What is term life insurance and how does it work?
Term insurance
is affordable, temporary insurance that provides coverage for a pre-determined period of time (10, 20, 30 years, etc.). It
provides you the largest amount of coverage for the dollar when your financial obligations are the greatest. It is pure protection
and does not build cash value.
What are the advantages of purchasing a term
life insurance product?
Term life insurance is a very cost-effective way to provide protection
for you, your family, or your business. You decide the length of term you want your policy to be in force. These increments
can be in 10-, 20- or 30-year durations. This allows you to set aside a premium amount each month to cover a specific need
such as mortgage protection.
What is a Return of Premium Policy?
This type of life insurance is essentially a
hybrid between term life and whole life. You buy a return of premium policy for a set amount of time — say, 30 years.
You make your payments every year, and in the event that you pass away, your heirs are paid the face value of your death benefit.
Here's the part that appeals to a lot of people. Should you outlive your policy, the insurer sends you a tax-free check
for the full amount that you've spent on premiums over the lifetime of your coverage. In the words of one agent, it's
a win/win situation. There is a downside. Price. In order to guarantee you your premiums at the end of the 30 years, the insurer
charges you an additional 50% over the cost of a standard term policy.
What
is Whole Life ?
Whole life combines term insurance with an investment component. A whole life policy
has two elements: the mortality charge, the part of your premium that pays for the insurance coverage, and a reserve, the
investment component that earns interest. As you age, the portion that goes into the reserve decreases while the portion that
pays for the mortality charge increases. In addition to interest, many companies credit the reserve with an annual dividend,
depending on the insurer's loss experience and investment performance.
The cash surrender value (which is also called
the cash value) is what you'd get if you cashed
in your policy. If you decide to give up your policy, your cash surrender value can be paid in cash or paid-up insurance.
There are several problems with using whole life as a savings vehicle, however. One is that the policy's advertised rate
of return, as disclosed in a set of hypothetical numbers called the policy illustration, can have little or no relation to
reality. In fact, the policy's returns will fluctuate with the markets -- and will usually trail returns available from
other investments like equity mutual funds. Another problem is that whole life is extremely expensive, and if you're on
a limited budget, you may not be able to afford all the insurance coverage you actually need.
