Life Insurance: Basic Policy Types

Two Basic Types Term Insurance Permanent Insurance

Life Insurance: Basic Policy Types Term Insurance SimplestSimplest Usually most inexpensiveUsually most inexpensive A policy that is limited to a specific length of time, or termA policy that is limited to a specific length of time, or term Does not accumulate cash valueDoes not accumulate cash value Usually term is 1,5,10,15,20,25,or 30 yearsUsually term is 1,5,10,15,20,25,or 30 years

Life Insurance: Basic Policy Types Term Insurance Level Term Insurance Pays the same death benefit throughout the termPays the same death benefit throughout the term Premium usually remains levelPremium usually remains level Decreasing Term Insurance Death benefit decrease throughout the termDeath benefit decrease throughout the term Premiums remain levelPremiums remain level One use is to pay off a mortgageOne use is to pay off a mortgage

Life Insurance: Basic Policy Types Term Insurance Increasing Term Insurance Death benefit increases over timeDeath benefit increases over time Premiums increase over timePremiums increase over time

Life Insurance: Basic Policy Types Term Insurance Term Policy Options Renewability OptionRenewability Option After the term has expired you can choose to renew your policyAfter the term has expired you can choose to renew your policy Don’t have to prove insurabilityDon’t have to prove insurability Will pay a higher premiumWill pay a higher premium

Life Insurance: Basic Policy Types Term Insurance Term Policy Options Convertibility OptionConvertibility Option Permits policyholder to convert to permanent insurancePermits policyholder to convert to permanent insurance Does not require proof of insurabilityDoes not require proof of insurability

Life Insurance: Basic Policy Types Term Insurance Options for paying term premiums LevelLevel Premium remains the samePremium remains the same IncreasingIncreasing Premium increases by a specified amount at a specified timePremium increases by a specified amount at a specified time Level/IncreasingLevel/Increasing Stays level for a certain period and then increasesStays level for a certain period and then increases IndeterminateIndeterminate Has a minimum and maximum rateHas a minimum and maximum rate

Life Insurance: Basic Policy Types Permanent Life Insurance Covers the insured for a lifetime or until age 100 If you live to 100 insurer pays individual the death benefit Three types of Permanent Insurance: Whole lifeWhole life Universal lifeUniversal life Variable lifeVariable life

Life Insurance: Basic Policy Types Permanent Life Insurance Cash Value Cash reserves accumulate in the policyCash reserves accumulate in the policy You can take a loan out on the policyYou can take a loan out on the policy You can cash in your policyYou can cash in your policyDividends The proportion of a company’s profit that it pays to its policyholdersThe proportion of a company’s profit that it pays to its policyholders

Life Insurance: Basic Policy Types Permanent Life Insurance Whole Life Insurance Policyholder pays the same premium amount for a certain number of yearsPolicyholder pays the same premium amount for a certain number of years Annual premiums are initiallyhigher than term, but in the long run they may become less since they stay levelAnnual premiums are initially higher than term, but in the long run they may become less since they stay level If you plan on having insurance for more than 20 years it is usually more advantageous to have whole life insuranceIf you plan on having insurance for more than 20 years it is usually more advantageous to have whole life insurance

Life Insurance: Basic Policy Types Permanent Life Insurance Whole Life Insurance Advantages: Absolutely predictable with zero riskAbsolutely predictable with zero risk Return is guaranteedReturn is guaranteedDisadvantage: Relatively inflexibleRelatively inflexible

Life Insurance: Basic Policy Types Permanent Life Insurance Universal Life Takes advantage of high interest rates and yields higher returns on the cash valueTakes advantage of high interest rates and yields higher returns on the cash value You can adjust the premiums you pay and the death benefit amountYou can adjust the premiums you pay and the death benefit amount

Life Insurance: Basic Policy Types Permanent Life Insurance Universal Life Advantages: FlexibilityFlexibility You can increase the amount of money you put inYou can increase the amount of money you put inDisadvantages: Risks of investment market are transferred to the policyholderRisks of investment market are transferred to the policyholder You may end up having to pay more in premiums than expectedYou may end up having to pay more in premiums than expected

Life Insurance: Basic Policy Types Permanent Life Insurance Variable Life Both life insurance and an investment toolBoth life insurance and an investment tool Subject to regulation from the Securities and Exchange CommissionSubject to regulation from the Securities and Exchange Commission The funds in the policy have to be managedThe funds in the policy have to be managed

Life Insurance: Basic Policy Types Permanent Life Insurance Variable Life Advantages: Policy owners who are knowledgeable about the stock market can potentially yield high returnsPolicy owners who are knowledgeable about the stock market can potentially yield high returnsDisadvantages: Risk of investment is passed onto the policyholderRisk of investment is passed onto the policyholder Only guarantee is a specified minimum death benefitOnly guarantee is a specified minimum death benefit Policyholder could lose most of the principalPolicyholder could lose most of the principal