Life insurance is a contract that exists between a policyholder and the insurer. The policy holder pays premiums to the insurer. In return, the insurer agrees to pay money to a beneficiary upon the death of the insured person. Often, the policy holder and the insured person are the same person, but this is not always the case. Each insurance company will have different terms and conditions to its life insurance policies.
Types of Life Insurance
There are two categories for life insurance, called term and permanent life insurance, but there are also many types beyond those two categories.
Term life insurance policies provide insurance for a term of years in exchange for pre-established premium. These policies pay out a benefit in response to a specific event (typically, the death of the insured), which is generally paid out in a lump sum.
Permanent life insurance remains in force until such a time as the policy pays out, assuming continued payment of the policy remains premiums. Permanent life insurance, unlike term insurance, actually accrues cash value. There are certain subcategories of permanent life insurance.
Whole life insurance, as opposed to term, covers the entire life of the insured person. The advantages of whole life are guaranteed death benefits, cash values, and fixed premiums. The premiums may be higher than term insurance, but over time the amounts are roughly equal, if policies are kept in force and are up to date. The cash value of a whole life insurance policy can be accessed through “loans” made from the policy, and are received non-taxable. These loans can decrease the benefits payable on death of the insured person, however.
Universal life insurance is a permanent life insurance that is based on cash value. The value of the policy can increase where the premium payments exceed the cost of the insurance. The cash value can receive monthly interest, and is also charged with a “cost of insurance” charge, as well as any other fees that can draw on the cash value of the policy if no premium payment is made.
Endowment policies are types of life insurance that pay a lump sum after a specified term or on death. Endowments can be cashed in early (or “surrendered”) and the holder then received the surrender value, which is determined by the insurance company depending on how long the policy has been running and how much has been paid into it.
Riders are additional, optional amendments to a life insurance policy. Here are some examples of available riders:
The Accelerated Death Benefit Endorsement can automatically be included on your policy at no additional premium; however, there is an administrative fee when benefits are elected. It offers you the flexibility to access a portion of your Death Benefit should you develop a qualifying illness. The Death Benefit your beneficiaries receive will be reduced by the amount accelerated.
Terminal Illness If you become terminally ill (life expectancy of 24 months or less), this endorsement will allow you to advance a portion of your Death Benefit as a lump sum. The maximum amount available to advance at age 80 is $144,635.00, however since this benefit is paid prior to death, the payment you receive will be discounted.
Chronic Illness If you become chronically ill (unable to perform at least two activities of daily living or suffering from severe cognitive impairment), this endorsement will allow you to advance a portion of your Death Benefit as frequently as monthly. You can use the benefit in any way that you wish, such as helping to pay for a nursing home or home health care assistance. The maximum amount available to advance at age 80 is $3,856.00 per month, however since this benefit is paid prior to death, the payment you receive will be discounted.