Saturday, December 15, 2012
Term Life and Universal Life Insurance
Term Life Insurance
Term life insurance covers the insured for only a certain period of time. It usually comes in 10, 20, or 30-year terms. Term life insurance, therefore does not cover you for your entire life. Once the term is finished, you have to renew or buy a new term insurance. Although, after finishing your term, your premiums will increase with your age, term life insurance is affordable for families just starting out. Term life insurance is good for young people. Having a lesser cost of insurance coverage, you can put your money to other crucial areas such as paying loans and debts, funding your children's education, and other financial obligations. However, it is important to note that Term Life Insurance only pays a death benefit if the insured person dies during the term. If you die after the term, you will not get any money!
Universal Life Insurance
Universal Life (UL) Insurance is a type of permanent life insurance in which the premium payment is higher than the minimum cost of insurance (COI). The excess money is invested in funds, stocks, bonds, and other securities in order to earn an interest.
An underwriter is a third person or company, a broker, or agent, who helps you to choose the appropriate type of life insurance according to your needs. Underwriters help you with your application of life insurance to the insurance company.
How do insurance brokers or agents get paid?
Insurance brokers and agents get paid commission from the policies they sell. The higher the premium they sold, the higher their commissions would be. The commissions are paid by the insurance company to the brokers/agents. Your monthly premiums are all sent directly to the insurance company. Your monthly premiums do NOT go to the brokers or agents.
Cost of Insurance (COI) Options
1. Yearly Renewable Term (YRT) or Annually Increasing (AI)
What is YRT? Yearly Renewable Term (YRT) is an insurance option that is good for people who needs life insurance policy for less than 5 years. The advantage of this insurance option is the low initial cost of premium. This will allow you to accumulate more money from the premium and accelerate the cash value of your insurance coverage. However, the disadvantage of this option is that the premium will increase every time it is renewed, in this case, every year. This is why the name of this cost of insurance option is Yearly Renewable Term, also known as Annually Increasing. For a universal life insurance with COI structure of YRT, the excess money from the premium is invested so that the earnings will be compounded. The main purpose of this investment is to cover or offset the increased cost of insurance in the later years of the insured individual. The problem with this, however, is when the actual rate of return is lesser than the projected rate of return, then, the payment period becomes longer. For example, if you are paying higher premiums ($150/month) under an assumption of projected rate of return of 6% for a payment period of 6 years, so that after the said 6 years of paying premiums, you don't have to pay premiums for the rest of your life (i.e., the life insurance is fully paid), or otherwise known as premium payment holiday. But, if the actual rate of return is lesser than 6%, say for example 4%, then this would mean a longer payment period (more than 6 years) is required before the life insurance is fully paid.
2. Guaranteed Level
Guaranteed Level cost of insurance has the same (equal) premiums throughout the life of the policy and coverage period. The premium rate is locked-in for the duration of the coverage. This is ideal when you don't want an increasing premium. Equal payments can then be evenly spread for a longer payment period but with less amount of premium per payment period. The COI of a Level plan starts higher than a YRT. However, the cost of insurance will be lower when the insured person gets older.
Limited-pay cost of insurance is where all the premiums are paid within a specified period usually 10, 15, or 20 years. The cost of insurance is guaranteed for the duration of the coverage and once paid for the term, no more additional premiums are required.
Cancellation of Life Insurance
If you cancel a life insurance, you will be charged with Surrender Charges. These surrender charges apply when coverage is decreased, cancelled, or terminated. Surrender charges vary (change) depending on the policy year. Cash Surrender Value is the amount of money that will be refunded to you if you cancel your policy. Cash Surrender Value is the difference between your policy's Total Cash Value and the deductions applicable which may be in the form of surrender charges, market value adjustments, etc.
Procedure for Cancellation of Life Insurance
How do I cancel my life insurance? Phone calls are not acceptable for cancellation of insurance policies. If you want to cancel your life insurance, you must write a letter saying you want to cancel your insurance. It is important that all persons insured in the policy should sign. If you have a spousal policy, your signature and the signature of your spouse are required. Equally important to include in the cancellation letter are:
1. Policy Number
2. Name(s) of the insured
5. Signatures of insured
After sending the letter through mail or fax, the insurance company will issue you a cheque within 2 to 3 weeks after the receipt of your cancellation letter. When selecting and applying for an insurance policy, you should be very careful, seek sufficient advice from proven and trusted sources. Do a good homework and research. It is recommended to seek advice and help from an independent insurance advisor. It is better to start off with the best insurance company rather than cancelling your insurance policy because after paying for many years, you feel unhappy about your life insurance and end up cancelling it, and of course, losing huge money!
Annual Billing vs. Monthly Billing
You can save money by choosing Annual Billing. The disadvantage of this is that you will have to pay a huge amount of money at one time. Paying monthly premium is generally convenient because you pay the cost of insurance with 12 monthly payments.