There are basically two types of Life Insurance
policies and, within each, different set-up
styles.
1. Term Insurance: The policy cover is for
a specified time period and premium rate is
set. If the insured dies during that period,
the Death Benefit is paid to the beneficiaries.
o Renewable Term Insurance guarantees the
insured the right to renew cover after a specified
time without submitting to further medical
examinations or providing proof of employment.
In most cases renewable term insurance premiums
can be paid yearly and the policy, able to
be renewed up to the age of seventy years.
o Re-entry policies usually have lower premiums
than guaranteed rate ones, however, accessing
cover this way is not guaranteed. Basically,
when the specified period of a term life policy
ends, the insured may apply for new cover
- or "re-entry". Acceptance of the
application, however, is dependent on a medical
examination and not guaranteed. It is possible,
therefore, that if the applicant's health
has markedly deteriorated during the period
of guaranteed cover, he or she will no longer
be insured. The applicant may still find coverage
but it will most likely be at a much higher
rate.
It is recommended for Term Life policies
that the term chosen be for the longest coverage
realistically needed. This will ensure that
insurance remains available in spite of the
natural deterioration in health due to age.
2. Cash Value: Provides the insured with
redeemable cash value in addition to Death
Benefit coverage.
o Whole Life Cover is the traditional Life
Insurance policy. It basically covers the
insured until death. The policy does not have
to be renewed like a Term policy. As long
as the premiums are paid, cover is held. The
premium rates remain the same for the life
of the policy and part of those premiums are
invested, growing at a guaranteed rate of
interest. There are additional benefits to
this type of insurance including tax breaks
and the ability to borrow against the cash
value, usually at a better rate than other
lenders.
o Universal Life Cover is similar to Whole
Life Cover, however, the premiums may be adjusted
up or down by the insured. The way this works
is that the whole premium is initially paid
into the cash value of the policy, growing
at a guaranteed minimum rate of interest.
The policy and death benefit costs are then
deducted.
As with Whole Life Cover, the cash value
growth is tax-deferred and the insured may
borrow against it or even partially withdraw
funds from it. As the cash value grows, the
insured may lower the premium, even choosing
to allow the fund to totally cover it. Caution
must be taken, though, to ensure the policy
doesn't lapse.
o Variable Universal Life allows the insured
to choose the investment mix for the cash
value of the policy. This has the potential
for a higher rate of return, however, it is
also a higher risk investment.
o Variable Whole Life again allows the insured
to choose the investment mix, with all the
consequential benefits and risks.
Overall, Life insurance is a good idea. More
than a mere morbid money upon death facility,
it is also a vehicle by which one may access
finance at considerably more favourable rates
than banks. It allows for the accumulation
of funds on a tax-deferred basis and, most
importantly, puts the mind at ease, knowing
that those dearest to us will be cared for
should we leave the planet first.
