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Term Life Insurance

Term Life Insurance provides protection for a specified period of time. If death occurs during the period, the face amount of the policy is paid, with nothing being paid in the event that the insured survives the specified period. Term policies generally have no cash or loan values. Since term insurance provides only a death benefit without also building up a cash value, as of a given age at purchase, it will have a lower premium per $1,000 of insurance than comparable whole life policies.

While term insurance is simple in concept, there are a number of different contracts on the market that the consumer might consider. There is Annually Renewable Term (ART) which is also called Yearly Renewable Term (YRT). In this product, the premium charged per $1,000 of insurance increases for each successive year as the insured's attained age increases. As a result, the cost of a level amount of term insurance will continually increase year by year as the insured grows older. It will be quite low when the insured is younger but it will increase dramatically as the insured gets older.

Another product is called Level Term. Here, the premium remains fixed (or level) for a stated period of coverage, such as 5, 10, 15, or even 20 or 30 years, after which time the premium increases to that of an insured at that attained age. Many level term policies allow renewal for additional similar level term periods, but others have the premium increase each year after the initial term period. Level term provides more cost stability for the policyowner, but the initial premium rate per $1,000 will be higher than for a comparable ART or YRT policy.

Decreasing Term provides a declining amount of insurance over the period of the contract. This type of coverage is typically used for two purposes-to maintain a level premium or to payoff a declining balance debt, such as a mortgage loan.

Many term policies are renewable for successive periods of time at the policyowner's option without having to show any evidence of insurability at renewal. Term policies are also generally convertible. This means that the policyowner has the right during the conversion period to change the term policy into a whole life or other permanent policy of a like (or lesser) amount of insurance without having to show any evidence of insurability at the time of conversion.

Whole Life Insurance

This policy furnishes protection for the whole of life. Premiums may be paid throughout the insured's lifetime or over a limited period, such as 10, 20, or 30 years, to a specified age. The premium also may be paid in one lump sum at the inception of the policy, in which case the policy is referred to as a Whole Life Insurance policy. When the insured is to pay premiums throughout his or her lifetime, the policy is commonly referred to as Ordinary or Straight Life Insurance. When the insured is to pay premiums over a specified period, such as for 20 years or to age 65, it is referred to as Limited-Payment Life Insurance.

In addition to permanent protection, other major distinguishing features of whole life insurance as compared with term insurance are the level premiums for the premium-paying period and the combining in the insurance contract of savings (cash value) with insurance.

Universal Life Insurance

Under Universal Life (UL), the policy cash value is set up as a cash-value fund (or accumulation fund) to which is credited an interest rate, and from which is taken the cost of term insurance (as a mortality charge) at the insured's attained age on the net amount of death protection. There also may be certain expense charges deducted. This separation of the cash value from the death benefit has been referred to as unbundling the traditional life insurance product or as an open architect product.

Under UL, premium payments are at the discretion of the policyowner, except that there must be a minimum initial premium to start coverage and then there must be at least enough cash value in the policy each month to cover the mortality and any expense charges so the policy will not lapse. Insurers also set maximum premium payments.

There are two general types of death benefit systems under UL; Option A and Option B. Under Option A, there is a level death benefit, and so if the cash value increases, the net amount of death protection (also referred to as the net amount at risk) declines. Under Option B, the death benefit is equal to a specified amount selected by the policyowner when the policy is purchased plus the policy's current cash value. Thus, under this option, the death benefit will increase if the cash value increases.

The cash value under UL is credited with an interest rate (usually monthly). There is a guaranteed minimum interest rate specified in the policy, and then the insurer may pay a higher current crediting rate. The interest rate actually paid by an insurer on its UL policies may be determined in several ways-the portfolio rate approach, the new money approach, the interest indexed life insurance approach or the equity indexed universal life approach. The portfolio rate is one rate set by the insurer and generally based on the investment performance of the insurer's whole investment portfolio. Under the new money approach, the insurer sets more than one rate depending on when the policy premiums were paid. Under the interest indexed life insurance approach, the insurer credits interest rates that are indexed to some outside interest rate measure, such as a percentage of average long-term corporate bond rates. Finally, the equity indexed universal life approach; the insurer bases the current credited return on some outside equity (common stock) index, such as the Standard and Poor's (S&P) 500 stock index.

In addition to permanent protection, other major distinguishing features of whole life insurance as compared with term insurance are the level premiums for the premium-paying period and the combining in the insurance contract of savings (cash value) with insurance.

Variable Universal Life Insurance

Variable Universal Life (VUL) is universal life combined with the variable life concept. The policyowner can decide into which separate account(s) provided under the policy will hold his or her flexible premiums. The cash value then will be determined by the investment experience of the separate account(s) chosen. The death benefit will depend on whether UL Option A (level death benefit) or Option B (face amount plus the cash value at death) is selected by the policyowner. Thus, under VUL, the policyowner has the greatest degree of flexibility of all-flexibility with regard to both investment of cash values and payment of premiums. However, the investment decisions and the corresponding investment risks fall on the policyowner rather than on the insurer.

Disability Insurance (also know as Income Protection Insurance)

Disability Insurance (DI) provides protection against a long-term illness or injury that could keep a person from working for an extended period of time. DI protects a policyowner from the loss of income due to disability. Here, there is Short-Term Disability (STD) and Long-Term Disability (LTD). STD typically covers the first 90 to 180 days of a disability while LTD typically has a waiting period of 90 to 180 days where no benefits are payable. However, many LTD policies pay benefits until the policyowner attains age 65.

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