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RMC Insurance Services
Life
Insurance > Types
In choosing the type of
life insurance policy you purchase, consideration must
be given to the need which is being filled: funding
retirement needs, creation of an estate, payment of
estate settlement costs (federal and state death taxes,
last illness and burial costs, probate fees, etc.),
business buy-out, key-man coverage, etc.
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Policy Type
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Features
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Consider the Need |
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Decreasing Term |
Level
premium, decreasing coverage, no cash value.
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Suitable for
financial obligations which reduce with time
such as mortgages or other amortized loans. |
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Annual Renewable
Term |
Increasing
premium, level coverage, no cash value
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Suitable for
financial obligations which remain constant
for a short or intermediate period such as
income during a minor's dependency. |
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Whole Life |
Level
premium, level coverage, cash values. Cash
value typically increases based on insurance
company's general asset account portfolio
performance. |
Suitable for
long-term obligations, such as surviving
spouse lifetime income needs, estate
liquidity, death taxes, funding retirement
needs, etc. |
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Universal Life |
Level or
adjustable premium and coverage, cash values.
Cash values increase based on the performance
of certain assets held in the company's
general account. |
Suitable for
long-term obligations or sinking fund needs:
estate growth, estate liquidity, death taxes,
funding retirement needs, etc. |
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Variable Life and
Variable
Universal Life |
Level or
adjustable premium, level coverage (can be
increased by positive investment performance.
Cash values are directed to a choice of
investment accounts (bond, stock, money
market, etc.) by the policy owner.
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Suitable for
long term obligations and those who are more
active investors and for estate growth and
death tax liquidity. |
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Single Premium
Whole Life
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Entire
premium is paid at purchase, cash values,
level coverage. |
Provides
protection as well as being an outstanding
asset accumulation vehicle. |
NOTE:
Withdrawals and loans may be available from permanent
policies. There are different income tax consequences
if they are "modified endowment contracts"
Term Life Insurance
Term Life Insurance provides death protection for a
stated time period, or term.
- Good
choice for short-range goals
- Provides
temporary life insurance protection on a
limited budget
- Premiums
increase when the policy is renewed
- Can be
converted to a permanent or whole life policy
within a time frame that varies from
company to company.
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Permanent Life Insurance
Permanent life insurance provides death protection for
as long as you live.
- Good
choice for long-range goals
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Guaranteed cash values can provide money
later on to help with temporary needs or
emergencies
- Level
premiums
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Not sure what type of insurance would be
best for you?
When deciding which type of life insurance would best
meet your need, four basic features should be
considered:
- Death
Benefit
- Premium
- Cash
Value
- Duration
of Coverage
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Note: A combination of term
life insurance and permanent life insurance is often
appropriate.
Death Benefit
- Term
life insurance provides a death benefit
for a stated period of time
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Permanent life insurance provides a
death benefit for as long as you live
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Premium
-
Permanent life insurance premiums are
generally level and payable for life
- Term
life insurance premiums will increase
over time and are payable for a specific
period of time
- Term
life insurance premiums generally
increase at each renewal
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Cash Value
Guaranteed Cash Values:
- Term
life insurance does not accumulate cash
values
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Permanent life insurance accumulates
guaranteed cash values
- The
growth in cash values is tax-deferred
under current federal income tax law
- You may
borrow against the cash value as a
policy loan at the current policy loan
interest rate
- Borrowed
amounts reduce the death benefit and
cash surrender value
- Amounts
withdrawn that exceed the cost basis of
the policy are federally income taxable
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Dividends:
- Term
life insurance does not earn dividends
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Permanent life insurance policies may be
eligible for dividends
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Dividends are a return of premium and
are based on actual mortality, expense,
and investment experience of the company
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Dividends are not guaranteed, since
actual experience is not known in
advance
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Net Cost of Insurance:
You can compare permanent life insurance and term life
insurance by taking into consideration both the premium
payment and the guaranteed cash value. This comparison
is referred to as the Net Cost of Insurance.
Total Premiums Paid - Guaranteed Cash Value =
Net Cost of Insurance
As an example, compare a term life insurance policy
with a permanent life insurance policy over a 20 year
period.
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Total Premiums Paid
|
- |
Guaranteed Cash
Value |
= |
Net Cost of
Insurance |
|
| Term1 |
$4,540 |
|
$0 |
|
$4,540 |
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Permanent2 |
$29,200 |
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$26,883 |
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$2,317 |
1Select
Term-20 policy -- 35 year old male, non-tobacco,
$100,000 worth of coverage
2Whole Life Policy -- 35 year old male,
non-tobacco, $100,000 worth of coverage
(Note: These figures do not recognize that, because of
interest, a dollar in the future has less value than a
dollar today.)
Duration of Coverage
If your need for life insurance is to provide
protection for a specific period of time, like
providing protection for educational expenses in the
event of your premature death, then you may want to
consider term insurance. Other examples of temporary
needs are:
- Use of
death benefit to pay off home mortgage
- Use of
death benefit to pay off an automobile
loan
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If your need for life
insurance is long term, such as paying bills at death
or providing money for your loved ones, then you may
want to consider permanent insurance. Other examples of
permanent needs are:
- Use of
death benefit to pay final expenses
- Use of
death benefit to provide money for a
favorite charity
- Use of
death benefit to pay estate taxes
- Fund a
business buy/sell agreement or provide
key person protection
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Note: The longer period of
time that insurance protection is needed, the more
consideration you should give to permanent life
insurance. |
RMC Insurance
Services
PO Box 218750
Houston, TX 77218
281.391.8787
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