Life Insurance: Valuing Lives For Policy Purposes

Life insurance is a contract between an insurance company and a policy owner. The insurer guarantees to pay a sum of money to the policy's beneficiaries when the insured person dies. The policyholder must pay a single premium upfront or regular premiums over time for the policy to remain in force. The best life insurance policies have good financial strength, low customer complaint numbers, high customer satisfaction, and easy application processes.

There are two primary types of life insurance: term and permanent. Term life insurance provides protection for a certain period and is usually the cheapest option. Permanent life insurance can provide lifetime coverage and often includes the ability to accumulate cash value, which can be accessed while the policyholder is still alive.

Term life insurance

When purchasing term life insurance, individuals go through an application process where the insurance provider assesses their risk based on factors such as health, occupation, lifestyle, and hobbies. The cost of term life insurance premiums depends on these factors, with risky hobbies and occupations resulting in higher rates. The length of the term is also a factor, with longer terms typically costing more.

When choosing a term life insurance policy, it is important to consider the length of coverage needed and the desired death benefit. Individuals should also compare rates from different providers and consider the financial strength and stability of the insurance company.

Permanent life insurance

There are two main types of permanent life insurance: whole life insurance and universal life insurance. Whole life insurance has fixed and guaranteed premiums, a fixed rate of return on cash value, and a fixed death benefit. The cash value grows over time based on the interest rate, and policyholders may have the opportunity to earn dividends. Universal life insurance, on the other hand, offers more flexibility, allowing adjustments to premium payments and death benefits within certain limits. It also has different subtypes, including guaranteed universal life insurance, indexed universal life insurance, and variable universal life insurance, each with distinct features and risks.

Whole life insurance

Lifelong Coverage

Savings Component

Guaranteed Payouts

Premium Payments

Riders and Customization

Cost Considerations

While whole life insurance offers comprehensive benefits, it is important to consider the cost. Whole life insurance is significantly more expensive than term life insurance due to its lifelong coverage, cash value component, and guaranteed payouts. The cost of whole life insurance is based on factors such as age, gender, health, lifestyle, and the desired coverage amount. It is important to carefully evaluate one's financial situation and needs before purchasing a whole life insurance policy.

Universal life insurance

Flexible Premiums

One of the key features of universal life insurance is its flexible premium structure. Policyholders can choose to pay more or less than the minimum required premium, known as the cost of insurance (COI). Paying more than the COI will result in the excess premium being added to the cash value of the policy, which can accumulate interest. On the other hand, if there is sufficient cash value, policyholders may be able to lower or skip payments without the risk of the policy lapsing. This flexibility can be particularly useful for those with variable incomes or fluctuating financial circumstances.

Investment Savings Element

Death Benefit

Variable universal life insurance

Pros of Variable Universal Life Insurance

• Control over cash value investments: Policyholders can choose how to invest their cash value, picking from various subaccounts that align with their risk tolerance and investment objectives.
• High growth potential: By investing the cash value in the financial markets, VUL offers the potential for higher returns compared to other types of permanent life insurance.
• Flexible premiums: Similar to traditional universal life insurance, VUL allows policyholders to adjust their premium payments to fit their budget.
• Tax advantages: The cash value of a VUL policy grows tax-deferred, and beneficiaries typically do not pay federal income taxes on the death benefit.

Cons of Variable Universal Life Insurance

• Risk of cash value losses: The return on the cash value is not guaranteed and is exposed to market fluctuations. Poor investment performance can result in losses, and if the cash value is too low, higher premiums may be required to maintain the policy.
• Possible increase in premiums: If the cash value does not perform well, higher premium payments may be needed to cover the cost of insurance and rebuild the cash value.
• High fees and charges: VUL policies often come with high fees due to the combination of life insurance and investment components. There may also be surrender charges if the policy is cancelled within a certain period.

Frequently asked questions