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Life Insurance Policy

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A life insurance policy is really a death insurance policy. It is a contract between the policyholder and the insurance company. Under the life insurance policy, the insurer promises to pay a specified amount to the beneficiaries of the policy upon receipt of proof of the death of the insured and a completed claim form, surrendering the policy. In return, the policyholder makes specified payments, called premiums, either periodically or in a lump sum to maintain the life insurance policy.

Read the Policy

Since a life insurance policy is a contract, it is important to read it even if you don't want to. There is a "free look" period of ten days or so, depending on state law and policy provision, in which you can return the policy and have all initial payments returned. Even the simpler term type of life insurance policy has provisions you should understand and be sure you have received what you expected. Is the face amount (death benefit) and term of coverage correct? If the right to convert to a permanent life insurance policy at the end of the term just might be important later on, be sure you understand what guarantee the policy is offering.

A more complex life insurance policy may have illustrations of projected investment performance. They should make some sense to you. It would also be good if they were realistic. There may or may not be guarantees of level premium, cash value, and factors affecting face amount. If you ordered certain optional extras, are they included in writing? Make sure you have what you believed you were buying.

History of Life Insurance

In North America, the first life insurance company began in 1759. The industry grew rapidly in the 1840's as the growth of commerce in the US accelerated. However, in the depression beginning in the 1870's, over half of the insurers failed. Today, most life insurance companies are for-profit companies owned by shareholders, with a small number of mutual companies owned by policyholders, and an even lesser number of fraternal companies.

The original life insurance policy was for a limited number of years, i.e., term insurance. The premium would increase as the insured aged and the risk of death and payment of the death benefit increased, similar in principle to annual renewable term. The other alternative was a type of decreasing term where coverage decreased over time in return for a fixed periodic premium.

Because that policy design is so limited in its scope, many other forms of coverage have developed over the years to fulfill the needs of different situations.

Types of Life Insurance

The most commonly purchased life insurance is still term. However, unlike the original form, it is now available for a guaranteed level premium for a specified number of years in five year increments up to thirty years.

Since there is a need in some cases for insurance that does not expire at the end of a term, various ways have been devised to fund permanent insurance that will pay a death benefit no matter when the insured dies.

Life Insurance Policy
Whole Life Insurance

The first permanent policy form was called "whole life" because premiums were payable for the insured's whole life. A higher premium than term was necessary so that an internal savings account would build up a cash value at compound interest tax free. This was not done to provide the policyholder a savings account to borrow against, but to reduce the net amount at risk for the insurance company.

As the account value increased, the difference between the account value and the death benefit would decrease until it became zero at a certain age, typically age 95 or 100. By reducing the amount at risk, the insurance company could issue a life insurance policy where the death benefit is a guaranteed "when" instead of "if", while maintaining the financial integrity of the life insurance operation. The individual life insurance policy itself grows to be increasingly self-supporting, giving more financial security to the insurance company compared to just paying claims out of a general pool of premiums collected.

Universal Life Insurance Policy

When interest rates were high in the 1970's, whole life policies seemed to be poor performers, and a new permanent policy design evolved, universal life. Since the cash value is usually invested in short and intermediate fixed-income instruments, its returns fluctuate more than a whole life policy whose account is invested in long term bonds and mortgages. Because of the short term nature of its investments, overly optimistic illustrations of universal life policy performance have disappointed many buyers.

Variable Life Insurance

In order to provide the opportunity to boost the value of the account in a permanent insurance policy even more, variable life was introduced. A variety of investment options is available, some managed by the insurance company, some using outside managers. Either way, there are management fees that reduce returns to some degree. Various mixes of mutual funds are offered such as small cap, index, precious metal, global, and bonds.

Permanent to Age 100 Life Insurance

However, especially since the introduction of universal guaranteed level premium to age 100, it has been said that it is better to keep insurance separate from investing. The premium for universal to age 100 is significantly less than whole life. So it is possible to have a lower cost permanent life insurance policy and focus investing elsewhere. Keep it simple.

Quotes for the Universal guaranteed level premium to age 100 life insurance policy is included in our online quoting system of over 140 top life insurance companies.

When you are ready, you can contact us for help in discovering what is best for you needs. We can also get you the application for just about any life insurance company.

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