PRINCIPLES & PRACTICES OF INSURANCE
UNIT 3rd
Life Insurance: Life insurance means that insurance for you and your’s peace
of mind. “Life insurance is a policy that people buy from a life insurance
company, which can be basis of protection and financial stability after
once’s death. It can be also a form of saving in the long term run if you
purchase a plan.”
Life insurance is a contract between the policy owner and the insurer,
where the insurer agrees to pay a designated beneficiary a sum of money upon the
occurrence of the insured individual's or individuals' death or other event, such as
terminal illness or critical illness. In return, the policy owner agrees to pay a
stipulated amount at regular intervals or in lump sums. There may be designs in
some countries where bills and death expenses plus catering for after funeral
expenses should be included in Policy Premium. In the United States, the
predominant form simply specifies a lump sum to be paid on the insured's demise.
The main purpose of a life insurance policy is to provide survivor benefits for
designated beneficiaries. A life insurance policy allows you to provide financial
security for your family upon your death. It can help your family meet the financial
needs previously covered by your income.
Types of life insurance
Whole life insurance
Term life insurance
Universal life insurance
Whole life insurance: - Whole life insurance is designed to provide coverage for
the entire life of the insured. The policy provides a fixed amount of life insurance
coverage while building cash value (a savings feature). The premium remains the
same until the maturity date (usually age 100). Benefits are payable upon the death
of the insured or on the maturity date. The cash value accumulates from premiums
paid and increases over the years. Policies with cash values include provisions that
allow you to take out loans on your policy for up to the amount of the cash value.
The loans accumulate with interest but repayment is not required prior to death. If
you die and the loan has not been repaid, the loan amount with interest is deducted
from the amount paid to your beneficiary.
Term life insurance:- Term life insurance is purchased for a specific time period
and pays a death benefit only if the insured dies during the specified time period
and premiums are paid. Term insurance does not build cash value. Term insurance
is usually purchased for large amounts of coverage for specific time periods (i.e.,
one, five, 10 or 20 years, etc.) or to age 60 or 65. With term insurance, coverage
ends after the specified term in the policy is reached, unless it includes a provision
allowing you to renew the policy without providing evidence of insurability, such as
passing a physical exam. However, the premium will increase with age. A term
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PRINCIPLES & PRACTICES OF INSURANCE
UNIT 3rd
insurance policy may be convertible. This means you can exchange the term policy
for a whole life policy without providing evidence of good health. Although the
premium for the whole life policy will be higher initially, it will remain the same for
the rest of your life.
Universal life insurance:- Universal life insurance is a combination of a term life
policy and the ability to accumulate cash value. It gives the policyholder more
control over premiums, provides protection for beneficiaries and is more flexible
than a whole life policy. The universal life policy provides flexibility by allowing the
policyholder to change the death benefit at certain times or to vary the amount or
timing of premium payments. Both the universal and whole life policy allows
withdrawals or loans against the cash value of the policy.
Need Life Insurance
To determine your need for life insurance, answer the following questions:
• Are there people who depend on you financially?
• If you provide services such as child care, cooking, shopping, and cleaning for
your family, who will provide these services if you die?
If so, life insurance can provide for their needs if you should die. The proceeds from
a life insurance policy can also help pay off debts such as your mortgage or other
financial obligations you may leave behind.
For most people, the need for life insurance is greatest after starting a family or
buying a home. The need decreases as the children grow up and become
independent and mortgages are paid.
Do I need life insurance for my children or my parents?
There are three (3) common reasons to purchase life insurance.
The first is to replace income or services provided should the insured person
die.
The second is to assist with burial expenses and the third is to pay off debts
left behind by the insured.
Children and people who are older or retired, or who have no dependents,
may not need large amounts of life insurance.
Insurance on children is sometimes purchased to assist with burial expenses,
or to build cash value, which can be transferred when the child turns 21.
From The Desk Of Mr.Ashish Singh Faculty (FINANCE) Green
Agra Mahavidhyala Agra.
PRINCIPLES & PRACTICES OF INSURANCE
UNIT 3rd
Should stay at home spouses have life insurance?
If the stay-at-home spouse dies and provided services such as childcare, laundry,
shopping, cooking, and cleaning, the survivor may have to pay someone for those
services. Add up the expense of replacing these services to determine the financial
impact when deciding if there is a need to insure a stay-at-home spouse.
Features of Life Insurance
Death benefit is generally income-tax-free:-The death benefit of your
permanent life insurance is generally passed on to your beneficiaries
free from federal income tax.
Premium withdrawals may be tax-free :- Under current federal tax rules,
you may generally take income-tax-free withdrawals under a life
insurance policy, which is not a Modified Endowment Contract (MEC),
up to your basis of the contract. Special rules apply to MDCs and to
certain withdrawals taken during the policy’s first 15 years.
Withdrawals and loans reduce the policy’s cash value and death
benefit, and increase the chance that the policy may lapse.
Transfers are tax-free:- Transfers among the underlying investment
options of a variable life or variable universal life insurance policy
are not subject to current income or capital gains taxes.
Withdraw early with no penalty: - You can take loans or withdrawals from
a life insurance policy prior to age 59½ without the 10% early
withdrawal penalty as long as the policy is not an MEC.
Accumulation is tax-deferred: - Any earnings accumulated in your
insurance policy’s cash value grow free from taxes until you withdraw
them. Please note that in a variable life insurance policy, cash value
growth is not guaranteed.
Your money may grow faster without taxes
• $10,000 annual hypothetical investments
• Assumed 8% hypothetical annual compounded rate of return
• Results shown at the end of 10, 20 and 30 years
Temporary Coverage:-Term life insurance offers coverage for a limited period of
time, typically 10-30 years. Unlike other types of life insurance, a term policy
eventually expires. This can be a positive or negative feature depending on
individual circumstances. On the one hand, temporary coverage means lower
start-up premiums. On other hand, once the policy expires it might be
From The Desk Of Mr.Ashish Singh Faculty (FINANCE) Green
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PRINCIPLES & PRACTICES OF INSURANCE
UNIT 3rd
difficult to secure an extension due to worsening health conditions. If you can
accurately predict the length of time for which you need coverage, term life
insurance is most economical.
Pure Death Benefit: - Permanent forms of life insurance come with savings and
investment components that may or may not be suitable for your needs.
Term life offers no such component; think of term life as life insurance
proper, whose aim is to provide a lump-sum payout upon the death of the
policy owner. This benefit can be used to pay for funeral and medical costs or
to replace lost income. If you want to grow wealth in your life insurance
policy, consider a permanent type of insurance life universal or variable.
Death Benefit: - The primary feature of a life insurance policy is the death
benefit it provides. Term policies provide coverage within the time specified by
the contract. After that time period, protection expires and no death benefit is
paid. Permanent policies provide a death benefit that is guaranteed for the life of
the insured, provided the premiums have been paid and the policy has not been
surrendered.
The value of a death benefit is determined by a number of factors, including:
• The type of policy purchased
• The availability of paid-up additions
• Whether or not the policy has accumulated cash value
• Whether or not any policy loans remain outstanding at the time of death
• Whether or not the cash value has been surrendered in portion or in full
From The Desk Of Mr.Ashish Singh Faculty (FINANCE) Green
Agra Mahavidhyala Agra.
PRINCIPLES & PRACTICES OF INSURANCE
UNIT 3rd
Policy Loans: - Some life insurance policies allow a policy owner to apply for a
loan against the value of their policy. Either a fixed or variable rate of interest is
charged. This feature allows the policy owner an easily accessible loan in times
of need or opportunity.
No Capital Build-up:- Term life insurance doesn't accumulate wealth over
time as a whole, universal, or variable policy would. As with car insurance,
term life premiums go directly towards securing compensation in case the
unthinkable should occur. Once you stop making premium payments or the
policy matures (reaches the end of its term), you are left with zero capital.
Premiums are used to solely fund the death benefit, and if no death occurs,
the insurance company never pays out. This is a direct cost of insuring
against risk of death.
Fixed Coverage Amount :- Like all life insurance, term life can be
purchased with widely varying death benefits, from as low as $100,000 to
as high at $10,000,000. The amount of coverage desired directly affects the
size of the annual premium, as the insurance company charges policy
owners per $1,000 of coverage. One downside of term life policies is that
once a coverage amount is set, it cannot be increased or decreased. This is
not a problem in theory if you can accurately estimate the right level of
coverage for the full length of the policy's term, but in practice your
financial situation will change many times over the course of 10-30 years. If
you want a flexible coverage amount and annual premium, consider
universal life or variable universal life.
Increasing Premiums: - Most term life insurance (non-level term life)
comes with premiums that increase every year. This results from the rising
risk of death as the policyholder ages. Fundamentally, all life insurance
faces the grim reality of escalating mortality charges. The difference is,
permanent life insurance averages out later premiums with former ones,
enabling the owners to fund their policies with uniform annual payments. If
level premiums are important for you, consider purchasing level term life or
a permanent life insurance policy. If you only need temporary coverage, a
level-premium policy is to your disadvantage.
From The Desk Of Mr.Ashish Singh Faculty (FINANCE) Green
Agra Mahavidhyala Agra.
PRINCIPLES & PRACTICES OF INSURANCE
UNIT 3rd
From The Desk Of Mr.Ashish Singh Faculty (FINANCE) Green
Agra Mahavidhyala Agra.
