Life insurance is a protection against the loss of income that would result if the insured passed away. The named beneficiary receives the proceeds and is thereby safeguarded from the financial impact of the death of the insured. The goal of life insurance is to provide a measure of financial security for your family after you die. So, before purchasing a life insurance policy, you should consider your financial situation and the standard of living you want to maintain for your dependents or survivors. For example, who will be responsible for your funeral costs and final medical bills? Would your family have to relocate? Will there be adequate funds for future or ongoing expenses such as daycare, mortgage payments and college? It is prudent to re-evaluate your life insurance policies annually or when you experience a major life event like marriage, divorce, the birth or adoption of a child, or purchase of a major item such as a house.
Whole life insurance has been the mainstay of the life insurance business for over a century and continues to be a significant component of new life insurance sales and an even larger component of life insurance in force. “Whole Life Insurance” provides for the payment of the face amount upon death of the insured regardless of when death occurs. It is insurance for the whole life. Almost all whole life policies sold in the United States are based on mortality tables that assume that all insureds die by age 100. Since all insureds do not, in fact die by age 100 but insurance companies price whole life as if they do, it is only fair that the insurance company should pay the policy face amount to those few persons who live to age 100- as if they had died. This is the reason that whole life policies are sometimes referred to an endowment-at-age-100 policies. The age 100 “endowment”. really is not an endowment in the usual sense but rather is paid by the insurer in recognition that the underlying reserve and cash value of the policy equals the policy face amount at age 100 and therefore there is no “pure” insurance protection beyond that point. Thus the insurer should terminate the policy. Even if the company did not do so the policyholder may surrender the policy for its cash value- which would equal the face amount. The face amounts payable under whole life policies typically remain at a constant level throughout the duration of the policy unless the policy has a special provision permitting or causing changes (such as a “cost of living” rider). Also, through the use of dividends, participating policies, total death benefits can be increased over time. Several factors have made traditional whole life more attractive in recent years. Among these are falling interest rates, field resistance to reappearing “vanishing premiums”, the failure of other products to live up to their illustrations, companies’ concerns over the profitability of investment-oriented products and the use of innovative riders on whole life policies that accomplish some of the same things addressed by the new-generation products. The whole life insurance policy (also known as the “straight life” policy and even more confusing, “ordinary life”) is the basic type of lifetime policy. It provides insurance protection at a level premium for the entire lifetime of the insured.
Perhaps no new life insurance product has been discussed, debated, and written about as much and as intensely as universal life insurance (UL). Universal Life has captured not only a major share of the life insurance market- and in record time-but perhaps more important, it has captured the news media’s and the public’s attention and imagination. Since its introduction in 1979 to the public it has been a major player in the life insurance industry. Universal Life policies offer great policy owner flexibility but, both traditional and new-whether they are low-cost is a function of the manner in which insurance companies has priced the product. Universal Life insurance is a flexible-premium, adjustable-death benefit life insurance policy. Universal Life policies offer flexible, potentially low-cost coverage on a basis that permits product transparency. After making an initial premium payment of at least some required minimum, policy owners may thereafter pay whatever amounts and at whatever times they wish, or even skip premium payments as long as the cash value will cover policy charges, subject to company rules and the tax law. Also, policy owners may raise-usually subject to evidence of insurability- or lower their policies’ death benefits as they deem appropriate with a minimum of difficulty. These are the two key elements of Universal Life flexibility. Universal Life allows for flexibility of premium payments unlike other types of life insurance plans.
Term Life Insurance furnishes life insurance protection for a limited number of years. The face amount of the policy is payable only if death occurs during the stipulated term and nothing is paid in case of survival. Term policies may be issued for a period as short as one year but customarily provide protection up to age 65, 70, or beyond. Term insurance compares more closely to a property and liability insurance contract than any other life insurance contract. If a building valued at $10,000 is insured for that amount under a five-year term policy, the company will pay this amount only in case of the total destruction of the building during the term. Similarly, if a person insures his or her life for $10,000 under a five-year term policy, the company will pay $10,000 only in case of the insured’s death before the expiration of the five years; nothing is paid if death occurs after the expiration of the contract period. Initial premium rates per $1,000 of coverage are lower for term life insurance than for other life products issued at the same age since the periods of protection are limited. However, premiums for term coverage can escalate rapidly as the duration of the policy lengthens. Three features common to many term life policies deserve special attention. Three features common to many term life policies deserve special attention.
Almost all one-year and five-year term policies and many 10 year and other duration policies contain an option that permits the policy owner to “renew” the policy for a limited number of additional periods of protection. This option permits the policy owner at the expiration of each term period, to continue the policy without reference to the insured’s then insurability status. Usually, however, companies limit the age generally to 65 or 70 to which such term policies may be renewed. The premium although level for a given period, increases with each renewal and is based on the attained age of the insured at the time of renewal. The scale of guaranteed future rates is contained in the contract, although for some types of term insurance, the company may charge a rate lower than that stated by the policy. As the premium rate increases with each renewal, mortality experience increasingly reflects selection against the company. Resistance to higher premiums and lower cost product opportunities cause many insured’s in good health to fail to renew, whereas the majority. Interaction between Premium Waiver and Conversion Features of those in poor health will renew even in the face of higher premiums. The companies recognize this problem in their pricing structure or through other means, such as the dividend scales, by limiting renewability to stipulate maximum ages, or by product designs that encourage or require conversion. From the policy owner’s perspective, the term “renewability” means simply that the policy can be continued to the stipulated termination age. Renewal rates are fixed by contract and renewal is effected merely by the policy owner paying the billed premium. Therefore, renewable term policies can be viewed as increasing-premium, level-benefit term life insurance from the policy owner’s perspective.
Most term insurance policies include a convertible feature. This feature permits the policy owner to exchange the term policy for a whole life or other cash value insurance contract without evidence of insurability. Often the period during which the conversion is allowed is shorter than the maximum duration of the policy. The conversion privilege increases the flexibility of term life insurance. For example, at the time a term policy was purchased, a policy owner may not have definitely selected the type of policy best adapted to his or her needs. He or she may have preferred another type but because of budget constraints, decided on some form of low premium term coverage. Following the issuance of the term policy, circumstances may have changed such as to enable the policy owner to purchase an adequate amount of other insurance. Or he or she may desire to utilize insurance as a means of accumulating funds rather than using it entirely for protection against death. If therefore, an individual concludes that term insurance does not meet present and future needs, this conclusion could be implemented by exchanging the term contract for a type that conforms better to his or her needs. A significant percentage of insureds become uninsurable or insurable only a higher than standard rates. Under such circumstances, a term the insured in the desired manner. If however, the policy contains a conversion privilege, an if the time limit for making the exchange of the policy has not yet expired it can be to the insured’s advantage to exercise this privilege and thus protect against the possibility that insurance may expire before death occurs. If the insured under a term policy is uninsurable at standard rates, little or no financial advantage may exist to exercising the conversion privilege over reentering the marketplace and shopping carefully. Although some insurers provide certain financial incentives to effect conversion, such as a limited credit toward the converted policy’s first premium, most standard classed insureds should view conversion in the same manner as they would replacement of one policy with another. Conversion often is permitted on an attained age or original age basis. The attained-age method of conversion involves the issuance of a whole life or other cash value policy of a form currently being issued at the date of conversion. The premium rate for the new policy is that required at the attained age of the insured and would be the same as that offered by the company to new insureds who could qualify for standard rates. The original-age method involves a retroactive conversion, with the whole life or other cash value policy bearing the date and premium rate that would have been paid had the whole life or other cash value policy been taken out originally instead of the term policy. Most companies offering this option require that retroactive conversion take place within five years of the date of issue of the term contract. The policy owner is required to pay the difference between (1) the premiums (net of dividends and other credits) that would have been paid on the new policy if it had been issued at the same time as the original policy, and (2) the premiums actually paid for the term policy, with interest on the difference at a stipulated annual rate usually between 6 and 8 percent. In making the choice between the two bases of conversion, it was said that the policy owner may prefer original age conversion because he or she could obtain a lower premium rate and possibly more liberal contract provisions. However, with the trend toward lower premium and better-valued products, it is far from clear that either potential benefit would necessarily materialize. Even if the premium rate for the original age conversion were less than the rate for current issues, it is questionable whether an original age conversion makes sound financial sense for most persons.
3. Interaction between Premium Waiver and Conversion Features
The majority of individual life insurance policies sold in the United States provides that if the insured becomes totally disabled the insurer will waive premium payments during the period of disability. This provision may be automatically included within the policy or, more commonly, it is offered as an additional benefit for a specified additional charge. When the premium waiver(PW) feature is incorporated within a term policy, how the conversion feature interacts with the PW feature can be of great importance. There are three different provisions available in the market:
(1) Some contracts provide that if the insured becomes totally disabled, premiums for the term policy will be waived, but if the policy owner wishes to exercise the conversion option during this period, the company will not waive the premiums on the newly converted policy. In other words, full premiums must be paid by the policy owner on the new policy.
(2) Other contracts permit conversion and will waive premiums on the new policy. Clearly, this approach is more valuable to the policy owner than the former.
(3) Some contracts provide for a waiver of the premium on the term policy and on the new policy but only if the conversion is delayed until the end of the period during which conversion is allowed. At that point an automatic conversion will take place and premiums on the new policy will be waived. This benefit provision falls between the two previously discussed provisions in terms of policy owner value. Naturally, other things being equal, the more liberal the interaction of the PW and conversion features, the higher the additional premium for the PW feature should be, although pricing may not reflect this. This interaction can be a significant element of product evaluation, as can the definition of disability used in the provision.