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Insurance Glossary
Terms & Definitions
Beneficiary
The person(s) named in the policy to receive the life
insurance proceeds upon the death of the insured.
Cash (Surrender) Value
The amount that is available in cash for loans and that may
be available for withdrawals. Accessing Cash Surrender Value
may reduce the death benefit and may increase the risk of
lapse.
Convertible Term Insurance
Term insurance which can be exchanged (converted), at
the option of the policy owner and without evidence of
insurability, for a permanent insurance policy.
Dividend
A return of part of the premium on participating insurance
that is based on the insurer's investment, mortality, and
expense experience. Dividends are not guaranteed..
Face Amount
The amount stated on the face of the policy that will be
paid in case of death. It does not include additional
amounts payable under accidental death or other special
provisions, or acquired through the application of policy
dividends.
Insurability
Acceptability to the company of an applicant for
insurance.
Insured or Insured Life
The person on whose life the policy is issued.
Level Premium (Life Insurance)
Life insurance for which the premium remains the same from
year to year. The premium is normally more than the actual
cost of protection during the earlier years of the policy
and less than the actual cost in the later years. The
building of a reserve is a natural result of level premiums.
The payments in the early years, together with the interest
that is to be earned, serves to balance out the underpayment
of the later years.
Loan (Policy Loan)
A loan made by a life insurance company from its general
funds to a policy owner on the security of the cash value of
a policy.
Mortgage Insurance
Decreasing Term is a product that provides level premiums with a decreasing death benefit. Traditionally, banks market this product for mortgage protection. This is a huge income for the banks and terrible for the consumer. Here is why!
Let's say I need $250,000 of death benefit coverage and the premium is $45.00 per month for a period of 30 years. Year 2 passes...I'm still paying my $45.00 per month but the death benefit has decreased to $235,000. This will continue for the next 30 years.
Paid-up Insurance
Insurance that will remain in force with no need to pay
additional premiums.
Participating Policy
A life insurance policy that is eligible for the payment of
dividends by the insurer (see also Dividend.)
Permanent (Life Insurance)
Any form of life insurance except term; generally insurance
that builds up a cash value, such as whole life.
Policy Owner
The person who owns a life insurance policy. This is usually
the insured person, but it may also be a relative of the
insured, a partnership or a corporation.
Premiums
Payments to the insurance company to buy a policy and to
keep it in force.
Renewable Term Insurance
Term insurance which can be renewed at the end of the term,
at the option of the policy owner and without evidence of
insurability, for a limited number of successive terms. The
rates generally increase at each renewal as the age of the
insured increases.
Term Insurance
Life insurance that does not build up cash value and where
the premium normally increases as the insured gets older.
Term is the lowest cost life insurance product available. When you buy term life, you are purchasing "pure" insurance which typically does not include a cash value or a savings feature. Term Life insurance, as the name implies, is purchased for a particular "term" or length of time. Once that term period has arrived, and you do not convert your term policy to a "permanent" type, your life insurance policy will expire. If the insured dies within the "term period," the predetermined death benefit will be paid to the beneficiaries
Term insurance is bought by millions of people for a number of reasons. Families use Term for security. In case the insured passes away, your Term policy insures there will be money to use to pay for your home, college, outstanding loans and other major expenses. Small Business Owners use Term insurance as low cost debt protection to cover notes, lease obligations, business real estate mortgages and other expenses.
Business Partnerships often use Term Insurance to buy out partners in the event of their death. For example, the deceased's beneficiary gets the insurance proceeds and the ownership in the company is then transferred to the remaining
partner(s).
Corporations use Term as stock purchase redemptions. In this case, the corporation gets the insurance proceeds and buys back the stock from the deceased's beneficiary, normally the surviving spouse or estate. For businesses, Term Insurance can provide real benefits for the beneficiaries with no negative cash flow impact on the company.
Term life is a good choice for many people, but NOT for the following reasons:
A) To fund expected federal and/or state estate tax obligations.
B) To fund an irrevocable life insurance trust.
C) To fund trusts for the purpose of providing an estate.
D) These reasons would be better served with permanent life insurance, either whole life or universal life. We suggest you seek counsel from either your estate tax attorney, financial planner, or your CPA.
Universal Life Insurance
A flexible premium life insurance policy under which the
policy owner may change the death benefit from time to time
(with satisfactory evidence of insurability for increases)
and vary the amount or timing of premium payments. Premiums
(less expense charges) are credited to a policy account from
which mortality charges are deducted and to which interest
is credited at rates which may change from time to time.
Whole Life Insurance
A basic type of permanent life insurance which can
provide lifetime protection at a level premium. Premiums
must generally be paid for as long as the policy is in
force.
Both traditional whole life
(WL) and universal life (UL) products are examples of cash-value life insurance. However, there are several important differences between these two products. While WL policies contemplate the payment of fixed, level premiums and provide for level death benefits, UL policies offer adjustable death benefits and flexible premiums that can be varied according to changing circumstances. This is a rather simplistic comparison, however, since
policy owner dividends under participating WL insurance contracts can be used to offset a portion of the premium payment otherwise required; in addition, dividends can be used to increase the policy's death benefit. Because of these and other possible uses of
policy owner dividends, an argument can be made that participating WL insurance possesses some (but not all) of the same flexibility/adjustability that is possessed by UL policies. Another important difference between WL and UL relates to product transparency. In UL policies, it is easy for
policy owners to look at the internal operations of the policy and to examine the relationships among various policy elements (premiums, cash values, interest credits, mortality charges, and expenses) and how they interact with each other.
Which type of cash value life insurance policy, universal life (UL) or
participating whole life (WL) , is a "better buy"
financially?
There is no simple answer to this question. The best performing product (from a financial perspective), whether UL, WL or some other type of cash value life insurance, will likely be the one offered by the insurer that enjoys the best future experience as it relates to interest earnings, actual expenses and mortality costs. Insurers earning the highest investment income, and who also incur the lowest expenses and the lowest mortality costs, are in the best position to offer life insurance at the lowest cost. This is true whether the cash value life insurance product being offered is UL or
WL. Thus, it will be necessary for prospective insureds and their advisers to carefully examine the financial aspects of each product under consideration, irrespective of whether the product is UL or
WL.
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