Types of Life Policies: Key Points
TERM Life Insurance
- Duration: Lasts for a specific term or set amount of time.
- Cost: Generally the least expensive option.
- Purpose: Ideal for those needing coverage for a specific period, like until a child finishes college or until a mortgage is paid off.
- Features: No cash value, which means no loans or withdrawals are possible.
WHOLE Life Insurance
- Duration: Covers the insured for their entire lifetime.
- Cash Value: Accumulates cash value over time.
- Loans: Allows loans against the accumulated cash value.
- Payout: Guarantees payout at age 100 if still alive.
- Investment: Cash value grows at a guaranteed interest rate, managed within the insurance company’s general account.
UNIVERSAL Life Insurance
- Flexibility: Premiums can be adjusted up or down.
- Cash Value: Includes a cash value component.
- Loans and Withdrawals: Allows both loans and withdrawals.
- Options: Option A or B for death benefits, affecting how cash value is paid out at death.
- Investment: Cash value interest is guaranteed, with funds managed in the insurance company’s general account.
VARIABLE Life Insurance
- Licensing: Requires two licenses to sell—insurance and securities.
- Regulation: Governed by both state (insurance commissioner) and federal (SEC and FINRA) entities.
- Cash Value: Has cash value that varies based on investment choices.
- Investment Control: Policyholders can control investments of the cash value, potentially outperforming guaranteed rates.
- Account Management: Cash value is managed in the insurance company’s separate account.
ANNUITIES
- Phases: Includes an accumulation period (investing money) and an annuitization period (withdrawing money).
- Variable Annuities: Invested in separate accounts at the insurance company, similar to variable life insurance policies.
Life Policies Explained
Types of Life Policies
There are 4 different types of life insurance you learn about. While any question is fair game here are some of the baselines you really want to know:
TERM Life – Lasts for a set amount of time (in other words a set term of time). All other things equal it is the least expensive of the 4. It is for people who want Life insurance for a set amount of time or the most insurance for the lowest premium. If they want you to pick Term on the exam they will often have a question about someone wanting life insurance for 20 years, or someone wanting life insurance for 10 years until their child goes to college, or to cover their mortgage or “the most insurance for the lowest premium. Term insurance does NOT have cash value… therefore no loans and no withdrawals.
WHOLE Life – for people that want insurance for their whole of life. DOES have cash value. Can take loans. Pays out at age 100 if still alive. Cash value grows at Guarantee interest rate, funds kept in insurance company’s General account.
UNIVERSAL – I tell students the shape of the U reminds you this is the one where the consumer can adjust their premium up or down. DOES have cash value. Can take loans. CAN take withdrawals from Universal. CAN pick Option A or B where cash value would pay out at death. Cash value grows at Guarantee interest rate, funds kept in insurance company’s General account.
VARIABLE – I tell students it takes 2 lines to make a V. This is the product you need 2 licenses to sell, insurance and securities. Also governed by 2 entities state government (insurance commissioner) and federal govt. (SEC and FINRA). DOES have cash value. Can take loans. This product is for people who think if they are able to control how their cash value is invested they can outperform the guaranteed interest rate. Cash value grows depending on insured’s investment choices, funds kept in insurance company’s SEPARATE account.
ANNUITIES – can be a challenge if this is your first time seeing them. Some of the things to know include accumulation period(putting money into the account) vs. annuitization period(taking money out of the account) and the fact that for a Variable annuity those funds are again going to be held in a separate account at the insurance company.
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