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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.

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