Life Insurance Plans and Their Descriptions

What Life Insurance Plans Provide - Plans Provide a contract between a policyholder and the insurer. In the most simplistic form, the contract agrees to pay a sum of money upon the insured individual's or individuals' death to a designated beneficiary. In exchange, the policyholder pays a regularly scheduled premium or a single premium. When the policy holder dies, the insurance proceeds pass to the beneficiaries free of probate and taxes, though they are counted for federal estate tax purposes.

There are many types of Life Insurance Plans serving specific purposes. These include:

                 Term Life                                        ROP Term

                                            Whole Life                                    Universal Life (UL)

                                            Variable Life                             Variable Universal Life

                                                           Equity Indexed Universal Life (EIUL)

                     (Visit the "Life Insurance Carriers" page for a
                     a list of Insurance Plan Providers and the
                     types of plans they offer.)

Life Insurance provides protection against life's uncertainties, managing the risk of premature death for individuals and families, and outliving savings in retirement and estate planning. It is advised that Organizations and Individuals obtain the assistance of a well trained Insurance Broker that specializes in Life Insurance, Estate Planning and Wealth Management.

                         Scroll Down for the Plan Definitions


Plan Definitions

          Term Insurance - is a specific type of life insurance contract that protects for a specific period of time. The policy has no cash value or loan value ( an amount that can be used as collateral for a loan). Term Life Insurance provides a pre-determined amount of coverage if the policyholder dies during the time period specified in the policy. Policyholders usually have the option to renew at the end of the term of the policy. Varying time periods are made available with fixed premiums from a one to 20-year period. The policy may be convertible to permanent coverage. Unlike whole Life Insurance, premiums generally increase as the insured person gets older and the risk of death increases. Term Life Insurance is generally less expensive than permanent life insurance.

Term Insurance is often provided on a group basis at the worksite. The policy generally terminates when the Member or Employee reaches a certain age or leaves the organization.

          ROP Term - Return of Premium Term Insurance - is a reasonably new form of Term Insurance that provides for the return of the premium paid after a set period of time. If you keep the policy for the term period (generally 15, 20 or 30 years) you are free to choose for yourself If you are still living at the end of the coverage term, you can receive the entire premium cost that you paid through out the the term the policy was in force. The ROP policies provide for a lower risk of losing the premium by outliving the policy but at an increased cost. A common ROP Policy may cost about 25% to 50% more per year than a traditional Term Policy.

          Whole Life - is a traditional form of permanent Life Insurance. Policy contracts provide coverage for the entire life of the policyholder, who pays the same fixed premium throughout his or her life. Unlike Term Insurance, which does not accumulate any cash value, some of the money you pay into your Whole Life policy accumulates as a guaranteed cash value. The policy accrues cash reserves that may be paid out to the policyholder when he or she surrenders or partially surrenders the policy or uses the cash value to fund a low-interest loan. The amount of your guaranteed cash value depends on the kind of Whole Life policy you have, its size, and how long the policy has been in force. The annual increases in the cash value of the policy is not taxed and when the policy is surrendered, a portion of the payment is not taxable. Upon the death of the policyholder, the beneficiary receives the death benefit income tax-free. Premiums are partially offset with dividends that can be paid in cash, reduce future premiums, or buy paid-up additional coverage.

          Universal Life (UL) - is a type of Whole Life Insurance that has evolved as a dominant form of permanent coverage offering additional features and benefits. Unlike Whole Life, UL pays no dividends. The policy builds cash value reserves that may be paid out to the policy holder when he or she surrenders, or partially surrenders, the policy or uses the cash reserves to fund a low-interest loan. The unique feature of the policy is that it has a variable premium, benefits and payment schedule all of which are tied to market interest rates and the performance of the investment portfolio.

The cash value, investment function of the policy, is credited to your policy tax-deferred. A guaranteed minimum interest rate is applied to the policy (usually 4%) that means no matter how the investments perform, the insurance company guarantees a certain minimum return on your money. If the insurer does well with its investments, the interest rate on the accumulated cash value will increase. UL generally provides for two death benefit options:
          Option A - pays the death benefit out of the policy's cash value (the greater the cash value builds up, the less the insurance company needs to pay out from the insurance side).
           Option B - pays the face amount of the policy stated in the contract, plus any cash value that has accumulated over the period of years the policy was in force.

It should be noted, if your premiums are to small to keep the policy in force, the policy could lapse, leaving you without insurance. Many UL policies currently offer a no-lapse guarantee. As long as you pay the minimum designated premium, the policy will remain in effect to age 100 or beyond. However, if you only pay the minimum premium, there will not be significant build-up of cash value.

         Variable Life - is a form of Whole Life Insurance in which the amount of the death benefit varies depending on the performance of the investments. The insurance company places a portion of the fixed premium into an investment account. In some cases the insured can decide how the money is invested. The policyholder bears the risk of investment losses, though there is a guaranteed minimum benefit payment. The interest and dividend income is not taxed until it is paid to the policyholder.

          Variable Universal Life (VUL) - is a form of Whole Life Insurance that combines Variable and Universal Life. Like Universal Life, VUL offers flexible premiums, payment schedules and benefits. This is a popular insurance policy because it gives the policyholder choice.

Generally, the policyholder is given a wide range of investment options (fixed-income, stocks, mutual funds, money market funds, etc.) You are given the opportunity to switch investment options depending on your objectives. A useful way to think about VUL is to think you are buying Term Insurance and investing the savings into investment vehicles. The insurance company selling you the policy is doing this for you.

If the investments in your accounts out-perform the general accounts of the insurance company, a higher rate-of-return can occur than the fixed rate-of-return on a Whole Life policy. However, the policyholder bears the risk of investment losses in the portfolio. The interest and dividend income is not taxed until it is paid to the policyholder.

          Equity Indexed Universal Life (EIUL) - is a combination of a traditional whole life policy and a market linked policy. EIUL is a permanent life insurance policy that allows the policyholder to tie accumulation values to a stock market index. While traditional life insurance declares a specific interest rate or dividend, with EIUL interest earnings are credited based on increases in value of a specific index. Because EIUL policies are permanent life insurance plans, they provide features that can give you stability:
     1). A guaranteed minimum interest rate
     2). Tax-deferred interest accumulation
     3). Access to cash value through withdrawal and loan provisions
     4). Protection against downside market risk

BenefitPlace highly recommends working with an experienced Life Insurance Professional (see Broker Selection and Health and Life Brokers).