What is Life Insurance?

What is the purpose of life insurance?

The primary purpose of taking out life insurance is to provide financial security to the family of the insured individual. In addition, it also provides a solution to other potential problems that could be encountered if the insured were to die suddenly. Though life insurance is primarily taken for its benefit of providing financial security, it has other benefits as well, such as:

1. Ensuring that the insured’s dependents are provided for in case of his death.
2. Providing funds that can be used for investments.
3. Ensuring a better quality of life for the insured’s dependents by providing them with a financial cushion to fall back on.
4. Ensuring that outstanding debts are paid off in case of death, thus avoiding legal hassles for the family.
5. Sufficient funds to pay the final expenses of the insured in case his family is not financially capable.

Life insurance can also be used to create a nest egg for your family and can be utilized as an investment tool. Some examples include:

• Income replacement
• Mortgage
• College education of children
• Debt
• Funeral and final expenses

Life Insurance is beneficial for both you and your family. You can help to provide yourself with peace of mind knowing that, should the unexpected happen, you will not leave behind a financial burden for those who depend on you. For your family, life insurance can be the difference between living the comfortable life that you have worked hard for and being left with the added stress of financial insecurity.

Insurance companies, including investment banks, provide a variety of life insurance options, and they can help you create a policy that works for your unique financial situation. Depending on your needs and budget, you may purchase either term, whole, or universal life insurance.

What is term insurance?

Term insurance is the simplest form of life insurance. The contract is for a stated period of time; there is no cash value, and the insurance coverage expires upon the term period completion, and then the beneficiary is paid death or policy amount. It is generally much less expensive than other types of life insurance.

Forms of Term Insurance

Term insurance is offered in two forms:

• Basic Life AD&D
• Voluntary Term Life AD&D

These forms of term insurance differ only in the type of accidents and diseases covered, as well as premiums. It’s important to be aware of the exclusions in your basic policy; once you know exactly what is not covered, you can decide if you want to add more coverage at an additional cost.

Basic Life AD&D is generally employer-sponsored in full. It can be offered in a form of a flat amount such as $100,000, or sometimes up to an X of the employee’s annual salary.

On the other hand, Voluntary Term Life AD&D is paid for by the employees and serves as a supplement to the employer-sponsored basic life insurance.

Accident, Death, and Dismemberment (AD&D)

The majority of life insurance policies, on both an individual and group basis, are bundled with Accident, Death, and Dismemberment (AD&D). This implies that if the person’s death is due to an accident rather than natural causes, the beneficiaries may receive double the policy coverage. For example, if a person has a $100,000 policy and is fatally injured in an accident, the beneficiary would receive $200,000.

AD&D is offered in a bundled fashion or unbundled fashion. In the bundled form, AD&D is included in a single policy with life insurance. In the unbundled form, AD&D insurance is provided as a separate policy. It is important to note that purchasing unbundled insurance will not increase the amount of life insurance you can purchase. As such, it is generally more cost-effective to purchase all insurance as a bundle.

Guaranteed Issue

One may qualify for a guaranteed issue by the insurance company based on the estimated risk level of a group, such as age/gender demographics of employees, the industry in which one is working (s/w company vs. mining company), size of the group, etc.

Normally, individual insurance purchases require a person to answer many health questions and sometimes even go through a medical exam. On the other hand, a guaranteed issue amount is a policy amount up to which the employee can purchase without being asked any medical questions.

In group purchases, up to the GI, no questions are asked. But the offer, for instance, can offer choices of $10,000 increment from a minimum of $50,000 to $300,000 and the GI could be $100,000.

Evidence of Insurability

If the employee chooses an amount greater than $100,000, which does not qualify as GI, they are subject to Evidence of Insurability. EOI requires the employee (and spouse if applying), to answer medical questions as part of the benefits enrollment process. The insurance company will review and decide to approve or disapprove the amount higher than the GI. They can approve a reduced amount than what was applied for. They can refuse it completely as well, but they cannot refuse the GI amount. In other words, the employee’s max policy goes at the GI level. This process is called underwriting and the underwriting department has the responsibility to assess the individual risk based on the EOI application data.

What is whole life insurance?

Whole Life provides a cash value at a guaranteed interest rate of the investment and the policyholder can use the cash value itself to pay the premiums once it builds up. They can take loans against these. So the insured is also benefitted and not only the beneficiaries. The beneficiary will still get the death amount based on what balance remains. Technically, there is a life insurance policy and a savings account.

Cash value keeps changing as you age. It is due to the fact that the insurance company determines the premiums based on actuarial tables on a yearly basis. They increase as one gets older because rising mortality charges drain the cash value every year.

What is universal life insurance?

Universal Life policies provide a death benefit equal to the policy’s cash value. The insured has access to this money and can use it as they wish. This creates what is called term-certain insurance, as the death benefit is predetermined.

The difference in Universal Life is that the interest rate can change as it is tied to market indexes and so it is also called the variable universal life.

So, the main question is which insurance to choose?

This comes down to what you want out of life insurance. Your choice should be based on your family’s needs, whether you are saving for retirement or want to pass along wealth. Let’s take a look at the table below to break down some of the major differences between these insurance types.

Term insurance is by far the most affordable type of life insurance, but it isn’t without its drawbacks. In addition, term insurance doesn’t build any cash value and isn’t available for investment purposes.

If you’re looking for coverage that builds cash value and allows you the most flexibility with your money, universal life is the best option. This kind of policy will allow you to pay your premiums using cash value or with non-borrowed money, and you can choose how to invest your cash value. You’ll be able to take loans against the policy’s cash value as well.

Universal Life policies are based on market performance, so they may not provide the death benefit that would be available in a whole life policy. If you want to be able to rely on the cash value in your policy at all times, consider purchasing a new universal life insurance policy or converting an existing whole life policy to a universal life policy.

Whole life insurance is permanent life insurance that offers lifetime protection and many protections. It builds cash value at a guaranteed interest rate. The insured can use the cash value itself to pay the premiums once it builds up. They can take loans against these. So the insured is benefitted and not only the beneficiaries. The beneficiary will still get the death amount based on what balance remains, technically there is a life insurance policy and a savings account.

To sum it up, the main difference between whole life and universal life is that you’ll have a lower premium with whole life policies and the insurance company guarantees that you’ll never outlive your coverage.