

For the most part, there are two types of life insurance plans - either term or permanent plans or some combination of the two. Life insurers offer various forms of term plans and traditional life policies as well as "interest sensitive" products which have become more prevalent since the 1980's . In New York State, the Department of Financial Services must approve any life insurance policy before a company can issue it to consumers and New York Insurance Law provides for standard provisions that must be included in every policy.
Term insurance provides protection for a specified period of time. This period could be as short as one year or provide coverage for a specific number of years such as 5, 10, 20 years or to a specified age such as 80 or in some cases up to the oldest age in the life insurance mortality tables. Policies are sold with various premium guarantees. The longer the guarantee, the higher the initial premium. If you die during the term period, the company will pay the face amount of the policy to your beneficiary. If you live beyond the term period you had selected, no benefit is payable. As a rule, term policies offer a death benefit with no savings element or cash value.
Premiums are locked in for the specified period of time under the policy terms. The premiums you pay for term insurance are lower at the earlier ages as compared with the premiums you pay for permanent insurance, but term rates rise as you grow older. Term plans may be "convertible" to a permanent plan of insurance. The coverage can be "level" providing the same benefit until the policy expires or you can have "decreasing" coverage during the term period with the premiums remaining the same. If you do not pay the premium for your term insurance policy, it will generally lapse without cash value, as compared to a permanent type of policy that has a cash value component. Currently term insurance rates are very competitive and among the lowest historically experienced.
It should be noted that it is a widely held belief that term insurance is the least expensive pure life insurance coverage available. One needs to review the policy terms carefully to decide which term life options are suitable to meet your particular circumstances.
While term insurance is designed to provide protection for a specified time period, permanent insurance is designed to provide coverage for your entire lifetime. To keep the premium rate level, the premium at the younger ages exceeds the actual cost of protection. This extra premium builds a reserve (cash value) which helps pay for the policy in later years as the cost of protection rises above the premium. Whole life policies stretch the cost of insurance over a longer period of time in order to level out the otherwise increasing cost of insurance. Under some policies, premiums are required to be paid for a set number of years. Under other policies, premiums are paid throughout the policyholder's lifetime. The insurance company invests the excess premium dollars
This type of policy, which is sometimes called cash value life insurance, generates a savings element. Cash values are critical to a permanent life insurance policy. The size of the cash value build-up differs from company to company. Sometimes, there is no correlation between the size of the cash value and the premiums paid. It is the cash value of the policy that can be accessed while the policyholder is alive.
The Commissioners 1980 Standard Ordinary Mortality Table (CSO) is the current table used in calculating minimum nonforfeiture values and policy reserves for ordinary life insurance policies. This table provides the minimum cash values that must be guaranteed in your policy.
The policy's essential elements consist of the premium payable each year, the death benefits payable to the beneficiary and the cash surrender value the policyholder would receive if the policy is surrendered prior to death. You may make a loan against the cash value of the policy at a specified rate of interest or a variable rate of interest but such outstanding loans, if not repaid, will reduce the death benefit.
In 1984 a new federal tax law required that for permanent insurance to enjoy preferred tax treatment it must provide coverage up to at least age 95, limit the amount of premium that may be paid in relation to the face amount of coverage and establish a minimum ratio between cash value and face amount of insurance. Many permanent policies will contain provisions, which specify these tax requirements.
There are two basic categories of permanent insurance, traditional and interest-sensitive, each with a number of variations. In addition, each category is generally available in either fixed-dollar or variable form.
Traditional whole life policies are based upon long-term estimates of expense, interest and mortality. The premiums, death benefits and cash values are stated in the policy.
There are six basic variations of traditional permanent insurance:
While insurers guarantee stated benefits on traditional contracts far into the future based on long-term and overall company experience, they allocate investment earnings differently on interest sensitive whole life in order to better reflect current fluctuations in interest rates. The advantage is that improvements in interest rates will be reflected more quickly in interest sensitive insurance than in traditional; the disadvantage, of course, is that decreases in interest rates will also be felt more quickly in interest sensitive whole life.
There are four basic interest sensitive whole life policies:
Universal Life The universal life policy is actually more than interest sensitive as it is designed to reflect the insurer's current mortality and expense as well as interest earnings rather than historic rates. Universal life works by treating separately the three basic elements of the policy: premium, death benefit and cash value. The company credits your premiums to the cash value account. Periodically the company deducts from the cash value account its expenses and the cost of insurance protection, usually described as the mortality deduction charge. The balance of the cash value account accumulates at the interest credited. The company guarantees a minimum interest rate and a maximum mortality charge. Some universal life policies also specify a maximum basis for the expense charge. These guarantees are usually very conservative. Current assumptions are critical to interest sensitive products such as Universal Life. When interest rates are high, benefit projections (such as cash value) are also high. When interest rates are low, these projections are not as attractive.
Universal life is also the most flexible of all the various kinds of policies. Because it treats the elements of the policy separately, universal life allows you to change or skip premium payments or change the death benefit more easily than with any other policy.
The policy usually gives you an option to select one or two types of death benefits. Under one option your beneficiaries received only the face amount of the policy, under the other they receive both the face amount and the cash value account. If you want the maximum amount of death benefit now, the second option should be selected.
You generally pay a planned premium designed to keep the policy in force for life, and accumulate cash value, based upon the interest and expense and mortality charges you assume. It is important that these assumptions be realistic because if they are not, you may have to pay more to keep the policy from decreasing or lapsing. On the other hand, if your experience is better then the assumptions, than you may be able in the future to skip a premium, to pay less, or to have the plan paid up at an early date.
You do not have to pay the planned premium, but if you pay less, the benefit may be more like term insurance, which is only in force for a limited time and builds no cash value. On the other hand, if you pay more, and your assumptions are realistic, it is possible to pay up the policy at an early date.
If you surrender a universal life policy you may receive less than the cash value account because of surrender charges which can be of two types. A front-end type policy will deduct a percentage of the premium paid, while a back-end type policy will deduct a more substantial charge but only if the policy is surrendered before a specified period, generally 10 years but which could be as long as 20 years. A back-end type policy would be preferable if you intend to maintain coverage, and the charge decreases with each year you continue the policy. Remember that the interest rate and expense and mortality charges payables initially are not guaranteed for the life of the policy.
Although this type of policy gives you maximum flexibility, you will need to actively manage the policy to maintain sufficient funding, especially because the insurance company can increase mortality and expense charges. You should remember that the mortality charges increase, as you become older.
Excess Interest Whole Life If you are not interested in all of the flexible features of Universal Life, some insurers offer fixed premium versions called excess interest whole life. The key feature is that premium payments are required when due just like traditional whole life. If premiums are paid when due, the policy will not lapse.
With the premium level fixed, any additional or excess interest credited, or better life insurance experience, will improve the cash value of the policy. The premium level will probably be comparable to traditional whole life policies. Cash value may be applied to pay future premium payments. This type of product maximizes the deferred tax growth of your cash value.
Current Assumption Whole Life Current assumption whole life is similar to a universal life policy but your company determines the amount of premium to be paid. The company sets the initial premium based upon its current estimate of future investment earnings and mortality experience and retains the contractual right to reevaluate its original estimates to increase or decrease your premium payments later. If premiums are increased, some policies let you decrease the face amount of coverage so that you can continue to pay the original premium. Current mortality and experience and investment earnings can be credited to the insurance policy either through the cash value account and/or the premium or dividend structure (depending on whether it is a stock or mutual company). Regardless, this type of policy has the following characteristics:
Single Premium Whole Life There are a few single premium life products, which determine the premium using the current interest rate assumption. You may be asked to make additional premium payments where coverage could terminate because the interest rate dropped. Your starting interest rate is fixed only for a year or in some cases three to five years. The guaranteed rate provided for in the policy is much lower (e.g., 4%). Another feature that is sometimes emphasized is the "no cost" loan. Companies will set the loan interest rate to be charged on policy loans equal to the rate that is being credited to the policy.
Most types of both traditional and interest sensitive life policies can be purchased on either a fixed-dollar or variable basis. On a fixed-dollar basis, premium, face amount and cash values are specified in dollar amounts.
On the variable basis, face amount and cash value are specified in units, and the value of the units may increase or decrease depending upon the investment results. You can allocate your premiums among various investment pools (like stock, bond, money market, mutual funds and real estate pools) depending on the amount of risk you are willing to assume in the hope of a higher return.
Traditional variable life provides a minimum guaranteed death benefit, but many universal variable life products do not, and should investment experience be bad, coverage will terminate if substantially higher premium payments are not made. Variable life is also made available on a single premium basis but if investment experience is poor additional premiums will be required.
Although you can obtain credit life insurance (term) as an individual, it is usually sold on a group basis to a creditor, such as a bank, finance company or a company selling high priced items on the installment plan. The policy generally pays the outstanding balance of the debt at the time of the borrower's death, subject to policy maximums. Debts covered in this way include: personal loans; loans to cover the purchase of appliances, motor vehicles, mobile homes, farm equipment; educational loans; bank credit and revolving check loans; mortgages loans; etc.
When you borrow from an organization that has a group credit life policy, the organization may require you to purchase credit life insurance or it may simply offer the protection as an additional service. In either case you must receive a certificate of insurance describing the provisions of the group policy and any insurance charge. Generally the maximum amount of coverage is $220,000 for a mortgage loan and $55,000 for all other debts. Credit life insurance need not be purchased from the organization granting the loan.
If you are covered under a group credit life policy and you terminate coverage by prepaying or defaulting on the loan, or if the group policy itself is terminated, you may be entitled to a partial refund of the premium you paid so check your certificate. If life insurance is required by a creditor as a condition for making a loan, you may be able to assign an existing life insurance policy, if you have one. However, you may wish to buy group credit life insurance in spite of its higher cost because of its convenience and its availability, generally without detailed evidence of insurability.
is insurance with premiums payable monthly which are meant to be collected by the agent at your home. In most cases, however, home collections are not made and premiums are mailed by you to the agent or to the company.
There are certain factors that tend to increase the costs of debit insurance more than regular life insurance plans:
Where a company has different premiums for debit and regular insurance it may be possible for you to purchase a larger amount of regular insurance than debit at no extra cost. Therefore, if you are thinking of debit insurance, you should certainly investigate regular life insurance as a cost-saving alternative.
A modified life plan is similar to whole life except that you pay a lower premium for the first few years and a higher than regular whole life premium in later years. This plan is designed for those who cannot initially afford the regular whole life premium but who want the higher premium coverage and feel they will eventually be able to pay the higher premium.
The family policy is a combination plan that provides insurance protection under one contract to all members of your immediate family husband, wife and children. Usually family policies are sold in units (packages) of protection, such as $5,000 on the main wage earner, $1,500 on the spouse and $1,000 on each child.
Joint Life and Survivor Insurance provides coverage for two or more persons with the death benefit payable at the death of the last of the insureds. Premiums are significantly lower under joint life and survivor insurance than for policies that insure only one person, since the probability of having to pay a death claim is lower.
Joint Life Insurance provides coverage for two or more persons with the death benefit payable at the first death. Premiums are significantly higher than for policies that insure one person, since the probability of having to pay a death claim is higher.
Juvenile insurance provides a minimum of protection and could provide coverage, which might not be available at a later date. Amounts provided under such coverage are generally limited based on the age of the child. The current limitations for minors under the age of 14.5 would be the greater of $50,000 or 50% of the amount of life insurance in force upon the life of the applicant. The limitations on a minor under the age of 4.5 would be the greater of $50,000 or 25% of the amount of life insurance in force upon the life of the applicant. Juvenile insurance may be sold with a payor benefit rider, which provides for waiving future premiums on the child's policy in the event of the death of the person who pays the premium.
Senior life insurance, sometimes referred to as graded death benefit plans, provides eligible older applicants with minimal whole life coverage without a medical examination. Since such policies are issued with little or no underwriting they will provide only for a return of premium or minimum graded benefits if death occurs during a specified period which is generally the first two or three policy years. The permissible issue ages for this type of coverage range from ages 50 75. The maximum issue amount of coverage is $25,000. These policies are usually more expensive than a fully underwritten policy if the person qualifies as a standard risk.
This type of coverage is for a small face amount, typically purchased to pay the burial expenses of the insured. As previously mentioned within the discussion of monthly debit ordinary insurance, this coverage often carries a higher premium per $1,000 of coverage than larger size policies.
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