Life insurance represents a key corner of the financial planning space in need of more education. Nearly three in five consumers (59%) own some form of life insurance, according to LIMRA’s 2018 Insurance Barometer Study. Yet, common questions persist, especially over the industry’s constant use of jargon.
So, with good cause, let’s review a batch of the more frequently used life insurance terms.
Whole and Term Life ─ The easiest way to remember this is: Whole Life, Whole Thing. Term Life, Times Up. Whole life insurance is designed to be permanent (as long as all scheduled premiums are paid), build cash value and provide a guarantee that its price will remain level for life.1 Term Life is for a specified time only, after which you have to renew and, most certainly, pay more if you want the same level of coverage. Most term Life insurance policies build no cash value.
Universal and Variable Universal life ─UL for short, it is considered permanent life insurance and can build cash value. There are several types of UL based on how the policy is structured to pursue that growth. For example, Indexed UL offers indexed options that earn credited interest based, in part, on changes in major indexes, but are not directly tied to the markets. On the other hand, Variable UL can take it to the next level by offering separate sub-accounts that invest in asset classes such as stocks, bonds, real estate, alternatives and more. Because of this wider exposure and higher market risk, Variable UL is regulated by the Securities and Exchange Commission (SEC) as a registered security, whereas Universal Life is generally not. With so many types of UL to consider, be sure to talk to a financial professional to understand their differences.
Illustration ─ This is an agent’s most effective, hands-on tool to educate you on how a policy can work in your financial situation. Illustrations are strictly regulated to ensure accuracy, fairness, balance and full disclosure of risks and the like, so they’re a cornerstone to understanding what you’re buying. Ask for them by name!
Underwriting and Accelerated Underwriting ─ Underwriting is the process of a company taking on risk, whether it’s a house, a car or a human life. The outcome of assuming the risk is the insurance policy. Modern life insurance underwriting involves medical data, personal habits and other factors. But, there are many situations in which the process is so finely tuned, it can be completed much faster and often without medical exams. This more streamlined approach is known as accelerated underwriting.
Face Amount ─ This is the same as the stated death benefit of a life insurance policy when it is issued (i.e., $50,000), and generally what beneficiaries will receive tax-free at the insured’s death.2 Some policies are structured so that premiums, dividends or cash value can increase the death benefit, so the death benefit paid to beneficiaries will likely be more than the original face amount applied for. Face Amount is not cash value or cash surrender value.
Modified Endowment Contract ─ Because life insurance death benefit proceeds are generally tax-free, the funding of policies must adhere to specific IRS limits. If you pay too much in cumulative premiums, the policy’s tax status can change to that of a modified endowment contract, which does not offer the same tax advantages as life insurance. Your agent will be careful in the design of your policy to avoid this.
Excess Premium ─ Many permanent life insurance policies let you pay more than the minimum required premium. Why would you? Policy owners may want to use the excess premium to purchase additional coverage, either for themselves or children, or just add to cash value. Excess premiums are a way to do that. But you need to be careful about IRS rules for modified endowment contracts when paying excess premiums. Too much funding may not be good for the policy’s tax treatment (see above).
For a deeper dive on these and more terms common to life insurance, touch base with your agent or other financial professional.
Variable life products are sold by prospectus. For more complete information, please request a prospectus from your registered representative. Please read it and consider carefully a variable product’s objectives, risks, charges and expenses before you invest or send money. The prospectus contains this and other information about the investment company.
Investing involves risk, including the potential for loss of principal. Past performance does not guarantee future performance. Variable products can be offered solely by representatives registered to offer such products through a broker/dealer by way of prospectus.
1Guarantees are dependent upon the claims-paying ability of the issuing company.
2Internal Revenue Code § 101(a)(1). There are some exceptions to this rule. Please consult a qualified tax professional for advice concerning your individual situation.