An appropriate Insurance Product can be of great assistance in planning for taxes upon death and dealing with the often complex problems of estate management.
Protection Policies – designed to provide a benefit in the event of specified event, typically a lump sum payment. A common form of this design is term insurance.
Investment Policies – where the main objective is to facilitate the growth of capital by regular or single premiums. Common forms are whole life, universal life and variable life policies.
The specific uses of the terms "insurance" and "assurance" are sometimes confused. In general, in jurisdictions where both terms are used, "insurance" refers to providing coverage for an event that might happen (fire, theft, flood, etc.), while "assurance" is the provision of coverage for an event that is certain to happen. In the United States both forms of coverage are called "insurance" for reasons of simplicity in companies selling both products.
Term assurance provides life insurance coverage for a specified term. The policy does not accumulate cash value. Term is generally considered "pure" insurance, where the premium buys protection in the event of death and nothing else.
There are three key factors to be considered in term insurance:
1. Face amount (protection or death benefit),
2. Premium to be paid (cost to the insured), and
3. Length of coverage (term).
Permanent Life Insurance
Permanent life insurance is life insurance that remains active until the policy matures, unless the owner fails to pay the premium when due. The policy cannot be cancelled by the insurer for any reason except fraudulent application, and any such cancellation must occur within a period of time defined by law (usually two years). A permanent insurance policy accumulates a cash value, reducing the risk to which the insurance company is exposed, and thus the insurance expense over time. The owner can access the money in the cash value by withdrawing money, borrowing the cash value, or surrendering the policy and receiving the surrender value.
The four basic types of permanent insurance are whole life, universal life, limited pay and endowment.
Whole Life Coverage
Whole life insurance provides lifetime death benefit coverage for a level premium in most cases. Premiums are much higher than term insurance at younger ages, but as term insurance premiums rise with age at each renewal, the cumulative value of all premiums paid across a lifetime are roughly equal if policies are maintained until average life expectancy. Part of the insurance contract stipulates that the policyholder is entitled to a cash value reserve, which is part of the policy and guaranteed by the company. This cash value can be accessed at any time through policy loans and are received income tax free. Policy loans are available until the insured's death. If there are any unpaid loans upon death, the insurer subtracts the loan amount from the death benefit and pays the remainder to the beneficiary named in the policy.
The advantages of whole life insurance are guaranteed death benefits, guaranteed cash values, fixed, predictable annual premiums and mortality and expense charges that will not reduce the cash value of the policy.
The disadvantages of whole life are inflexibility of premiums and the fact that the internal rate of return in the policy may not be competitive with other savings alternatives. Riders are available that can allow one to increase the death benefit by paying additional premium. One such rider is a paid-up additions rider.
Universal Life Coverage
Universal life insurance (UL) is a relatively new insurance product, intended to combine permanent insurance coverage with greater flexibility in premium payment, along with the potential for greater growth of cash values. There are several types of universal life insurance policies which include interest sensitive (also known as "traditional fixed universal life insurance"), variable universal life (VUL), guaranteed death benefit, and equity indexed universal life insurance.
A universal life insurance policy includes a cash value. Premiums increase the cash values, but the cost of insurance (along with any other charges assessed by the insurance company) reduces cash values. However, with the exception of VUL, interest is paid at a rate specified by the company, further increasing cash values. With VUL, cash values will be and flow relative to the performance of the investment sub-accounts the policy owner has chosen. The surrender value of the policy is the amount payable to the policy owner after applicable surrender charges, if any.
Universal life insurance addresses the perceived disadvantages of whole life – namely that premiums and death benefit are fixed. With universal life, both the premiums and death benefit are flexible. Except with regards to guaranteed death benefit universal life, this flexibility comes with the disadvantage of reduced guarantees.
Another type of permanent insurance is Limited-pay life insurance, in which all the premiums are paid over a specified period after which no additional premiums are due to the policy in force. Common limited pay periods include 10-year, 20-year, and are paid out at the age of 65.
Endowments are policies in which the cumulative cash value of the policy equals the death benefit at a certain age. The age at which this condition is reached is known as the endowment age. Endowments are considerably more expensive (in terms of annual premiums) than either whole life or universal life because the premium paying period is shortened and the endowment date is earlier.
Accidental death is a limited life insurance designed to cover the insured should they pass away due to an accident. Accidents include anything from an injury and upwards, but do not typically cover deaths resulting from health problems or suicide. Because they only cover accidents, these policies are much less expensive than other life insurance policies.
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