Life Insurance Amendments: Understanding Policy Changes

Life insurance is a legally binding contract between an insurance company and a policy owner, where the insurer guarantees to pay a sum of money to the policy's beneficiaries upon the death of the insured. The policyholder pays a single premium upfront or regular premiums over time for the life insurance policy to remain in force. There are two main types of life insurance: term life insurance and permanent life insurance. Term life insurance offers protection for a set period, while permanent life insurance stays in effect for the entire life of the insured unless the policy is cancelled or premiums are no longer paid. Life insurance policies can be amended or customized by adding riders, which are additional coverages or features tailored to the policyholder's needs.

Term vs. Permanent Life Insurance

The primary purpose of all life insurance is to provide a benefit to chosen beneficiaries upon the policyholder's death. Typically, these are people who are financially dependent on the policyholder. There are two main types of life insurance: term and permanent.

Term Life Insurance

Term life insurance provides coverage for a specific period, usually 10, 20, or 30 years. It is a simple and relatively inexpensive way to get life insurance coverage. If the policyholder dies while the policy is in force, the beneficiaries receive a payout. Term life insurance does not accumulate cash value and is therefore considered a low-cost option. It is suitable for specific short-term needs.

Permanent Life Insurance

Permanent life insurance, on the other hand, offers lifelong coverage and builds cash value over time. It is more expensive than term life insurance but provides additional benefits that can be used while the policyholder is still alive. Permanent life insurance can be used as a financial tool to build wealth and is often used for long-term financial goals.

Factors to Consider

When deciding between term and permanent life insurance, it is important to consider your unique circumstances and financial goals. Term life insurance is typically chosen by those who need large death benefits for a specific period and are also on a budget. Permanent life insurance, on the other hand, is suitable for those who need long-term financial protection, wish to create an inheritance for their heirs, or want a tax-advantaged way to save for future expenses.

Both term and permanent life insurance can effectively protect your loved ones. The main differences lie in the length of coverage, the features and benefits offered, and the structure of premium payments. It is essential to carefully consider your time frame, budget, and financial goals before choosing the type of coverage that best suits your needs.

Whole Life Insurance

There are several types of whole life insurance policies, including level payment, single premium, limited payment, and modified whole life insurance. Level payment policies have consistent premiums throughout the duration of the policy. Single premium policies require a one-time large premium payment that funds the policy for life. Limited payment policies have higher premiums but are only paid for a set number of years. Modified whole life insurance has lower premiums for the first few years, followed by higher premiums for the remainder of the policy.

Universal Life Insurance

Advantages of Universal Life Insurance

• Flexible death benefit: The policyholder may be able to increase or decrease the death benefit.
• Potential cash value growth: The cash value can grow over time, earning interest based on the current market or the policy's minimum interest rate.
• Flexible premiums: Policyholders can adjust their premiums within certain limits, making it a cost-efficient option compared to whole life insurance.
• Loan options: Policyholders can borrow against the accumulated cash value without tax implications, although interest will be charged on the loan amount.

Disadvantages of Universal Life Insurance

There are also some disadvantages to consider:

• Risk of large payment requirements or policy lapse: If the cash value falls too low and the premiums don't cover the COI, the policyholder may have to make large payments to keep the policy active or risk policy lapse.
• Returns are not guaranteed: If interest rates drop, the cash value may not perform well, and there is no guaranteed rate as there is with whole life insurance.
• Some withdrawals are taxed: Withdrawals from the policy may be taxable if they exceed the amount paid into the policy.
• Cash value lost at the policyholder's death: The insurance company retains the cash value after the policyholder's death, and the beneficiaries only receive the death benefit.

Both universal life insurance and whole life insurance are forms of permanent life insurance that offer a cash value savings component. However, universal life insurance offers more flexibility in terms of adjustable premiums and death benefits, while whole life insurance offers fixed premiums and guaranteed cash value and death benefits. Universal life insurance premiums may also be lower than those of whole life insurance, but they can vary with interest rates and the policyholder's age.

Variable Universal Life Insurance

However, there are risks and drawbacks to this type of insurance. The cash value return is not guaranteed, and if the policyholder's investments perform poorly, their cash value will not grow as quickly, and they could even lose money. If they don't have enough in cash value to cover the cost of their life insurance, they would need to increase their premium payments or lose their insurance protection.

Life Insurance Riders

• Accelerated Death Benefit (ADB) Rider: Also called a terminal illness rider, this lets you claim some or all of your death benefit while you're still alive if you meet certain conditions.
• Critical and Chronic Illness Riders: These riders give you access to your death benefit if you're diagnosed with certain qualifying conditions, though they typically exclude terminal illnesses that a general ADB rider would include.
• Long-Term Care (LTC) Rider: If you need qualifying long-term care, this rider allows you to access your policy's death benefit while you're alive. Depending on your LTC rider, you might be reimbursed for covered expenses or via a lump sum to be used however you like.
• Waiver of Premium Disability Rider: This rider waives your policy's premium if you develop a qualifying disability and can't work. The qualifying conditions vary by insurer, so it's important to research the qualifications outlined in the policy.
• Child and Spouse Riders: Child riders and spouse riders pay out a small death benefit if the insured child or spouse passes away during the rider's term. The payout amount can typically cover medical bills and funeral expenses.
• Accidental Death and Dismemberment (AD&D) Rider: An AD&D rider increases your life insurance payout if your death is caused by a covered accident. It can also pay out a certain amount while you're still alive if you suffer a qualifying injury caused by an accident.
• Cost of Living Rider: This rider gradually increases your policy's coverage over time, so the value of your policy doesn't erode due to inflation. Your premium will also increase alongside your coverage amount.
• Guaranteed Insurability Rider: This rider lets you periodically choose to add more coverage to your policy without undergoing a life insurance medical exam. This is most common on whole life insurance and universal life insurance policies.
• Return of Premium Rider: This rider refunds all or some of your term life insurance premiums at the end of your policy's term, as long as the death benefit hasn't been paid out.
• Term Life Insurance Rider: This rider lets you purchase additional term coverage on top of your permanent life insurance policy, giving you a larger death benefit for a set period of time.
• Term Conversion Rider: With this rider, you can convert a term life insurance policy into a whole life policy near or at the end of the term.

Frequently asked questions