Types of Coverages

Term Life
Term life insurance is pure insurance protection with no savings element involved with the insurance policy. It is typically the cheapest type of insurance on the market for that specific reason. The policies range from lengths of time in force "Term" of 1, 5, 10, 15, 20 years. Recently companies have offered 25 and 30-year products as well. When purchasing term insurance the one element that you need to be aware of is the length of time the premium will remain level and how long the guarantee period for level premium is. Most companies will offer 5, 10 or 15-year periods of guaranteed premiums during which time they can not change the premium for policies all ready in place. However, after that "guarantee period" has expired the company has the right to increase the annual premium up to the maximum amount stated in the policy.

The common belief with term insurance is that you only have an insurable need (income replacement, mortgage/debt payoff, fund college education and provide funeral expenses) for a short time period not your entire life, so you should not hold a life insurance policy for that entire period. But instead, over the course of your working life eliminate some of the needs and then have enough retirement savings set aside to "self-insure" yourself against the other needs.

Whole Life
Whole life insurance is a type of insurance that offers a combination of insurance and a savings element or cash value accumulation. The policy is set up with a maturity date at some point in the future for the insured individual, at which time the cash value within the policy should equal the amount of insurance face amount. This cash value does not increase the amount of the death benefit, but only offers the insured individual to collect a sum of cash equal to the original face amount should that person live to the maturity of the policy.

The cash value can be withdrawn in the form of a policy loan without causing the policy to lapse, however there are a few strings attached. First, if the loan is still outstanding at the time of death the death benefit will be reduced by the amount of that loan. Second, the insurance company has the right to charge as much as 8% on the loan until all funds are paid back. Another draw back about the cash value accumulation for non-variable products the interest rate earned on the money held in the cash value in normally very low.


Universal Life
Universal Life is similar to Whole life in that is allows for a cash value accumulation, but the difference is that the cash value can actually increase the death benefit of the policy. Universal Life offers two ways for the policy's cash value to accumulate. The first way is one in which the cash value will actually reduce the amount of financial risk taken on by the insurance company(option A) and the cash value has a delayed effect on increasing the death benefit. The other has no change to the amount of financial risk taken on by the insurance company(option B) and any cash value accumulated in the policy will increase the death benefit.

The same pitfalls associated with loans on the cash value apply to those in a whole life policy, except for the fact that it will not reduce the death benefit below the original face amount of the policy. The diagrams below show how a UL policy death benefit will change with both option A and option B.


Pre-Need (Burial) Insurance
Is sold for that purpose only, to provide funds for the family of the insured to use in order to provide funeral services for the insured. It is a type of whole life insurance and it is usually sold in small dollar amounts $5,000 - $15,000. Employees of funeral homes that are licensed insurance agents and only sell that specific product to families that pre-arrange their funeral services often sell it.

Home Service Insurance
The home service distribution system is a method of selling and servicing insurance policies through agents who collect the renewal premiums within their given sales territory. The policies sold in the home service market have the same characteristics of whole life policies but are sold with very small face amounts.

Viatical Settlement Contracts
A person living with a terminal illness often faces very tough financial choices. A viatical settlement is one option that can give the person cash to help with expenses.

A viatical settlement is the sale of a life insurance policy to a third party. The insured has an illness or condition that is catastrophic, life threatening, or chronic. The owner of the policy sells it for a percent of the death benefit. The buyer, a viatical settlement provider, becomes the new owner/or beneficiary of the life insurance policy, pays all future premiums and collects the entire death benefit when the insured dies. The viatical settlement provider must be registered with the NC Department of Insurance before doing business in North Carolina.

Consider all your options before deciding to enter into a viatical settlement contract. Some things to consider:
Do you have any cash value in your life insurance policy?
Does your life insurance policy have an accelerated death benefits provision?
Consult a professional tax advisor. Not all proceeds are tax-free.
Proceeds are subject to the claims of any creditors.
Will you lose any public assistance benefits such as food stamps or Medicaid if you get cash settlement?
You must provide certain medical and personal information.

Annuities
Annuities are investment vehicles that are classified as insurance products and can be purchased using large sums of money in the form of a single premium or a continuous premium schedule. They can be classified in a number of different ways; non-qualified, qualified, qualified IRA.

A non-qualified annuity is not set up as a tax deferred investment vehicle but simply as a place to invest discretionary income. A qualified annuity is tax deferred and usually involves money that is a direct roll over from another qualified retirement plan such as a 401k or for an individual with a large amount of discretionary income because it allows for unlimited contributions. A qualified IRA annuity is another form of an IRA that limits the amount of annual premium payments to $2,000. As a qualified account an annuity should only be purchased if the individual is currently participating in a company retirement plan, such as a 401k, and is contributing the maximum amount and has an IRA set up with the maximum of $2,000 per year being contributed to it.

The money placed into an annuity is then withdrawn based on a number of payout options or the money can be designated to a beneficiary and be passed on as a lump sum. The second option could be a way of avoiding estate taxes since the annuity is classified as an insurance product, but you should consult your tax advisor for specific details on this.

The investment options for an annuity can either be a fixed annuity that offers a guaranteed interest rate return or a variable annuity which offers a mutual fund portfolio to choose from.