Decreasing Term Insurance
What is ‘Decreasing Term Insurance’
Decreasing term insurance is renewable term life insurance with coverage decreasing over the life of the policy at a predetermined rate. Premiums are usually constant throughout the contract, and reductions in coverage typically occur monthly or annually. Terms range between 1 year and 30 years.
Permanent Life Insurance
Whole Life Insurance
Traditional Whole Life Policy
BREAKING DOWN ‘Decreasing Term Insurance’
The theory behind decreasing term insurance holds that with age, certain liabilities and the corresponding need for high levels of insurance decreases. Numerous in-force decreasing term insurance policies take the form of mortgage life insurance, which affixes its benefit to the remaining mortgage of an insured’s home. Alone, decreasing term insurance may not be sufficient for an individual’s life insurance needs. Affordable standard term life insurance policies offer the security of a death benefit throughout the life of the contract.
Inexpensive Life Insurance Protection
Decreasing term insurance is a more affordable option than whole life or universal life insurance. The death benefit is designed to mirror the amortization schedule of a mortgage or other high personal debt not easily covered by personal assets or income. Decreasing term insurance allows a pure death benefit with no cash accumulation. As such, this insurance option has modest premiums for comparable benefit amounts to either a permanent or temporary life insurance.
For example, a 30-year-old male who is a non-smoker might pay a premium of $25 per month throughout the life of a 15-year $200,000 decreasing term policy, customized to parallel a mortgage amortization schedule. The monthly cost for the level-premium decreasing term plan does not change. As the insured ages, the risk of the carrier increases. This increase in risk warrants the declining death benefit.
A permanent policy with the same face amount $200,000 could require monthly premium payments of $100 or more per month. While some universal or whole life policies allow reductions of face amounts when the insured uses the policy for loans or other advances, the policies frequently hold fixed death benefits.
Additional Advantages of Decreasing Term Life
The predominant use of decreasing term insurance is most often for personal asset protection. Small business partnerships also use a decreasing term life policy to protect indebtedness against startup costs and operational expenses. In the case of small businesses, if one partner dies, the death benefit proceeds from the decreasing term policy can help to fund continuing operations or retire the percentage of the remaining debt for which the deceased partner is responsible. The security allows the business to guarantee commercial loan amounts affordably.
Life Insurance – Top Ten Questions
Term Life Insurance
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Term life insurance provides death benefit protection for a period of one or more years. The death benefit of the policy is paid only if the insured dies during that period. If the insured lives beyond the term period, no death benefit is paid. Typically, there are no cash values or loan values for term life insurance.
When should I consider buying a term life policy?
Term insurance is generally used when the need for death benefit protection is temporary or if you are unable to afford the premiums of a permanent life insurance policy. Term insurance typically provides for the largest immediate death benefit amount for each premium dollar. It is appropriate if you are seeking protection for a specific need that will end at a future date such as to pay for a child’s college education expenses, to repay a loan or to replace income should death occur prior to retirement.
How does term life insurance differ from permanent life insurance?
Permanent life insurance is intended to provide protection for your entire life. Generally, the premiums for permanent insurance are higher at least initially than for the same amount of term insurance. A portion of the permanent life insurance premium is used to build-up a cash value in the policy. The cash value can be used in a number of different ways including allowing you to take out a loan against the cash value. Term insurance, as described in question one, provides protection only for a specified period of time and typically does not build up any cash value.
What are the main types of term life insurance available for purchase?
In general, there are three main types of term insurance available:
Level term insurance
The amount of death benefit protection you purchase will remain the same for the entire term period. The premiums you pay for this level amount of death benefit may also be level for the entire period, may be level only for a specified period, or may increase over time.
Decreasing term insurance
The amount of the death benefit protection you purchase will decrease over the term period. Premiums for a decreasing term policy usually remain level throughout the term period. Decreasing term insurance is generally purchased by those who have financial obligations that decrease over time such as a mortgage or a personal or a business loan.
Annual renewable term insurance
The amount of the death benefit protection you purchase will remain the same for the term period. The premiums you will pay for this level amount of insurance will increase each year.
What is “renewable” term life insurance?
Many term life insurance policies are described as being “renewable”. This feature allows the policy to be renewed for another term period without having to show that the insured is in good health. As long as you pay the premium due, the policy will automatically renew for another term period subject to a maximum age limit. The premium due upon renewal will most likely be higher than the premium you paid for the initial term period.
In most cases, term policies in New York currently cannot be renewed beyond age 80.
What is “convertible” term life insurance?
Some term life insurance policies are described as being “convertible”. A conversion provision allows the owner of the term life policy to convert from the term life insurance policy to a permanent life insurance policy during a specified period of time without having to show that the insured is in good health. The conversion period is shorter than the duration of the term insurance coverage.
How long will coverage under a term policy continue?
How long coverage under a term policy will continue will depend on the type of and duration of the term policy you purchase. For example, if you purchase an annual renewable term policy your coverage may be renewed each year up to a specified maximum age limit. If you purchase a 10 year level term policy you will have coverage for 10 years. If you purchase a 10 year renewable level term policy you will have coverage for 10 years and then have the right to renew your term coverage for another 10 years.
Will the premiums due for term life insurance change over time?
Whether or not your premiums remain level for the entire term period or increase over time will depend on the type of term policy you purchase. Premiums for a term policy may be either level or increasing. Premiums can also be guaranteed in the policy to remain level for a specified period of time and may increase thereafter. In general, for most term policies the premiums will increase over time.
Some term policies provide for what is known as “indeterminate” premiums. This means that the policy will set forth a schedule of maximum guaranteed premiums. The insurer can never charge more than the maximum premiums in your policy. However, the insurer intends to charge you what is know as the “current” premiums which are less than the guaranteed maximum premiums in your policy. Ask to see both sets of rates before you make a purchase.
Term insurance is very competitive with respect to premium rates. Shop around and compare.
Can an insurer cancel term life insurance?
A term life policy will stay in force as long as you continue to pay the premiums due. If you miss a premium due date you will have a 31 day grace period to pay the premium due. Your policy will remain in force during the grace period.
An individual term life policy can be canceled by the insurer only for non-payment of premium. If you do not pay the overdue premium payment within the grace period your term policy will terminate. The policy cannot be canceled due to a change in your health status.
If you purchase term insurance through a group such as an employer-employee group your term coverage may terminate when you are no longer an eligible member of that group e.g. your employment ends. Be sure to read the termination provision of your group term life certificate.
What is a “Return of Premium” feature?
A “Return of Premium” feature is a feature that has recently become popular and may be offered in conjunction with term life insurance coverage. The return of premium feature will generally provide for a refund of all or some of the premiums you paid for the term insurance at the end of a level term period or at end of the term coverage period if no death benefit was paid out during that period. The parameters of the return of premium feature will vary depending on the term life insurance policy you purchase. The return of premium feature can be offered by a separate rider to the term life policy for an additional cost. The return of premium feature may also be a provision within the term life policy. Term life policies with this feature will be more expensive than a term life policy that does not offer this feature. You should consider whether the return of premium benefit is worth the extra cost.
What premium mode should I choose when purchasing term life insurance?
Most companies offer a variety of premium modes including annual, semi-annual, quarterly or monthly. In deciding which premium mode to choose you should consider the following:
If you choose to pay an annual premium and then decide to terminate your policy before the end of the year, the insurer is not required to refund any portion of the premium paid.
Generally, there is a higher cost associated with more frequent premium modes. Ask your agent or the company for a comparison of the different premium modes and the costs associated with each before making your purchase.
Cash Value Life Insurance
What is ‘Cash Value Life Insurance’
Cash value life insurance is permanent life insurance with a cash value savings component. The policyholder can use the cash value for many purposes, such as a source of loans, as a source of cash, or to pay policy premiums.
Add To Cash Value Option
Whole Life Insurance
Variable Life Insurance
Adjustable Life Insurance
BREAKING DOWN ‘Cash Value Life Insurance’
Cash value insurance is permanent life insurance because it provides coverage for the policyholder’s life. Traditionally, cash value insurance has higher premiums than term insurance because of the cash value element. Most cash value life insurance policies require a fixed level premium payment, of which a portion is allocated to the cost of insurance and the remaining deposited into a cash value account. The cash value account earns a modest rate of interest, with taxes deferred on the accumulated earnings.
Whole life, variable life, and universal life insurance are examples of cash value life insurance.
As the cash value increases, the insurance company’s risk decreases as the accumulated cash value offsets part of the insurer’s liability. For example, consider a policy with a $25,000 death benefit. The policy has no outstanding loans or prior cash withdrawals, and an accumulated cash value of $5,000. Upon the death of the policyholder, the insurance company pays the full death benefit of $25,000. Money collected into the cash value is now the property of the insurer. Because the cash value is $5,000, the real liability cost to the insurance company is $20,000 (25,000-5,000).
Cash-Value as a Living Policyholder Benefit
The cash value component serves only as a living benefit for policyholders. As a living benefit, any cash value may be drawn upon by the policyholder during their life. There are several options for accessing funds. For most policies, partial surrenders or withdrawals are permissible. Taxes are deferred on earnings until withdrawn from the policy and distributed. Once distributed, earnings are taxable at the policyholder’s standard tax rate. Some policies allow for unlimited withdrawals, whereas others restrict how many draws can be taken during a term or calendar year. Also, some policies limit the amounts available for removal (e.g., minimum $500).
Most cash value life insurance arrangements allow for loans from the cash value. Much like any other loan, the issuer will charge interest on the outstanding principal. The outstanding loan amount will reduce the death benefit dollar for dollar in the event of the death of the policyholder before the full repayment of the loan. Some insurers require the repayment of loan interest, and if unpaid, they may deduct the interest from the remaining cash value.
Cash value may also be used to pay policy premiums. If there is sufficient cash value, a policyholder can stop paying premiums out-of-pocket and have the cash value account cover the payment.
How do I choose the right life insurance product?
The concept of life insurance is actually pretty simple – pay today to protect your loved ones after you’re gone. But with so many types of life insurance out there, choosing life insurance for your situation can be hard. We can help you.
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Use our tool to find the right amount for your budget and your peace of mind.
Coverage and features to consider
Basic protection – Need life insurance just to provide financial support to your survivors if you die unexpectedly? Term insurance generally provides coverage for a specific length of time, at a lower cost than other types of insurance.
Market participation and cash value − If you need insurance protection for the long term, want the potential to build cash value (money from which you can borrow, even during your lifetime) and have a little more money to spend, consider permanent life insurance. There are three types of permanent life insurance policies:
- Whole life insurance builds value based on a set schedule. You’ll know the exact cash value of your policy at each anniversary. (If you take a loan or withdrawal from your policy, the cash value and death benefit will decrease.)
- Universal life insurance earns a fixed interest rate on the cash value of the policy. While the interest rate may change over time, it will never dip below a guaranteed minimum rate.
- Variable universal life insurance lets you invest your cash value in the stock market, so your policy value goes up or down based on the performance of your investments. The investment subaccount options in VUL policies are not offered for sale to the general public.
How long should your coverage last? Need life insurance coverage just for a specific timeframe – like while you’re paying off your mortgage? Term life insurance offers protection for a set period. All other types of insurance cover you for life, as long as the premiums are paid.
Fees and charges − Before you buy, ask about the fees and charges associated with a life insurance policy, how they’re calculated and what they’re for.
Access to your money − Will you need to take money out of your policy in the future, for instance, to pay college tuition or as retirement income? Most whole, universal and variable universal products let you withdraw money from your policy or take loans. 1 But some do restrict when you can take money, how much you can take and (for loans) the interest rate.
Flexible payments − Some universal and variable universal life products let you make flexible payments once you’ve paid enough to cover your policy charges.
Ready to take the next step?
Determining the right insurance coverage for your needs is an important decision. For help with understanding the types of life insurance policies and choosing life insurance, call us at 1-866-207-9160 or find an agent in your neighborhood.
1 Assumes contract qualifies as life insurance under Internal Revenue Code (IRC) Section 7702. Most distributions are taxed on a first-in/first-out basis as long as the contract remains in force and meets the non-MEC (Modified Endowment Contract) definitions of IRC Section 7702A. Loans and partial surrenders from a MEC will generally be taxable, and if taken prior to age 59 ½, may be subject to a 10% tax penalty.
As your personal situations change (i.e., marriage, birth of a child or job promotion), so will your life insurance needs. Take care to ensure these strategies and products are suitable for your long-term life insurance needs. Also, be aware that market volatility can lead to the possible need for additional premium in your policy. Investors should evaluate the impact of their financial ability to continue premium payments and the market risk associated with the variable product on the risk of lapse of the insurance policy.
Also, know that any loans, withdrawals, and surrenders, partial or whole, can adversely affect the death benefit, may have adverse tax consequences, and could result in the policy lapsing. Variable life insurance has fees and charges associated with it that include a cost of insurance that varies with such characteristics of the insured person as gender, health and age, underlying fund charges and expenses, and additional charges for riders that customize a policy to fit your individual needs.
Before deciding on a variable life insurance policy, you should carefully consider the investment objectives, risks, charges, and expenses of the policy and its investment options. The product prospectus and underlying fund prospectus contain this and other important information. To obtain a product prospectus, variable universal life insurance quote, or underlying fund prospectus, contact your investment professional or Nationwide. Read the prospectus carefully before making a purchase.
Life Insurance Resource Center
For the most part, there are two types of life insurance plans – either term or permanent plans or some combination of the two. Life insurers offer various forms of term plans and traditional life policies as well as “interest sensitive” products which have become more prevalent since the mid-1980s . In New York State, the Department of Financial Services must approve any life insurance policy before a company can issue it to consumers. The New York Insurance Law provides for standard provisions that must be included in every policy.
TERM INSURANCE Term insurance provides protection for a specified period of time. This period could be as short as one year or provide coverage for a specific number of years such as 5, 10, 20 years or to a specified age such as 80 or in some cases up to the oldest age in the life insurance mortality tables. Policies are sold with various premium guarantees. The longer the guarantee, the higher the initial premium. If you die during the term period, the company will pay the face amount of the policy to your beneficiary. If you live beyond the term period you had selected, no benefit is payable. As a rule, term policies offer a death benefit with no savings element or cash value.
Premiums are locked in for the specified period of time under the policy terms. The premiums you pay for term insurance are lower at the earlier ages as compared with the premiums you pay for permanent insurance, but term rates rise as you grow older. Term plans may be “convertible” to a permanent plan of insurance. The coverage can be “level” providing the same benefit until the policy expires or you can have “decreasing” coverage during the term period with the premiums remaining the same. If you do not pay the premium for your term insurance policy, it will generally lapse without cash value, as compared to a permanent type of policy that has a cash value component. Currently term insurance rates are very competitive and among the lowest historically experienced.
It should be noted that it is a widely held belief that term insurance is the least expensive pure life insurance coverage available. One needs to review the policy terms carefully to decide which term life options are suitable to meet your particular circumstances.
Types of Term Insurance:
- Renewable Term . Renewable term plans give you the right to renew for another period when a term ends, regardless of the state of your health. With each new term the premium is increased. The right to renew the policy without evidence of insurability is an important advantage to you. Otherwise, the risk you take is that your health may deteriorate and you may be unable to obtain a policy at the same rates or even at all, leaving you and your beneficiaries without coverage.
- Convertible Term . Convertible term policies often permit you to exchange the policy for a permanent plan. You must exercise this option during the conversion period. The length of the conversion period will vary depending on the type of term policy purchased. If you convert within the prescribed period, you are not required to give any information about your health. The premium rate you pay on conversion is usually based on your “current attained age”, which is your age on the conversion date. This type of policy often provides the maximum protection with the smallest amount of cash outlay.
- Level or Decreasing Term . Under a level term policy the face amount of the policy remains the same for the entire period. With decreasing term the face amount reduces over the period. The premium stays the same each year. Often such policies are sold as mortgage protection with the amount of insurance decreasing as the balance of the mortgage decreases. If the insured dies the proceeds of the policy can be used to pay off the mortgage.
- Adjustable Premium . Traditionally, insurers have not had the right to change premiums after the policy is sold. Since such policies may continue for many years, insurers must use conservative mortality, interest and expense rate estimates in the premium calculation. Adjustable premium insurance, however, allows insurers to offer insurance at lower “current” premiums based upon less conservative assumptions with the right to change these premiums in the future. The premium, however, can never be more than the maximum guaranteed premiums stated in the policy.
PERMANENT INSURANCE (Whole Life or Ordinary Life). While term insurance is designed to provide protection for a specified time period, permanent insurance is designed to provide coverage for your entire lifetime. To keep the premium rate level, the premium at the younger ages exceeds the actual cost of protection. This extra premium builds a reserve (cash value) which helps pay for the policy in later years as the cost of protection rises above the premium. Whole life policies stretch the cost of insurance over a longer period of time in order to level out the otherwise increasing cost of insurance. Under some policies, premiums are required to be paid for a set number of years. Under other policies, premiums are paid throughout the policyholders lifetime. The insurance company invests the excess premium dollars
This type of policy, which is sometimes called cash value life insurance, generates a savings element. Cash values are critical to a permanent life insurance policy. The size of the cash value build-up differs from company to company. Sometimes, there is no correlation between the size of the cash value and the premiums paid. It is the cash value of the policy that can be accessed while the policyholder is alive.
The Commissioners 1980 Standard Ordinary Mortality Table (CSO) is the current table used in calculating minimum nonforfeiture values and policy reserves for ordinary life insurance policies. This table provides the minimum cash values that must be guaranteed in your policy.
The policys essential elements consist of the premium payable each year, the death benefits payable to the beneficiary and the cash surrender value the policyholder would receive if the policy is surrendered prior to death. You may make a loan against the cash value of the policy at a specified rate of interest or a variable rate of interest but such outstanding loans, if not repaid, will reduce the death benefit.
In 1984 a new federal tax law required that for permanent insurance to enjoy preferred tax treatment it must provide coverage up to at least age 95, limit the amount of premium that may be paid in relation to the face amount of coverage and establish a minimum ratio between cash value and face amount of insurance. Many permanent policies will contain provisions, which specify these tax requirements.
There are two basic categories of permanent insurance, traditional and interest-sensitive, each with a number of variations. In addition, each category is generally available in either fixed-dollar or variable form.
Traditional Whole Life. Traditional whole life policies are based upon long-term estimates of expense, interest and mortality. The premiums, death benefits and cash values are stated in the policy. There are six basic variations of traditional permanent insurance:
- Non-Participating Whole Life A non-participating whole life policy will give you a level premium and face amount during your entire life. The advantages of such a policy are its fixed costs and generally low out-of-pocket premium payments. The disadvantage is that it pays no dividends.
- Participating Whole Life A participating whole life policy pays dividends. The dividends represent the favorable experience of the company and result from excess investment earnings, favorable mortality and expense savings. Dividends can be paid in cash, used to reduce premiums, left to accumulate at interest or used to purchase paid-up additional insurance. Dividends are not guaranteed.
- Indeterminate Premium Whole Life An indeterminate premium whole life policy is like a non-participating whole life plan of insurance except that it provides for adjustable premiums. The company will charge a “current” premium based on its current estimate of investment earnings, mortality, and expense costs. If these estimates change in later years, the company will adjust the premium accordingly but never above the maximum guaranteed premium stated in the policy.
- Economatic Whole Life An economatic whole life policy provides for a basic amount of participating whole life insurance with an additional supplemental coverage provided through the use of dividends. This additional insurance usually is a combination of decreasing term insurance and paid-up dividend additions. Eventually, the dividend additions should equal the original amount of supplemental coverage. However, because dividends may not be sufficient to purchase enough paid up additions at a future date, it is possible that at some future time there could be a substantial decrease in the amount of supplemental insurance coverage.
- Limited Payment Whole Life If you want to pay premiums for a limited time the limited payment whole life policy gives you lifetime protection but requires only a limited number of premium payments. Because the premiums are paid over a shorter span of time, the premium payments will be higher than under the whole life plan.
- Single Premium Whole Life Single premium whole life is limited payment life where one large premium payment is made. The policy is fully paid up and no further premiums are required. Many such policies have substantial surrender charges if you want to cash in the policy during the first few years. Since a substantial payment is involved, it should be viewed as an investment-oriented product.
- Interest in single premium life insurance is primarily due to the tax-deferred treatment of the build-up of its cash values. Taxes will be incurred on the gain, however, when you surrender the policy. You may borrow on the cash value of the policy, but remember that you may incur a substantial tax bill when you surrender, even if you have borrowed out all the cash value.
Interest Sensitive Whole Life. While insurers guarantee stated benefits on traditional contracts far into the future based on long-term and overall company experience, they allocate investment earnings differently on interest sensitive whole life in order to better reflect current fluctuations in interest rates. The advantage is that improvements in interest rates will be reflected more quickly in interest sensitive insurance than in traditional; the disadvantage, of course, is that decreases in interest rates will also be felt more quickly in interest sensitive whole life.
There are four basic interest sensitive whole life policies:
Universal Life The universal life policy is actually more than interest sensitive as it is designed to reflect the insurers current mortality and expense as well as interest earnings rather than historic rates. Universal life works by treating separately the three basic elements of the policy: premium, death benefit and cash value. The company credits your premiums to the cash value account. Periodically the company deducts from the cash value account its expenses and the cost of insurance protection, usually described as the mortality deduction charge. The balance of the cash value account accumulates at the interest credited. The company guarantees a minimum interest rate and a maximum mortality charge. Some universal life policies also specify a maximum basis for the expense charge. These guarantees are usually very conservative. Current assumptions are critical to interest sensitive products such as Universal Life. When interest rates are high, benefit projections (such as cash value) are also high. When interest rates are low, these projections are not as attractive.
Universal life is also the most flexible of all the various kinds of policies. Because it treats the elements of the policy separately, universal life allows you to change or skip premium payments or change the death benefit more easily than with any other policy.
The policy usually gives you an option to select one or two types of death benefits. Under one option your beneficiaries received only the face amount of the policy, under the other they receive both the face amount and the cash value account. If you want the maximum amount of death benefit now, the second option should be selected.
You generally pay a planned premium designed to keep the policy in force for life, and accumulate cash value, based upon the interest and expense and mortality charges you assume. It is important that these assumptions be realistic because if they are not, you may have to pay more to keep the policy from decreasing or lapsing. On the other hand, if your experience is better then the assumptions, than you may be able in the future to skip a premium, to pay less, or to have the plan paid up at an early date.
You do not have to pay the planned premium, but if you pay less, the benefit may be more like term insurance, which is only in force for a limited time and builds no cash value. On the other hand, if you pay more, and your assumptions are realistic, it is possible to pay up the policy at an early date.
If you surrender a universal life policy you may receive less than the cash value account because of surrender charges which can be of two types. A front-end type policy will deduct a percentage of the premium paid, while a back-end type policy will deduct a more substantial charge but only if the policy is surrendered before a specified period, generally 10 years but which could be as long as 20 years. A back-end type policy would be preferable if you intend to maintain coverage, and the charge decreases with each year you continue the policy. Remember that the interest rate and expense and mortality charges payables initially are not guaranteed for the life of the policy.
Although this type of policy gives you maximum flexibility, you will need to actively manage the policy to maintain sufficient funding, especially because the insurance company can increase mortality and expense charges. You should remember that the mortality charges increase, as you become older.
Excess Interest Whole Life If you are not interested in all of the flexible features of Universal Life, some insurers offer fixed premium versions called excess interest whole life. The key feature is that premium payments are required when due just like traditional whole life. If premiums are paid when due, the policy will not lapse.
With the premium level fixed, any additional or excess interest credited, or better life insurance experience, will improve the cash value of the policy. The premium level will probably be comparable to traditional whole life policies. Cash value may be applied to pay future premium payments. This type of product maximizes the deferred tax growth of your cash value.
Current Assumption Whole Life Current assumption whole life is similar to a universal life policy but your company determines the amount of premium to be paid. The company sets the initial premium based upon its current estimate of future investment earnings and mortality experience and retains the contractual right to reevaluate its original estimates to increase or decrease your premium payments later. If premiums are increased, some policies let you decrease the face amount of coverage so that you can continue to pay the original premium. Current mortality and experience and investment earnings can be credited to the insurance policy either through the cash value account and/or the premium or dividend structure (depending on whether it is a stock or mutual company). Regardless, this type of policy has the following characteristics:
The premiums are subject to change based on the experience (mortality, expenses, investment) of the company. The policyowner does not exercise control over the changes.
The policyowner can use the cash value to make loans just as he/she would with any traditional ordinary life insurance policy.
A minimum amount of cash value is guaranteed, just as with traditional ordinary life insurance.
The death benefit does not fluctuate.
Single Premium Whole Life There are a few single premium life products, which determine the premium using the current interest rate assumption. You may be asked to make additional premium payments where coverage could terminate because the interest rate dropped. Your starting interest rate is fixed only for a year or in some cases three to five years. The guaranteed rate provided for in the policy is much lower (e.g., 4%). Another feature that is sometimes emphasized is the “no cost” loan. Companies will set the loan interest rate to be charged on policy loans equal to the rate that is being credited to the policy.
VARIABLE LIFE Most types of both traditional and interest sensitive life policies can be purchased on either a fixed-dollar or variable basis. On a fixed-dollar basis, premium, face amount and cash values are specified in dollar amounts.
On the variable basis, face amount and cash value are specified in units, and the value of the units may increase or decrease depending upon the investment results. You can allocate your premiums among various investment pools (like stock, bond, money market, mutual funds and real estate pools) depending on the amount of risk you are willing to assume in the hope of a higher return.
Traditional variable life provides a minimum guaranteed death benefit, but many universal variable life products do not, and should investment experience be bad, coverage will terminate if substantially higher premium payments are not made. Variable life is also made available on a single premium basis but if investment experience is poor additional premiums will be required.
OTHER COVERAGES Variations on the Basic Plans
Credit Life Insurance Although you can obtain credit life insurance (term) as an individual, it is usually sold on a group basis to a creditor, such as a bank, finance company or a company selling high priced items on the installment plan. The policy generally pays the outstanding balance of the debt at the time of the borrowers death, subject to policy maximums. Debts covered in this way include: personal loans; loans to cover the purchase of appliances, motor vehicles, mobile homes, farm equipment; educational loans; bank credit and revolving check loans; mortgages loans; etc.
When you borrow from an organization that has a group credit life policy, the organization may require you to purchase credit life insurance or it may simply offer the protection as an additional service. In either case you must receive a certificate of insurance describing the provisions of the group policy and any insurance charge. Generally the maximum amount of coverage is $220,000 for a mortgage loan and $55,000 for all other debts. Credit life insurance need not be purchased from the organization granting the loan.
If you are covered under a group credit life policy and you terminate coverage by prepaying or defaulting on the loan, or if the group policy itself is terminated, you may be entitled to a partial refund of the premium you paid check your certificate. If life insurance is required by a creditor as a condition for making a loan, you may be able to assign an existing life insurance policy, if you have one. However, you may wish to buy group credit life insurance in spite of its higher cost because of its convenience and its availability, generally without detailed evidence of insurability.
Monthly Debit Ordinary Insurance Debit insurance is insurance with premiums payable monthly which are meant to be collected by the agent at your home. In most cases, however, home collections are not made and premiums are mailed by you to the agent or to the company.
There are certain factors that tend to increase the costs of debit insurance more than regular life insurance plans:
- Certain expenses are the same no matter what the size of the policy, so that smaller policies issued as debit insurance will have higher premiums per $1,000 of insurance than larger size regular insurance policies.
- In some companies, more debit policyholders allow their policies to lapse than is generally the case with policyholders of regular life insurance. Since early lapses are expensive to a company, the costs must be passed on to all debit policyholders.
- Since debit insurance is designed to include home collections, higher commissions and fees are paid on debit insurance than on regular insurance. In many cases these higher expenses are passed on to the policyholder.
- As a general rule the combination of smaller amounts, higher lapse rates and higher commissions and fees on debit insurance tends to make it more expensive than comparable regular life insurance plans.
Where a company has different premiums for debit and regular insurance it may be possible for you to purchase a larger amount of regular insurance than debit at no extra cost. Therefore, if you are thinking of debit insurance, you should certainly investigate regular life insurance as a cost-saving alternative.
Modified Life Plan A modified life plan is similar to whole life except that you pay a lower premium for the first few years and a higher than regular whole life premium in later years. This plan is designed for those who cannot initially afford the regular whole life premium but who want the higher premium coverage and feel they will eventually be able to pay the higher premium.
The Family Policy The family policy is a combination plan that provides insurance protection under one contract to all members of your immediate family husband, wife and children. Usually family policies are sold in units (packages) of protection, such as $5,000 on the main wage earner, $1,500 on the spouse and $1,000 on each child.
Joint Life and Survivor Insurance Joint Life and Survivor Insurance provides coverage for two or more persons with the death benefit payable at the death of the last of the insureds. Premiums are significantly lower under joint life and survivor insurance than for policies that insure only one person, since the probability of having to pay a death claim is lower.
Joint Life Insurance Joint Life Insurance provides coverage for two or more persons with the death benefit payable at the first death. Premiums are significantly higher than for policies that insure one person, since the probability of having to pay a death claim is higher.
Endowment Insurance Endowment insurance provides for the payment of the face amount to your beneficiary if death occurs within a specific period of time such as twenty years; or, if at the end of the specific period you are still alive, for the payment of the face amount to you. Due to recent tax law changes many endowment plans no longer qualify as life insurance for tax purposes and are generally not being offered by insurers.
Juvenile insurance Juvenile insurance provides a minimum of protection and could provide coverage, which might not be available at a later date. Amounts provided under such coverage are generally limited based on the age of the child. The current limitations for minors under the age of 14½ would be the greater of $50,000 or 50% of the amount of life insurance in force upon the life of the applicant. The limitations on a minor under the age of 4 and one half would be the greater of $50,000 or 25% of the amount of life insurance in force upon the life of the applicant. Juvenile insurance may be sold with a payor benefit rider, which provides for waiving future premiums on the childs policy in the event of the death of the person who pays the premium.
Senior Life Plans Senior life insurance, sometimes referred to as graded death benefit plans, provides eligible older applicants with minimal whole life coverage without a medical examination. Since such policies are issued with little or no underwriting they will provide only for a return of premium or minimum graded benefits if death occurs during a specified period which is generally the first two or three policy years. The permissible issue ages for this type of coverage range from ages 50 75. The maximum issue amount of coverage is $25,000. These policies are usually more expensive than a fully underwritten policy if the person qualifies as a standard risk.
Pre-need Insurance This type of coverage is for a small face amount, typically purchased to pay the burial expenses of the insured. As previously mentioned within the discussion of monthly debit ordinary insurance, this coverage often carries a higher premium per $1,000 of coverage than larger size policies.