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What is Term Insurance?
Term insurance provides protection for a specific period
of time. It pays a benefit only if you die during the term. Some
term insurance policies can be renewed when you reach the end
of a specific period, which can run from one to 20 years. The
premium rates increase at each renewal date. Many policies require
that evidence of insurability be furnished at renewal for you
to qualify for the lowest available rates.
What is Permanent Insurance?
Permanent insurance provides lifelong protection and
is known by a variety of names, described later. As long as you
pay the necessary premiums, the death benefit always will be there.
These policies are designed and priced for you to keep over a
long period of time. If you don't intend to keep the policy for
the long term, it could be the wrong type of insurance for you.
Most permanent policies - including Whole, Ordinary, Universal,
Adjustable and Variable life - have a feature known as "cash
value" or "cash surrender value." This feature,
which is not found in most term insurance policies, provides you
with some options:
- You can cancel or "surrender" the policy - in total
or in part - and receive the cash value as a lump sum of money.
If you surrender your policy in the early years, there may be
little or no cash value.
- If you need to stop paying premiums, you can use the cash
value to continue your current insurance protection for a specific
period of time or to provide a lesser amount of protection to
cover you for as long as you live.
- Usually, you may borrow from the insurance company using the
cash value in your Life Insurance as collateral. Unlike loans
from most financial institutions, the loan is not dependent
on credit checks or other restrictions. You ultimately must
repay any loan with interest or your beneficiaries will receive
a reduced death benefit.
The cash values of many Life Insurance policies may be affected
by your company's future experience, including mortality rates,
expenses and investment earnings.
Keep in mind that with all types of permanent policies, the cash
value of a policy is different from the policy face amount. Cash
value is the amount available when you surrender a policy before
its maturity or your death. The face amount is the money that
will be paid at death or at policy maturity.
What are the types of permanent
insurance?
There are many different types of permanent insurance.
Here are the most common:
Whole Life or Ordinary Life
This is the most common type of permanent insurance.
The premiums for a Whole Life policy must be paid periodically
in the amount indicated in the policy. These premium amounts
generally remain constant over the life of the policy.
Universal Life or Adjustable Life
This variation of permanent insurance allows you, after
your initial payment, to pay premiums at any time, in virtually
any amount, subject to certain minimums and maximums. You also
can reduce or increase the amount of the death benefit more
easily than under a traditional Whole Life policy. (To increase
your death benefit, you usually will be required to furnish
the insurance company with satisfactory evidence of your continued
good health.)
Variable Life
This type of permanent policy provides death benefits
and cash values that vary with the performance of an underlying
portfolio of investments. You can choose to allocate your premiums
among a variety of investments which offer varying degrees of
risk and reward - stocks, bonds, combinations of both, or accounts
that provide for guarantees of interest and principal. You will
receive a prospectus in conjunction with the sale of a variable
product.
The cash value of a Variable Life policy is not guaranteed, and
the policy holder bears that risk. However, by choosing among
the available fund options, the policy holder can create an asset
allocation that meets his or her objectives and risk tolerance.
Good investment performance will lead to higher cash values and
death benefits. On the other hand, poor investment performance
will lead to reduced cash values and death benefits. Some policies
guarantee that death benefits cannot fall below a minimum level.
There are both Universal Life and Whole Life versions of a variable
life.
What are the advantages and disadvantages
of Term and Permanent insurance?
Term Insurance
Advantages
Initially, premiums are generally lower than those for
Permanent insurance, allowing you to buy higher levels of coverage
at a younger age when the need for protection often is greatest.
- It's good for covering specific needs that will disappear
in time, such as mortgages or car loans.
Disadvantages
Premiums increase as you grow older.
- Coverage may terminate at the end of the term or may become
too expensive to continue.
- Generally, the policy doesn't offer cash value or paid-up
insurance.
Permanent Insurance
Advantages
- As long as the necessary premiums are paid, protection is
guaranteed for your life.
- Premium costs can be fixed or flexible to meet personal financial
needs.
- Policy accumulates a cash value that you can borrow against.
(Loans must be paid back with interest or your beneficiaries
will receive a reduced death benefit.) You can borrow against
the policy's cash value to pay premiums or use the cash value
to provide paid-up insurance.
- The policy's cash value can be surrendered - in total or in
part - for cash or converted into an annuity. (An annuity is
an insurance product that provides an income for a person's
lifetime or for a specific period of time.)
- A provision or "rider" can be added to a policy
that gives you the option to purchase additional insurance without
taking a medical exam or having to furnish evidence of insurability.
Disadvantages
- Required premium levels may make it hard to buy enough protection.
- It may be more costly than term insurance if you don't keep
it long enough.
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