Sunday, August 17, 2008

Term Insurance

Term insurance is designed to provide death protection for a definite and limited period of time such as One Year Term, Five Year Term, 30 year Term, or Term to 65. If the insured dies during the term, the policy matures and the insurance company pays the face amount of the policy to the beneficiary. If the insured doesn't die during the term, the policy expires.

The second most important characteristic of Term insurance is that it is pure insurance. You pay premiums only for the coverage. Since there are no forced savings or cash value attached to Term insurance, it is designed to provide the greatest possible protection for the lowest possible cost. Therefore, the two key points to remember about Term insurance are that if offers (1) protection only for a (2) a specified period of time.

One of the most widely marketed forms of Term insurance is Annually Renewable Term (ART). The insurance company grants the insured the right to renew the policy each year to a stated date or age. The cost to renew the policy goes up each year because the rates are based on the insured's attained or current age.

The increasing in premiums can present a real problem for the insuring public. One Term product that provides a partial solution to the rising costs is Level Premium Term. With a policy of long duration, the payment may be leveled out over the life of the policy to create Level Premium Term. The cost of Level Premium Term is calculated by price of the early years by the price of the later years. So in the beginning, you are making an overpayment of what the actual cost of insurance is. But in the later years, you are making an underpayment of what the actual cost of the insurance is. Why? Because the cost to insure someone is young is low compare to the cost of insuring someone who is old.

Term insurance, then, in any of its many forms, is the most affordable protection available for the premium dollar. It is particularly suitable for a person who only need temporary need for protection (See Theory of Decreasing Responsibility), for a person who may want permanent insurance in the future, or for the person who has the discipline to buy Term and really invest the rest.

There are 5 types of Term insurance you should know about:
1) Level Term
2) Decreasing Term
3) Increasing Term
4) Renewable Term
5) Convertible Term

LEVEL TERM: Coverage remains constant throughout life of the policy. Premiums remain constant for the stated period of time.

DECREASING TERM: This is where coverage decreases over time, but premiums usually remain constant. This is suitable for someone who has decreasing financially responsibilities over time such as a mortgage payment. If you purchase life insurance from a mortgage company, it is most likely a decreasing term insurance.

INCREASING TERM: Death benefit increases each year and premiums goes up as well. This is suitable for someone who see that he/she will have increasing financial responsibilities over time (such as having kids or buying a new home).

RENEWABLE TERM: In addition to normal benefits found in a Term policy, you can make a Term policy renewable without having to provide proof of insurability. The most common forms of Renewable Term are Five Year Renewable Term or Annually Renewable term. The premium will remain level during the policy period, but will increase at renewal due to the insured's newly attained age.

CONVERTIBLE TERM: With this form of Term insurance, you have the right to convert a Term policy to any form of permanent protection (such as Whole Life) without having to show proof of insurability. Most companies stipulate the length of the period in which this privilege may be exercised. If the insured fails to convert before the deadline, the right to convert is lost forever, but the term insurance coverage can be continued. When conversion is made, the premiums will increase significantly because permanent forms of insurance are more expensive than term insurance and also because the new premium will be based on attained age.

Saturday, August 09, 2008

Whole life insurance

Whole life insurance is a form of life insurance which has a guaranteed level death benefit until death or age 100, which ever comes first. It also builds a guaranteed cash value which will equal the face amount of the policy at age 100. So if you have coverage of $100,000 and you are still alive at age 100, the insurance company will void your life insurance policy and pay you $100,000.

Premiums remain level and there are 3 ways you can pay your premiums. The most common way is called "Straight Life" or "Continuous Premium Whole Life." This is where you premiums continuously until you die or when you reach age 100.

The second way is called "Limited Pay." This is where you pay a higher amount of premiums than Straight Life for a certain amount of time. Examples of this are "20-Pay Life" or "Life Paid at 60." With "20-Pay Life" you pay your premiums for 20 years. "Life paid at 60" means you pay your premiums until you reach 60 years old. The shorter the payment period, the higher the premiums and vice versa.

The third way is called "Single Premium Whole Life." This is where you pay one lump of premium and never have to pay it again.

As I mentioned earlier, Whole life insurance builds cash value. You can borrow it anytime and use it for any purpose. The question is "what is this borrowing part all about?" Isn't the savings suppose to be your money? The answer is no. The premiums you pay belongs to the insurance company.

If you want to take money out from your life insurance, you have to borrow it. The insurance company will charge you a loan interest of anywhere between 5-8%. But in the first 2 years of the policy, no cash value is accumulated. So there's nothing you can borrow during that time. After the first 2 years, you are guaranteed an interest rate between 1-3%. When you borrow money from the cash value, your death benefit is reduced by the amount you borrowed until you pay it all back, but the premiums remain the same. Interest charged on the amount you borrowed does not go back into your cash value. It goes directly to the insurance company.

If you die someday, the insurance company keeps your cash value and pays the death benefit only.

If someday, you decide you want to cancel your whole life policy, you will get most of your cash value. When you cancel your life policy, the insurance company may charge you a surrender charge on your cash value. If you borrowed money from your cash value, it is important that you pay this loan back before canceling the policy. Failure to do so will result in income tax on the loan amount.

In summary, here are the pros and cons of whole life insurance:
1) You are guaranteed coverage until you die or reach age 100, whichever is first.
2) Premiums remain level.
3) It builds cash value.

1) It builds cash value, which makes this type of life policy very expensive.
2) Cash value grows at a low rate of return
3) If you want to use the cash value, you have to borrow it and pay loan interest of 5-8%
4) If you die, the insurance company keeps your cash value.

What is life insurance?

First of all, lets discuss what "insurance" means. Insurance is the transfer of risk of financial loss from an individual to a company which, for consideration, assumes that risk for a stated period of time against a stated peril(s) up to a stated amount. In other words, insurance is where the policyowner trade for a small loss (the premiums) for the insurance company's promise to pay for a large, unknown loss. All the policyowners lose a little, but no one has to take the risk of losing everything. All insurance policies are contracts, which means nothing more than an agreement between two or more individuals or parties.

If you ask yourself, what is your greatest asset? Without much thought, you would say that it is your bank, your car, or your house. If you answer anything besides "yourself," your answer is wrong. Your earning ability is your greatest asset. Your ability to go to work and bring home a paycheck is your greatest asset. But you can't go on with life without being exposed to risk. In insurance, risk is defined as "uncertainty of financial loss." You have to live with the risk that you (or your spouse or partner) could lose the ability to bring home a paycheck. This is where life insurance comes into play.

What is life insurance? Life insurance is a contract under which the insurance company agrees to pay a stated amount to a beneficiary upon death of the insured. If something were to happen to you tomorrow, how would your family live? Would their life style change for the worse, be the same, or be better? In most cases, your family would be worser off because the flow of income from you has stopped. Your spouse may need to sell the home, use your kid's college funds to pay off bills, and so on. Without adequate protection, your family will not be able to maintain the same life style that they are currently in.

Life insurance can't protect you from dying, but it can protect your income. Financial experts say you should have coverage of 8-12 times of your annual gross income. If you earn $40,000/year, then you would need coverage of around $400,000. The question is: Do you have life insurance and if you do, do you have adequate coverage on yourself?

If you are single, you are probably wondering why you need life insurance. For most singles, they really don't need life insurance. There's no one really dependent on his/her income. He/she has no financial obligations that will be passed on to other family members (unless the debt is a joint account such as a mortgage or credit cards). But there are some reasons why a person who is single may need life insurance. He or she may want to leave money to their loved ones such as parents, brothers or sisters. He or she don't want to pay higher premiums in the future. He or she don't want to be un-insurable because of the possibility of declining health. In any case, a person being single has to determine whether he or she needs life insurance.

There are two main types of life insurance you should know about. One type of life insurance builds savings, which is called "cash value life insurance." The other type is known as pure insurance because its just insurance without any savings. This is called "term insurance." It is important to know that all life insurance policies are term insurance because all policies expires at a certain age (usually at age 100).

See also:
Cash value life insurance
Term insurance
Comparing cash value life insurance and term insurance in numbers.