Universal life insurance features a savings option that grows on a yearly
basis. A portion of your premiums are invested by the insurance company into
bonds, mortgages and money market funds. The return on this investment is
credited to your universal life insurance policy. In addition, a guaranteed
minimum interest rate, this is based on the market when you applied for the
policy. That means that, no matter how the investments perform, the insurance
company guarantees a certain minimum return on your money. Universal Life
allows you to choose from two death benefit options. Option A, which is the
most popular because there’s no risk, pays the death benefit out of the
policy's cash value; the more cash value you build up means the company is on
the hook for less insurance and therefore costs less. Option B pays the face
amount stated in the contract, plus any cash values you accumulated over the
years and therefore costs more. When using both options, the cash value will be
credited each month with interest as well as charged a fee by the insurance
company and taxed. However the policy will not be taxed if it is held until
death
Pros:
Universal Life gives you the
flexibility to adjust the death benefit as your needs change, as well as the
flexibility to pay smaller or larger premiums - depending on your financial
circumstances. This is often an important feature for families who may have
fluctuations in their ability to pay.
Cons:
If your premium payments are too small for too long, the policy could lapse,
leaving you without insurance protection. Also, if the insurance company does
poorly with its investments, the interest return on the cash portion of the
policy will decrease (but never below the minimum interest rate guaranteed in
the contract). In this case, cash values will probably fall, forcing you to pay
more premiums in the later years.
Accumulation phase - The period of time prior to annuitization.
Annuitant - A person who receives benefit payments from an annuity.
Annuitize - A method of receiving annuity benefits through a series of income payments for life or some other defined period of time.
Annuity - A contract with a life insurance company which guarantees an income for life or some other defined period in exchange for premiums you pay.
Back-end load - Company expenses that are charged at the time benefits begin.
Beneficiary - When provided in a contract, the person who receives benefit payments if the annuitant dies.
Contractholder - A person who pays premiums for an annuity. Often the same person as the annuitant.
Death benefit - A provision in certain annuity contracts that pays the beneficiary when the annuitant dies before the payout phase begins.
Deferred annuity - A contract that begins the payout phase at some future date.
Equity-indexed annuity - A contract that combines a guaranteed minimum interest rate with earnings linked to the performance of an external stock or bond index.
Fixed rate annuity - A contract that specifies your funds will earn a specified interest rate and guarantees a return on your premium.
Flexible premium annuity - A contract in which the amount of each premium payment you make can vary.
Front-end load - Company expenses that are charged at the beginning of a premium payment period.
Free look - A period specified in the contract (such as 10 days) during which you can decide whether to keep an annuity or return it for a full refund of your premium. Your free-look period is 20 days when you buy an annuity contract to replace one you already had.
Guaranteed interest rate - A minimum rate of interest specified in a fixed annuity. The actual rate the insurance company credits your contract at any given time may be higher but can never be lower.
Immediate annuity - A contract that begins the payout phase within one year after you pay the single premium.
Level premium annuity - A contract in which the amount of each premium payment you make stays the same.
Loan provision - A feature in certain annuity contracts that allows you to borrow up to a specified percentage of the value. Contract loans are usually subject to taxes.
Morality Tables - Statistics that project ones life expectancy based on many variables.
Payout phase (also called the annuity phase) - The period of time when benefit payments are being made to the annuitant.
Premium - The money you pay to fund an annuity contract.
Refund Annuity - Refunds part or all of the premiums paid if the insured dies before the start of the liquidation period.
Surrender charge - A fee the insurance company will charge you if you cash in (surrender) an annuity before the payout phase begins, or if you make a withdrawal larger than specified in the contract.
Variable annuity - Traditionally, a contract with no minimum guarantee (some newer products do include guarantees). Because the benefit amount depends on the insurance company's investment gains or losses, you share some part of the investment risk with the insurer.
Withdrawal privilege - A provision in many annuity contracts that allows you to withdraw an amount less than the surrender value, without paying a surrender charge. Any withdrawal may be subject to taxes and penalties.
Life insurance provides money typically to beneficiaries after a loved-one who has life insurance dies. Coverage is often provided by employers but can also be purchased separately through an insurance agent. The Ohio Department of Insurance urges consumers to regularly review their need to secure life insurance as part of their financial and estate planning.
Life Insurance Can Help:
- Replace your income with non-taxable death benefit
- Reduce the financial burden on your family of having to continue without you
- Put the kids through school
- Pay the mortgage, car note, and other debts you leave behind
- Pay your funeral expenses
- Pay your estate taxes
Types of Life Insurance:
- Term Life: Generally less expensive than other life insurance products and is designated for a certain time period or to a certain age. Term is named for the contracts limited length or "term" and is pure life insurance. Term policies generally last for 1, 5, 10, 15, or 20 years, or to some specified age such as age 65 or age 100.
- Whole Life: Lifetime coverage at a premium that does not increase with your age after you buy.
- Universal Life: Premium amount and death benefit are both flexible. Able to change the amount of your premium payments and/or death benefit after you buy the policy. Increasing your premium payments as you age is important to maintaining your universal life policy.
Who Can Take Out a Policy on My Life?
- Only someone who has an "insurable interest”, such as someone in your immediate family. A stranger cannot buy a policy to insure your life.
How Much Life Insurance Should Someone Get?
- Your life insurance plan should be structured to meet your life circumstances.
- How much life insurance a person should get depends on their life situation. Some people have life insurance through their employer, which sometimes use 1x salary or 2x salary as a coverage limit and may allow the employee to purchase additional term insurance.
Life Insurance Shopping Tips:
- Your life insurance plan should be structured to meet your life circumstances (for example, a single person may need less life insurance than a couple or a couple with children).
- Life insurance is complicated. Utilize the services of trained insurance professionals.
- An agent is not allowed to be the beneficiary of a life insurance policy the agent has sold you – unless the agent is a family member or a funeral director. Nor is the agent allowed to misrepresent any aspect of the policy being sold or a policy you already own or encourage you to put incorrect information on your application.
- Decide what type of life insurance policy you want: term, whole life, universal life or a combination of these policies. Make sure you calculate your total premiums for the life of the policy. It is possible to pay more in premiums than the face amount of the policy.
- Some policies have an accelerated benefits feature, which is a policy provision that lets the policyholder, under certain conditions, collect part of the death benefit before he/she dies.
- Be alert to any promise that you will never have to pay premiums again (the vanishing premium pitch). Also, make sure you are aware of any surrender penalties.
- Don’t sign any life insurance application that has not been completely and accurately filled in and dated, and make a copy for your files.
- Immediately study the policy once you receive it and make sure it’s exactly what you ordered: many life companies will offer a “free-look” (or “right to review”) provision. Take advantage of it.
- The policy owner is the only person who can cancel the policy. If premium payments are not being made the insurer will generally send a payment notice before cancellation.
- Make your premium payment check to the insurance company, not the agent.
- A failure to pay your premium will cause your policy to lapse or it could be terminated.
- Review your policy periodically. Your insurance needs change during different periods of your life.