Life Insurance Terms
Explained
Common insurance terms explained
LIFE INSURANCE BASICS
Insurance Terms
Asset Accumulation
Cash value life insurance policies offer the ability to accumulate cash
values on a tax-deferred basis (based on current federal income tax laws).
Depending on the type of policy, the funds can grow at guaranteed fixed
interest rates or at variable rates tied to the performance of selected
investments. Assets that accumulate within a life insurance policy (net of
loan and surrender provisions) may be available to the policyowner during
his or her lifetime through policy loans and withdrawals and may also
increase the death benefit available to the beneficiary.
Beneficiary
The person(s) named in the policy to receive the life insurance proceeds
upon the death of the insured.
Cash Value
The amount of money that a policyowner is entitled to receive (minus any
surrender charges and any outstanding loans and interest) if the
policyowner cancels the coverage and surrenders the policy to the
insurance company.
Death Benefit
A life insurance contract provides payment of a death benefit to a
designated beneficiary upon the death of the insured.
Dividend
A refund of excess premiums paid to the owner of an individual
participating life insurance policy.
Estate Planning
A procedure for the accumulation, conservation and distribution of
personal wealth. Estate planning seeks to transfer the estate to heirs
with a minimum loss in taxes and other expenses. Life insurance is
typically used as part of an estate plan. Depending on the size and nature
of the estate, an individual should solicit the expertise of an
accountant, financial planner, attorney and life insurance agent.
Premiums
Payments to the insurance company to buy a policy and to keep it in force.
Types of Insurance
Term Life
Policies that offer life insurance protection for a specified term or
period of time - typically from one to 30 years or until a specified age.
Term life insurance provides a death benefit only, and does not offer an
opportunity to build up cash values within the policy. As a result, term
insurance is generally less expensive than cash value life insurance.
Premiums for a term life policy typically increase with the age of the
insured.
Return of Premium Term
Term policies that provide a refund at the end of the level-premium period
of the cumulative premiums paid.
Cash Value Life
Policies, unlike term insurance, that provide both a death benefit and a
method of accumulating funds over time. Cash value life insurance policies
differ from term life insurance in several other ways, including higher
initial premiums to pay for the cash value feature of the policy, greater
flexibility through features such as policy loans, tax-deferred growth
opportunities and dividend payments.
Whole Life
Also known as permanent insurance that offers life insurance protection
throughout the life of the insured as long as the premium is paid when
due. The premium may be level or increase after a fixed period, but it
will not change from the premium schedule provided when the policy was
purchased. Part of each premium payment is applied to the policy's cash
value account, which grows on a tax-deferred basis. In addition to
providing guaranteed premiums, death benefits and cash values, whole life
policies may also pay policy dividends in some cases.
Universal Life
Cash value life insurance policies that offer the policyowner the
flexibility to choose his or her amount of insurance, the premiums he or
she will pay and the opportunity to change these amounts over the life of
the policy (within certain guidelines) to meet changing financial needs.
Premium payments are credited to a cash value account where the money
earns interest at a rate set by the company which may change from time to
time. Policy expenses are deducted from this cash value account. The
policy's cash value may be accessed through policy loans and withdrawals.
Indexed Universal Life
Universal life policies where the interest rate credited to the policy's
cash value is tied to an index that measures market performance, typically
a stock market index. Indexed universal life offers the opportunity to
benefit from the growth potential of the stock market while typically
providing the protection of a minimum guaranteed interest rate when the
market is down.
Variable Universal Life
Universal life policies that allow the policyowner to choose where the
money in his or her cash value account is invested. Companies typically
offer a selection of separate variable investment accounts to choose from.
Unlike nonvariable policies, the cash value of these separate accounts is
not guaranteed by the insurance company. As a result, a variable universal
life policy presents a risk to the owner because the policy values vary
based on the investment performance of the separate accounts selected.
Joint Survivorship Life
Policies that insure two lives under one policy, with the death benefit
payable at the death of the second insured. When the first insured dies,
the policy remains in force and no death benefit is paid. The mortality
cost - the cost of the pure insurance - is generally lower with this type
of policy compared to the cost of purchasing two individual life policies.
Credit Life
Policies purchased to ensure that loans or charge account balances will be
paid off in the event the insured dies with an outstanding loan balance.
Some lenders or sellers may require credit life insurance before they will
approve a loan.
Annuities
Contracts in which the buyer pays funds to a life insurance company for
investment and, in return, the life insurance company agrees to pay the
annuity owner periodic payments during his or her lifetime, typically for
retirement purposes. During an annuity's accumulation phase, funds within
the contract grow either at a fixed or variable rate, depending on the
type of annuity chosen. In the payout phase, the insurance company makes a
series of payments to the contract owner, usually at regular intervals,
for a fixed period or for life. Most annuities are tax-deferred, meaning
cash values accumulated are not taxed until the funds are paid out.
Fixed Annuities
Annuities in which the insurance company promises to pay a fixed rate of
return on the funds deposited into the annuity, regardless of the
company's investment performance. All the investment risk is carried by
the insurance company.
Variable Annuities
Annuities that allow the contract owner to choose where funds are
invested, shifting the investment risk from the insurance company to the
contract owner. Companies typically offer a selection of separate variable
investment accounts to choose from. The income paid out to the annuity
owner depends on the performance of the investments selected.
Immediate Annuities
Annuity contracts that begin making payments to the contract owner
immediately (within one year) after the annuity is purchased. An immediate
annuity does not go through the accumulation phase. Each payment that is
made from the immediate annuity is a return of part of the investor's
original investment plus any interest earned during the payout period.
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Why Do You Need Term Life Insurance?
Everyone’s situation is different. But everyone should have a financial
plan for the long-term benefit of themselves and their families. As an
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mind for the uncertainties ahead.
Cash when your family might need it most.
Do you and your spouse both work? If either spouse should die
prematurely, most families would be strained to meet mortgage payments and
other household and living expenses. And that doesn’t take into account
family goals such as providing for your children’s education.
Low cost life insurance gives you the protection of income replacement and an
important cash resource.
Making sure your estate passes to your family.
You want to preserve your hard-earned estate and pass what you’ve
worked for to your family. The life insurance benefit will generally pass
income tax free to the beneficiaries and can be used to pay unexpected
estate taxes, which could be particularly important if your estate
includes assets that may not convert easily into cash, such as property or
a family business. Life insurance can help you keep your estate intact for
your family.
Protecting the future of your business.
Even a thriving business might not survive the loss of a key owner or
partner. Life insurance can be an advantageous way to give partners and
family members peace of mind. It can be one of the smartest business
decisions you make.
What type of life insurance do you need?
There are many types of life insurance. Some offer protection for a
specified period of time and others are permanent plans that build cash
value. One of the primary reasons people select term life insurance is
that it provides the maximum amount of coverage for the lowest cost.
Term life insurance provides protection for a specific period, or term.
It can protect you for a duration of 5, 10, 15, 20, or even 30 years.
Our needs estimator calculator can help you to determine how much life
insurance you may need. Also, if you'd like to find out more about our
underwriting procedures, there's plenty of information here to answer your
questions.
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