beneficiaries. If the insured lives a long life, the buildup of cash value provides a source of funds which can be accessed through borrowing, policy cancellation, and fund withdrawal or conversion to a paid-up policy. Another benefit of whole life is that it allows individuals who need a lifetime of insurance to budget their payments over a relatively long period, thereby eliminating potential problems of uninsurability and the high cost associated with term policies in the later years. 13–7. UNIVERSAL LIFE INSURANCE. Universal life is similar to whole life in that it provides both death protection and a cash value savings feature. With whole life policies these features are merged and the allocation of premiums between these benefits is not distinguishable to the policyholder. In universal life policies, the cost of death protection and the investment in the cash savings feature are separated. Universal life is available with either a level death benefit or an increasing death benefit. With a level death benefit you have a fixed amount of protection, i.e. $100,000, which is the face amount of the policy. The increasing death benefit combines the face amount of the policy and the cash value for a total death benefit. The cost of insurance protection provided by universal life policies is similar to term insurance — that is, the cost will increase as the policyholder gets older. The cash savings component earns tax-deferred interest at market rates and generally includes a guaranteed return. If all the cash value remains in the policy until the death benefit is paid, the interest earned is not taxed since the death proceeds of a life insurance policy are not considered taxable income of the beneficiary. 13–8. OTHER TYPES OF LIFE INSURANCE. This discussion provides information on some of the other types of life insurance products including variable life, group life, and multiple life insurance. Variable Life Insurance is a form of permanent life which allows the policyholder to determine how the cash value portion of the policy will be invested. In effect, the cash value accounts are set up like mutual funds, and the insurance company provides a full range of investment opportunities from conservative money market and bond funds to aggressive stock funds. Since the policyholder is allowed to direct the investment process, he or she has the opportunity to earn the highest return on the savings portion of the whole life policy. However, with variable life there may be no minimum guaranteed return. Also, the amount of insurance coverage and the policy’s cash value can fluctuate as a
result of investment performance. Although the amount of insurance coverage can fluctuate, most variable life policies guarantee a minimum death benefit. The bottom line is that while variable life insurance is a useful product, it contains an element of risk that is not associated with other insurance programs. Group Life Insurance is generally term insurance which is sold to a specified community, i.e. military members, employees of a company, members of a professional association, etc. Normally a master insurance policy is issued to the group and each of the participants receives an individual certificate of insurance. The major advantage of group policies is that they normally provide a given level of insurance at a lower premium cost than could be obtained on an individual basis. Both the Servicemembers’ Group Life Insurance (SGLI) and Veterans’ Group Life Insurance (VGLI) programs (discussed in Chapter 6) are examples of group life insurance products. Group policies normally provide some type of conversion feature which allow a member to convert coverage to an individual policy. Multiple Life Insurance. Joint life or “first to die” insurance is popular in two income families where each spouse’s earnings are equally important to the family’s standard of living. Joint life pays the full death benefit to the surviving spouse and is especially suitable where the death of one spouse could jeopardize the lifestyle of the surviving family members. Though the purchase of one joint life policy is less expensive than the purchase of individual policies by each spouse, it does not cover both lives. Its disadvantage is that the surviving spouse may or may not be insurable upon the death of the first spouse. In addition, if the surviving spouse is insurable the cost would be higher at an older age. Another form of multiple life is survivorship or “last to die” insurance. This type of policy covers both spouses but only pays benefits after both parties have died. The focus of this insurance is the payment of estate taxes which is a major concern for individuals who anticipate leaving an estate of high value. See Chapter 15 for additional information on estate taxes. 13–9. CONTRACT PROVISIONS. This discussion examines some of the major features that are generally included in insurance contracts. Beneficiary. The primary beneficiary is the person, business, or trust that is designated to receive the death benefit. A contingent beneficiary will receive the policy proceeds only if the primary beneficiary dies before the benefits are paid.
CHAPTER 13: LIFE INSURANCE
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