Fort Worth life insurance attorneys should know this – but here goes with a reminder.
The most common life insurance types are term, whole life, and universal life.
“Term” life insurance policies simply provide a death benefit in return for a premium payment. At the end of the policy year, or “term,” the insurance ends, and the policy has no value. Most of these are for 10 or 20 years. Because the insured person is only paying for the death benefit, term policies are cheaper in the early years. As the insured person gets older, the risk of death increases and so does the premium, so term policies may become more expensive that the other types of life insurance. Insurance companies typically sell term policies that promise a fixed premium for a set number of years as stated above. This means an insurance company that sells a term policy for a fixed period, such as 10 years, will not be allowed to increase the premiums during that 10 year period.
“Whole life” life insurance policies typically charge more in premiums than term policies, so that the premium pays for the death benefit and provides an excess that allows the policy to accrue a “cash value.” This cash value is an investment, in addition to the benefits if the insured dies. The policies derive their name from the fact that the insurance company offers to insure the person for her “whole life” based on a certain stream of premiums. An insurance company may offer illustrations at the time the policy is sold showing how much cash value will accrue based on the premium payments, if the certain interest rates apply. The illustrations usually project the expected value of the policy over time, and often contain disclaimers and numerous assumptions, making comprehension difficult. This complexity causes insureds often to rely heavily on oral explanations by the agent, which may be inaccurate or misunderstood. This can be a source of trouble if the policy’s actual performance does not match the insured’s expectations.
One feature of whole life is that enough value may accrue so that future premiums can be paid from the accumulated cash value, without the insured having any more out of pocket expense. This is an effective marketing tool, showing the insured that after a substantial initial outlay, the insured will have coverage without making further payments. This too can be a trouble-spot if the actual performance does not live up to the projections.
Another feature of the accrued cash value is that the insured may borrow against the policy. If the insured does not pay back the “policy loan,” the loan is repaid from the cash value and policy benefits at the time of death.
“Universal life” works like whole life, except the rate of return on the investment portion may be tied to stocks or mutual funds, instead of a certain interest rate. This product was developed so life insurance companies could compete with other investments by offering more competitive rates of return.
Dividends are another potential feature. If the policy pays dividends, the insured may elect to receive them as a refund, or the dividend may be applied to buy additional coverage or to reduce the next premium.
Knowing these various types of policies and how they work enables an insurance law attorney to properly look at the situations that clients bring to him and to offer the best advice.
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