Riders are modifications to the
term or whole life insurance
policy added at the same time the policy is issued. These riders change
the basic policy to provide some feature desired by the policy owner. A
common rider is accidental death, which used to be commonly referred to
as double indemnity, which pays twice the amount of the policy face value
if death results from accidental causes, as if both a full coverage policy
and an accidental death policy were in effect on the insured. Another common
rider is premium waiver, which waives future premiums if the insured becomes
disabled.
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Life Insurance Introduction
When a person insures their life they do so knowing that one day they will
die. Therefore a policy that covers death is assured to make a payment. The
policy offers assurance on death; even if the policy has a prescribed termination
date the policy is still assured to pay on death and therefore is an assurance
policy. Examples include Term Assurance and Whole Life Assurance. An accidental
death policy is not assured to pay on death as the life insured may not die
through an accident, therefore it is an insurance policy.
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Health Categories
Many companies use four general health categories for those evaluated for a life
insurance policy. These categories are Preferred Best, Preferred, Standard, and
Tobacco. Preferred Best is reserved only for the healthiest individuals in the general
population. This means, for instance, that the proposed insured has no adverse medical
history, is not under medication for any condition, and his family immediate and
extended have no history of early cancer, diabetes, or other conditions. Preferred
means that the proposed insured is currently under medication for a medical condition
and has a family history of particular illnesses. Most people are in the Standard
category. Profession, travel, and lifestyle factor into whether the proposed insured
will be granted a policy or not, and which category the insured fails. For example, a person
who would otherwise be classified as Preferred Best may be denied a policy if he
or she travels to a high risk country. Underwriting practices can vary from insurer
to insurer which provide for more competitive offers in certain circumstances.
Although some aspects of the application process such as underwriting and insurable
interest provisions make it difficult, life insurance policies have been used in
cases of exploitation and fraud. In the case of life insurance, there is a motivation
to purchase a life insurance policy, particularly if the face value is substantial,
and then kill or murder the insured to obtain the death proceeds payment.
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Policy Types
- Term Life Insurance or Temporary Policy Coverage
- Term life insurance policies provide for life insurance coverage for a specified
term of years for a specified premium. The policy does not accumulate cash value.
A term life insurance policy is generally considered pure insurance, where the
premium buys protection in the event of death and nothing else. Term insurance
premiums are typically low because both the insurer and the policy owner agree
that the death of the insured is unlikely during the term of coverage.
- Whole Life or Permanent life insurance Coverage
- Whole life insurance provides for a level premium, and a cash value table
included in the policy guaranteed by the company. The primary advantages of
whole life are guaranteed death benefits, guaranteed cash values, fixed and
known annual premiums, and mortality and expense charges will not reduce the
cash value shown in the policy. The primary disadvantages of whole life are
premium inflexibility, and the internal rate of return in the policy may not
be competitive with other savings alternatives.
- Universal Life Coverage
- Universal life insurance - UL - is a relatively new insurance product intended
to provide permanent insurance coverage with greater flexibility in premium
payment and the potential for a higher internal rate of return. A universal
life policy includes a cash account. Premiums increase the cash account. Interest
is paid within the policy or credited on the account at a rate specified by
the insurance company. This rate has a guaranteed minimum but usually is higher
than that minimum. Mortality charges and administrative costs are charged against
and reduceed the cash account. The surrender value of the policy is the amount
remaining in the cash account less applicable surrender charges, if any. But
universal life has its own disadvantages which stem primarily from this flexibility.
The policy lacks the fundamental guarantee that the policy will be in force
unless sufficient premiums have been paid and cash values are not guaranteed.
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Taxation Of Life
Ins USA
Tax deferred benefit from a life insurance policy may be offset by its low return
or high cost in some cases. This depends upon the insuring company, type of policy
and other variables (mortality, market return, etc.). Also, other income tax saving
vehicles (i.e. IRA, 401K or Roth IRA) appear to be better alternatives for value
accumulation, at least for more sophisticated investors who can keep track of multiple
financial vehicles. The combination of low-cost term policies and higher return
tax-efficient retirement accounts can achieve better performance, assuming that
the insurance itself is only needed for a limited amount of time.
Premiums paid by the policy owner are normally not deductible for federal and
state income tax purposes. Proceeds paid by the insurer upon death of the insured
are not includible in taxable income for federal and state income tax purposes;
however, if the proceeds are included in the "estate" of the deceased, it is likely
they will be subject to federal and state estate and inheritance tax.
The tax ramifications of life insurance are complex. The policy owner would be
well advised to carefully consider them. As always, Congress or the state legislatures
can change the tax laws at any time.