Cash-value life insurance pays benefits upon the death of the insured and also incorporates a savings/investment element. This cash value belongs to the owner of the policy rather than to the beneficiary (although they can be the same person). While the insured is alive, the owner may obtain the cash value by borrowing from the insurance company or by surrendering and canceling the policy. Cash-value insurance is referred to as permanent insurance because it does not need to be renewed and because coverage is maintained for the entire life of the insured. The annual premiums for cash-value policies usually remain constant.
The premiums for cash-value policies are always higher than those for term policies providing the same amount of coverage. This difference arises because only a portion of the premium is used to provide the death benefit; the remainder is used to keep the premium level and to build the cash value. Figure 12.1 illustrates the premium differences between cash-value and term life insurance policies. Cash-value life insurance actually represents a combination of decreasing term insurance and an investment account that adds up to the face amount of the policy. Figure 12.2 illustrates this concept. Initially, for example, you might have $100,000 ofinsurance and no savings. Several years later, you might have built up $2000 in savings within the policy. In the event of your death, your beneficiary would collect $100,000,
The premiums for cash-value policies are always higher than those for term policies providing the same amount of coverage. This difference arises because only a portion of the premium is used to provide the death benefit; the remainder is used to keep the premium level and to build the cash value. Figure 12.1 illustrates the premium differences between cash-value and term life insurance policies. Cash-value life insurance actually represents a combination of decreasing term insurance and an investment account that adds up to the face amount of the policy. Figure 12.2 illustrates this concept. Initially, for example, you might have $100,000 ofinsurance and no savings. Several years later, you might have built up $2000 in savings within the policy. In the event of your death, your beneficiary would collect $100,000,
of which $2000 would be your own money. If you lived long enough, the cash value could equal and might surpass the $100,000 figure. In effect, your beneficiary would then collect your “savings account” rather than an insurance payment. Even though the cash value of a life insurance policy accumulates throughout your life, only the face amount of the policy will be paid upon your death. In many ways, cash values represent a kind of forced saving that allows funds to build up while you buy life insurance. Several types of cash-value life insurance are available that pay a fixed rate of investment return.
Whole Life Insurance
Whole Life Insurance
Whole, or straight, life insurance is a form of cashvalue life insurance that provides lifetime life insurance protection and expects you to pay premiums for life. The policy remains in effect and does not need to be renewed as long as the premiums are paid on time.
Limited-Pay Whole Life Insurance
Limited-Pay Whole Life Insurance
Limited-pay whole life insurance is whole life insurance that allows premium payments to cease before you reach the age of 100. Two common examples are 20-pay life policies, which allow premium payments to cease after 20 years, and paid-at-65 policies, which require payment of premiums only until the insured turns 65. Although premiums need be paid only for the specified time period, the insurance protection lasts for your entire life. As you might expect, the annual premiums for limited-pay insurance policies are higher than those for whole life insurance policies because the insurance company has fewer years to collect premiums. Limited-pay policies are said to be paid-up when the owner can stop paying premiums. An extreme version of limited-pay life insurance is single-premium life insurance, in which the premium is paid once in the form of a lump sum.
Adjustable Life Insurance
Adjustable Life Insurance
The three cornerstones of cash-value life insurance are the premium, the face amount of the policy, and the rate of cash-value accumulation. Adjustable life insurance allows you to modify any one of these three components, with corresponding changes occurring in the other two. These changes may be made without providing new proof of insurability. For example, you might feel that inflation has increased your need for life insurance. Adjustable life insurance would allow you to increase the face amount. In return, your premiums could increase, the cash-value accumulation could slow, or some combination of the two could apply.
Modified Life Insurance
Modified life insurance is whole life insurance for which the insurance company charges reduced premiums in the early years and higher premiums thereafter. The premiums are lower in early years because some of the protection during the early years is provided by term insurance. The period of reduced premiums can vary from one to five years. Modified life insurance is primarily designed for people whose life insurance needs are high (young parents, for example) but who cannot immediately afford the premiums required for a cash-value policy. Because it uses term insurance in the early years, modified life insurance accumulates cash value extremely slowly.
Endowment Life Insurance
Endowment Life Insurance
Endowment life insurance pays the face amount of the policy either upon the death of the insured or at some previously agreed-upon date, whichever occurs first. The date of payment, called the endowment date, is commonly some specified number of years after issuance of the policy (for example, 20 or 30 years) or some specified age (such as 65). New endowment policies are no longer being written, however, and this type of policy will be phased out as existing policies “endow” and are converted to cash.
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