Life Insurance

Term Life Insurance is pure insurance. That is, it pays benefits only if the insured dies during the period of time (term) covered by the insurance. This typically ranges from one to 30 years. The primary advantage of this type of policy is that the premiums are low and affordable because they are based on the idea that you are not expected to collect on the policy by passing away during the term of the policy. Since the policy has no accumulated value, it will be canceled if premium payments are not made.

The three key factors to consider in Term Insurance are face amount (amount beneficiaries will receive after the death of the insured), the premiums to be paid, and the length of coverage of the policy. Various insurance providers sell term insurance with many different combinations of these three factors. The face amount can remain constant or decline, the premium can remain level or increase, and the term can be for one or more years.

One common type of policy is known as “annual renewable term.” It is a one-year policy, but the insurance company guarantees it will issue a policy of equal or lesser amount without regard to the insurability of the insured or the insured’s age at the end of the year. In the past, most term insurance policies excluded payments following the suicide of the insured; however, if a suicide occurs within the first two years after the policy is purchased, the company may return the premiums paid.

Another common type of Term Insurance is Mortgage Insurance, which is usually a level premium, declining face value policy. The face amount is intended to equal the amount of the mortgage on the owner’s residence so the mortgage will be paid off if the insured dies. Many lenders require borrowers to obtain this type of insurance and keep it in effect until a specified amount of equity is reached.

Whole Life Insurance policies provide for a fixed premium to be paid through the years, and a portion of the premiums paid accumulates in accordance with a cash value table included in the policy and guaranteed by the company. The primary advantages of Whole Life policies are guaranteed death benefits, guaranteed cash values and fixed and known annual premiums. Many Whole Life policies have provisions for the insured to increase the death benefit by paying additional premiums or through the use of policy dividends. The chief disadvantages of whole life are premium inflexibility and the fact that the rate of return in the policy may not be competitive with other savings alternatives.

Many people like the idea that the policy’s cash value can be accessed at any time through policy “loans.” Payback of these loans is optional since the loans decrease the death benefit. Cash values are not paid to the beneficiary upon the death of the insured, just the face value of the policy.

This type of permanent insurance coverage has greater flexibility in premium payment and the potential for a higher internal rate of return. A Universal Life policy includes a cash account. Premiums increase the cash account, and interest is paid within the policy at least at the minimum rate guaranteed by the company, but the actual rate usually is higher than that minimum. Mortality charges and administrative costs reduce the cash account. The surrender value of the policy is the amount remaining in the cash account less applicable surrender charges, if any.

The advantages of Universal Life policies are that the premiums are flexible, and the internal rate of return is usually higher than with Whole Life because it moves with the financial markets. All basic costs are known, and the cash value may be considered more easily attainable because the owner can discontinue premiums if the cash value allows it. One disadvantage of this type of insurance is that it no longer is in force if sufficient premiums are not paid, and its cash values are not guaranteed as with Whole Life Insurance.

The owner of Universal Life Insurance may choose from two different options. The first permits the payment of the face amount at death. The second pays the face amount plus the cash values. Because tax laws regarding insurance change with the choice of the second option, it is good to have a qualified insurance agent explain which option is best for you.

Variable Life Insurance is a specialized form of Universal Life Insurance. Variable Life Insurance offers a choice of death benefit options and a potential to accumulate non-guaranteed tax-deferred cash value that fluctuates based on the performance of the underlying investment decisions you choose yourself from a wide range of investment options from qualified fund managers This type of insurance is a convenient way for those who prefer to manage their policy to combine permanent life insurance protection with investment flexibility. It provides protection you can guarantee for life or shorter periods

There is normally no deduction for state or federal taxes for payment of Life Insurance premiums. Benefits paid by the insurer on the death of the insured are not included as taxable income for state and federal tax purposes; however, if the beneficiary of the policy is the “estate” of the insured, it is usually subject to federal and state estate and inheritance tax. Certain types of policies can become a tax shelter until money is withdrawn.

As with all insurance choices, it is good to have a well-informed agent from Marcum & Associates discuss the ramifications of your Life Insurance choices.

Actuarial Tables
Life expectancy charts based on the family history, smoking record and health history of the person wishing to obtain Life Insurance.

Administrative Costs
Money an insurance provider deducts from premiums paid to cover its expenses and commissions to agents.

Beneficiary
The individual(s) specified in the Life Insurance policy to receive the death benefits after the insured passes away.

Cash Account
The amount of money that accumulates in a Universal Life policy through the years that premiums are paid plus interest and dividends at a fluctuating rate determined by the financial market less mortality and administrative expenses.

Cash Value
The amount of money that accumulates in a Whole Life policy through the years that premiums are paid. This usually is calculated at a fixed rate specified in the policy contract.

Insured
The individual whose life is insured in a life insurance policy.

Insurer
The company that provides insurance for the insured. Life Insurance companies must meet strict standards of responsibility. Marcum & Associates represents all of the major insurers and can recommend the provider that best meets your insurance requirements.

Investment Policies
Policies where the insured can facilitate the growth of capital by regular or single premiums. Common forms in the U.S. are Whole Life, Universal Life and Variable Life insurance.

Mortality
Protection provided for payment of a specified sum at the time of the insured’s death.

Policy Holder
The person who purchases the policy and pays the premiums. Sometimes parents will purchase policies on their children.

Premiums
Amount paid by the policy holder to obtain a policy and keep it in effect.

Term
Period of time specified in the policy the insured will be covered by the insurance company. Renewable term policies can be renewed at the end of that period in accordance with pre-determined rules.

Underwriting
An insurance company’s estimate of the risk involved in providing insurance for an individual customer.