or can be left to accumulate.

  • Non-Participating Whole Life: A non-participating whole life policy features a level premium and a level death benefit as long as the policy exists. A non-participating whole life policy does not participate in the insurer's earnings or pay dividends.
  • Flexible Premium Whole Life: A flexible premium whole life policy is one which permits the insurer to adjust premiums based on how well the insurer's cost and earnings projections come true. As reality changes, the premium may be adjusted, but cannot be raised above the maximum specified in the policy.
  • Limited Payment Whole Life: In a limited payment whole life policy, the premiums are only payable for a limited period of time which is less than the duration of the policy. Essentially, you pay a higher premium for a shorter number of years, at which point payments cease but the insurance remains in effect.

These policies can be issued for your entire life or to a specified age.

  • Single Premium Whole Life: In this kind of policy, you pay one premium when the policy is issued. No more premiums are payable. The term of the policy lasts to a specified age or for your entire life.
  • Interest Sensitive Whole Life: An interest sensitive whole life policy is one which will take into account current economic factors as opposed to being issued solely based on long-term projections. Costs and benefits can change as a result of both favorable and unfavorable economic conditions. Interest sensitive policies include Universal Life and Variable Life Insurance Policies (which are described next.)

Universal Life

A universal life insurance is one of the most flexible types of policies that you can purchase, permitting changes in premiums as well as face amounts. A universal life insurance policy combines elements of both term and permanent policies. Premiums are sensitive to changes in the insurer's earned interest.

Universal life policies work by letting the insured mix and match the three major elements of a life insurance policy: premium, death benefit, and cash value.

  • Premium payments are credited to a cash value account. The insurance company then periodically deducts money to cover expenses and the cost of the insurance protection. This is generally known as the mortality deduction charge. The balance of the cash value account accumulates at a rate of interest which is set in the policy. A minimum interest rate and a maximum mortality deduction charge are both guaranteed by the insurance company.
  • Owners of Universal life insurance policies should monitor the policy for fluctuations in the valuations and costs. For example, some people use the money in the cash value account to pay the premiums. Not all insurance companies will inform you when your cash value is insufficient to cover premium expenses. If this happens, the policy could lapse for non-payment of premium. If this were to happen, you would need to reapply for coverage and show medical evidence of insurability. Bottom line: If you have been diagnosed with a serious health condition after taking out the policy, do not let it lapse!

Variable Life

A variable life insurance policy is one in which the death benefit and cash value are specified in units instead of dollar amounts. The value of the units, and thus the death benefit and cash value, can increase or decrease depending upon the results to which the units are tied. For instance, the unit could vary with the value of the Dow Jones average. If the Dow goes up, so does the value of the unit, and thus of the death benefit. If the Dow goes down, so does the value of the unit.

The idea behind a Variable Life insurance policy is to protect against loss in buying power due to inflation by creating a policy where the amount of the death benefit can reflect variations in the securities markets.

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