Life Insurance From Insurance By Steve

Term Life Insurance Or Permanent Life Assurance?

Life insurance is probably the most complicated type of insurance that we might purchase. The reason for this is that it is usually both an insurance policy and an investment bundled into the same package. On top of that it may also include varying degrees of health care benefits.

The primary purpose of life insurance is also not clearly defined. It is usually seen as a means of passing on a cash lump sum inheritance to loved ones should the insured person die. But it can also be used merely as a means of investing money to provide a decent retirement and good level of care in old age. Some people just use it as a means of paying off a mortgage.

Let's clear something up first though. "Life Insurance" is a policy that pays out if someone dies when it is not expected. "Life Assurance" is a policy that pays out when it is known someone is going to die. Now I know we are all going to die, but life insurance could be for a set period, say 30 years, and during that period we do not know that the person being insured is going to die, whereas life assurance will pay out when the person eventually dies whenever it happens.

It's become common practice for the term "life insurance" to be used for both life insurance and life assurance.

Understanding A Life Insurance Policy

There is a lot of terminology and options associated with life insurance. Below are the basic ones and the explanations are as clear as I can make them. They should allow you visit any life insurance company website and get a grasp of what is being offered.

TERM - The term is the FIXED period in years over which the policy runs. So this could be 10 years, 20 years, 30 years or more. If it is a PERMANENT policy then it runs until the day the person eventually dies. As I mentioned above, this is really life assurance since it is something that is guaranteed to happen. It is now common practice now for insurance companies to offer a RENEWABLE term once the previous one expires. The premiums will however be higher because the insured person has aged.

LEVEL/DECREASING/INCREASING TERM - This refers to the amount of money paid out during the life of the policy. A LEVEL term policy pays out the same amount of cash throughout the term of the policy. A DECREASING TERM policy reduces the amount of cash paid out over the term of the policy. Why have decreasing term life insurance? Well, it's really for those people who want to use the policy to cover the cost of a repayment mortgage. As the outstanding amount owed on the mortgage declines then so does the amount required from the insurance policy to cover it. A decreasing term policy is therefore a cheaper option than a level term policy. An INCREASING TERM insurance does exactly the opposite and pays out more as the life of the policy increases. To me this would make sense for younger people who generally have fewer obligations and less risk of dying in their earlier years.

LUMP SUM - Simply put the amount of money paid out by the insurance company in one go. Calculating how much this should be depends upon what you are trying to cover. It could be the mortgage on your home, for a loss of employment income, to cover medical care costs, rest home care or to merely enjoy retirement. You could want a sum of money to cover all these things.

ILLNESS AND CARE COVER - Most of us will suffer illnesses as we get older and the last one will be the one that finishes us off. The cost of nursing care and medical treatment is really expensive. The policy could include different levels of medical care in old age and almost all offer terminal illness care.

BENEFIT - Anything the policy holder or person insured would gain from the insurance policy. A lump sum cash payment is a benefit, as is critical illness cover and paying out for funeral expenses. Every policy will list the benefits being offered and many are optional for an additional premium. Benefits can be received before the death of the insured person.

POLICY HOLDER - This can catch people. The policy holder is not necessarily the person being insured. It is the person who signed the contract and pays the premiums on the policy. They are usually the ones who will receive the cash benefits when the policy pays out. This means that your relative could own a policy on your life. This is the kind of stuff that lays the plot for murder mysteries. But in reality it makes sense that a partner will not lose out from your own passing. And it's not just husbands and wives and children who can hold a policy on a relative's life. It could be a business partner holding a life insurance policy on the life of the other member of the business.

PREMIUM - The money the policy holder pays the life insurance company to maintain the policy. This would normally be a regular monthly amount but it could be a single up front premium at the beginning of the policy. The insurance companies work out how likely it is the insured person is going to die or need health care. If they think the person is a risky prospect then they will raise the cost of the premium. On the other hand, the healthier you are, the less chance there is that the policy will pay out.

NAMED BENEFICIARY - Any person named on the insurance policy who will receive a benefit. This may be the insured person, the policy holder or somebody else such as grandchildren.

WHOLE OF LIFE POLICY - A permanent life insurance policy that accrues your premiums into a savings account or investment fund. Tax is not payable on the premiums paid in but is paid on withdrawals. They pay out on death but earlier withdrawals can be made from the investment account.

UNIVERSAL LIFE INSURANCE - A more flexible variation of a whole of life policy that allows premiums to be paid out of the interest on the savings account. The interest rate on the savings account is adjusted in line with the interest paid out by government securities. The lump sum death benefit can be increased or decreased dependent upon the value of the cash account. The policy expires if the balance in the cash account is not sufficient to fund the insurance premiums.

VARIABLE LIFE INSURANCE - A variation on the universal life insurance policy where premiums the are paid into one or more managed investment funds rather than a cash savings account. The value of this then varies over time with the performance of the managed investment funds.

ADJUSTABLE LIFE INSURANCE - A life insurance policy that allows the term, benefits and premiums to be adjusted during the life of the policy.

ACCIDENT COVER - An insurance that compensates for the death of a person from fatal accidents. The devil is in the detail with this type of life insurance policy. What is or is not deemed to be an accident or an Act of God or intentional or natural death will be be clarified in the policy details. These policies are cheaper because fatal accidents are relatively uncommon.

SURRENDER VALUE - The amount of money you would get if you wish to terminate the policy early.

Is Life Insurance A Good Thing To Have?

It depends upon whether the benefits they provide can be obtained from other sources or not. For example in the UK you would be provided with long term illness care by the NHS. A charitable hospice would also provide care to the terminally ill. If you already have substantial investments then you may feel you already have enough to leave to others on your death.

However, most of us do not have a lot to pass on when we die and we do not have many guarantees of medical care when we fall terminally ill. Probably the best feature of a life insurance policy is that it combines the many needs and obligations we have in our last days on this earth into single well defined package.

If you are attracted to having a life insurance policy then you really need to examine one against the other to ensure you are getting the most benefits you can for the money you are paying. Since it is such a long term investment it's well worth the time spending several hours, or even days, writing out comparison lists between the policies on offer.