Life Insurance
Consumer Information

Life Insurance consumer information. Learn about the different types of life insurance policies. Compare term and whole life insurance. Definitions, strengths and weaknesses of the different types of life insurance. Pre-requisites and requirements for applying.

Policy Types

What are the types of insurance policies?

There are two major categories of life insurance: term life and permanent (cash value) life insurance. Within the two broad categories are many types of policies that have been developed over the years in response to consumer demand, market conditions, and changes in the tax laws.

Term life insurance

Term life insurance (also called pure insurance) policies provide life insurance protection for a specific period of time or term. If you die during the coverage period, the beneficiary named in your policy receives the policy death benefit. If you don't die during the term, your beneficiary receives nothing. At the end of the coverage period, you must either renew your coverage or apply for a new policy. Term life insurance is often compared to automobile insurance: You must renew it at the end of every coverage period. If you get into an accident, you collect on the policy, but if you don't have a claim, you don't get your money back. Term insurance is available for different time periods ranging from one year to many years.

Permanent (cash value) life insurance

When you buy permanent insurance, the policy provides insurance protection for your entire life as long as the policy remains in force (meaning the premiums have been paid and the policy hasn't lapsed or been canceled). In addition to the insurance protection provided by permanent life insurance, this type of policy also builds internal cash values.

Cash value life insurance covering one life

Policy types subject to special tax rules

Congress has enacted certain tax laws to limit the use of life insurance policies as tax-preferred investment vehicles. When a policy fails to meet certain insurance definitions and criteria, access to the cash value may be subject to unfavorable tax treatment and penalties.

Comparison of Types of Life Insurance

*Dividends are not guaranteed.

Note: Any guarantees associated with payment of death benefits, income options, or rates of return are subject to the claims-paying ability of the insurer.

Note: Policy loans and withdrawals will reduce the policy's cash value and death benefit and may cause the investor to receive less than the original amount invested. Withdrawals may be subject to surrender charges and income tax penalties may apply to withdrawals before age 591/2.

Term Life 

Definition

Term life insurance provides life insurance coverage for a specific time period (term). It is often referred to as temporary insurance or pure insurance. The death benefit (face amount) of the policy is paid if you die during the term of the policy. When you live longer than the term of the insurance coverage, nothing is paid.

Prerequisites

·         You have a need for life insurance coverage

Key Strengths

·         Low cost for large death benefit (at least in younger years of life)

Key Tradeoffs

·         Premiums generally increase at each renewal--gets more expensive with age

Variations from State to State

·         No federal regulatory agency--insurance companies are regulated in each state by the department of insurance (or the local equivalent)

How Difficult Is It to Implement?

·         Policy application may require physical exam

Whole Life

Definition

Whole life insurance is called permanent protection, meaning the coverage (and possibly the premiums) lasts for your entire (whole) life, as long as the premiums are paid. The death benefit is a guaranteed amount, and your premium is fixed. When you pay the premiums on a whole life policy, part of the money accumulates in a cash value account.

Prerequisites

·         You have a long-term need for insurance

·         You want insurance protection coupled with a cash value component

Key Strengths

·         Premiums are fixed

·         Policy pays minimum guaranteed death benefit (unpaid policy loans may reduce the death benefit below the guaranteed minimum)

·         Cash values grow tax deferred at guaranteed rate (cash values are held in the general account of the insurer and are subject to claims by creditors if the insurer faces insolvency)

·         Cash values are accessible during lifetime

Key Tradeoffs

·         Policy surrender in early years of policy can be costly

·         Because insurance company controls investment of cash value, you don't get the potential for higher returns that accompanies other types of investments

·         Guarantees are subject to the claims-paying ability of the issuing insurance company

Variations from State to State

·         No federal regulatory agency--insurance companies are regulated in each state by the department of insurance (or its local equivalent)

·         State laws govern ability of creditors to access cash values

How Do You Implement It?

·         Policy application may require physical exam

·         Can be difficult to compare policy features and benefits

·         Tax issues relating to policy loans and surrenders can be complex

Do you need life insurance? Once you learn the benefits, a better question may be, how much do you want? Who needs life insurance?

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Learn more about Term Life Insurance get a quote, apply online.

Find out if Whole Life Insurance is right for you. Whole Life Insurance Information

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Legacy Insurance Agency, PLLC provides this consumer information thru its affiliation with
LEAP Systems, Inc and Forefield, Inc.