last updated 06/23/2022
Life insurance provides financial protection to loved ones in the event of the policyholder’s death. Once a policy is issued, an insurer cannot cancel it based on a change in the policyholder’s health status. There are several types of life insurance, allowing consumers to find a type of policy that works for their personal situation.
term life insurance
Term life insurance provides coverage for a specified period of time. Term insurance policies are typically issued for 1, 5, 10, or 20 years, or up to a specific age (such as 65). Term policies only pay a death benefit to the beneficiary if the policyholder dies during the specified term and are therefore a good option when the policyholder needs protection for a temporary time or a specific need. term insurance has the advantage of being cheaper than permanent insurance, particularly in the early policy durations. There are a few different types of term life insurance policies:
- The most common, level term insurance, is characterized by uniform face amounts of the policy over the life of the contract, usually 10, 20 or 30 years. The death benefit amount and policy amounts are generally guaranteed to remain level during this time, regardless of the health status of the insured.
- decreasing term insurance policies have a decreasing death benefit. A policyholder can use these types of policies to cover financial obligations that decrease over time, such as a mortgage.
- renewable term insurance guarantees the policyholder the right to renew at the end of the contract period without evidence of insurability, as long as the premium is paid.
- Convertible Term Insurance allows the policyholder to convert a term insurance policy into a permanent insurance policy that will build cash values in later years. These premiums are generally higher to reflect the additional cost of building cash value for the policy.
- term insurance policies may also have a return-of-premium (rop) feature that refunds some or all of the premiums paid at the end of a level term period if they are not paid death benefits. Policies with this feature are more expensive because the policyholder has the ability to receive cash reimbursements.
- A non-participating whole life insurance policy does not pay dividends to the policyholder, rather the insurer sets the level of the premium, death benefits, and equity values. Cash redemption at time of purchase. these amounts are set when the policy is issued.
- A participating policy allows the insured to share the insurer’s investment, expense and mortality experience by providing dividends used to reduce premium payments or to purchase additional paid insurance. Dividend options make these policies more flexible and more expensive than nonparticipating policies.
- Indeterminate Premium Whole Life Insurance is a nonparticipating policy that features adjustable premiums that are set annually and reflect the insurer’s mortality experience, investment earnings, and expenses, although cannot exceed a maximum guaranteed rate. premiums generally start lower than other types of whole life insurance.
- ordinary level premium whole life insurance features premium payments that remain constant until the death of the insured or reaching a terminal age when the cash value equals the face amount of the policy.
- limited payment whole life insurance may be participating or non-participating. premiums are paid over a shorter period, but you still retain lifetime protection. These policies have higher premiums and build cash value faster than ordinary life policies because they pay out over a shorter period.
- Single Premium Whole Life Insurance is a limited payment whole life policy that allows policyholders to purchase guaranteed protection for life for a single upfront payment, thereby have immediate cash value.
whole life insurance
Whole life insurance provides a fixed amount of insurance coverage during the life of the insured, with benefits paid only at the time of the insured’s death. Whole life policies are designed to build tax-deferred cash value, which is the accumulation of premiums collected less applicable expenses and applicable insurance charges, and allow you to borrow against the cash value of the policy. As required by state law, whole life policies contain non-forfeiture values payable in cash or some other form of insurance in the event the policy lapses due to non-payment of required premiums or the policyholder decides to waive the coverage. There are several types of whole life insurance policies.
universal life insurance
Universal life insurance is permanent life insurance that combines term insurance with a tax-deferred, interest-bearing cash account. In most contracts, premiums and/or death benefits may fluctuate at the policyholder’s discretion. the policy remains in force as long as the cash value is sufficient to cover the cost of insurance and loans can be taken against the cash value of the policy.
There are also variable universal life insurance products that are held in a separate account with the insurer. the interest earned under these contracts is not guaranteed and, in fact, may be negative, since the interest is a function of the change in the market value of the assets in the separate account.
Recent years have seen the rise of indexed universal policies, which have both fixed and variable features. Under these policies, interest credits are linked to an external index of investments, such as bonds or the S&P 500. These index products provide an interest rate guarantee.
Life insurance and annuities are regulated by state insurance commissioners. The NAIC encourages states to adopt model laws and regulations designed to inform and protect insurance consumers. the naic life insurance disclosure model regulation (no. 580) requires insurers to provide purchasers of life insurance with information that will enhance the purchaser’s understanding of the policy and your ability to select the most appropriate plan for your needs. The NAIC Model Life Insurance Illustrations Regulations (No. 582) provide rules for life insurance policy illustrations that will protect consumers and encourage consumer education. the regulation of the consumer credit insurance model of the naic (no. 370) protects the interests of debtors and the public by providing a system of rates, policy forms and operating standards for the credit life insurance transaction.
the naic life insurance illustration problems (a) working group, created in 2016, continues to explore how the narrative summary required by section 7b of the model (#582) and the policy summary required by section 5a(2) of the model ( #580) can be improved to promote readability and consumer understanding. this includes how they are designed, formatted, and accessed by consumers. the working group is discussing preliminary proposals to amend model #580 to incorporate a policy overview requirement that encourages (not requires) the use of a template by providing a safe harbor if the template is used.
the naic life actuarial working group was formed to identify, research and develop solutions to actuarial problems in the life insurance industry. after the adoption of the standard valuation law (#820) by 46 states representing 87.5% of the industry premium prior to July 1, 2016, the standard valuation law It became effective January 1, 2017. The Valuation Manual is revised annually to add clarity to existing requirements and promulgate new requirements. The task force has adopted revised generally recognized expense (GRET) table factors for 2021.