Life Insurance

 

In the following, we provide a very general overview of the types of life insurance products that are offered in the marketplace. Each of these products is offered in some form by ALICO through its branches and subsidiaries.

 

What is life insurance?

A Life insurance policy is a contract between you (the policyowner-insured) and an insurance company (the insurer). Under the terms of a life insurance contract, the insurer promises to pay a certain amount of money (death benefit) to someone you choose (a beneficiary) when you die, in exchange for your premium payments.

 

Do you need life insurance?

The need for life insurance is simple; you should consider life insurance if anyone depends on your income. Essentially, you transfer the risk (loss of your income) to the insurer by paying a fee, or “premium,” to the insurer. The insurer, with a large capital base and expertise in risk selection and management, is better able to accept this risk than any single individual would be.

 

This risk transfer may be helpful in both personal and business situations.

 

            Personal needs:

-         Dependent's Support: The major reason people buy life insurance is to replace income that would be lost because of the death of an income earner. If you support or help support a family, the loss of income that would result from your death could mean that your surviving dependents may face financial difficulties. Household expenses continue, utility bills and school fees must be paid, and food and clothing must be purchased. Life insurance provides you with a sense of security in the knowledge that the life insurance money will be available to help support family members in case of your death.

 

-         Education Costs: One of your primary objectives may be to send your children to a university or college. Due to an untimely death, the tuition may become beyond your family's reach. Life insurance may be used to provide for the tuition expense.

 

-         Burial expenses and estate planning: Life insurance may be used to pay funeral or burial expenses. In addition, it may be used to pay inheritance taxes.

 

-         Investment Income: Life insurance policies that accumulate savings can also be used as vehicles for personal savings and investment. Over a period of time, the accumulated savings in a permanent life insurance policy can grow to a substantial sum and, while growing, will still provide the insured with life insurance coverage.

 

-         Charity:  You can purchase life insurance in order to donate the proceeds to a charitable organization, such as a church or an educational institution.

Business needs:

-         A business continuation insurance plan: When the owner or a key person (any person whose death would cause the business a significant financial loss) dies, a business continuation life insurance plan may be used to provide the necessary fund for the business' continued operation.

 

-         Buy-Sell Agreement: If your business partner dies and you don't have enough money to buy your partner's financial interest in the company, life insurance may be arranged to cover this cost.

 

-         Life insurance as Employee Benefits: Businesses often use life insurance to provide benefits for their employees. Employers pay for all or part of these employee benefits as part of the total package under which they compensate their employees

 

Which insurance do you need?

Although you may hear about many names for different types of life insurance policies, the majority of policies contain benefits derived from one or more of three basic types. These types are briefly outlined in very general terms below.

 

1.      Term Life Insurance: Term insurance is issued for a specific period, or “term.” This term usually ranges from 1 to 30 years. You may choose the length of the term that best suits you. Term insurance is considered an “affordable” insurance choice. If you are young with a family and need a large amount of protection without paying high premiums, this type of life insurance may be of interest to you.

 

Under a Term policy, in case of death during the term of the policy, your beneficiary receives the cash payment equal to the insurance amount, or “death benefit.” The death benefit amount is chosen when you buy the policy. Term insurance protection ends when the period or “term” is over, and only pays out in case of death. For this reason this product type offers higher protection at a lower cost. It is a pure “risk transfer” product.

 

Term insurance can be divided into three main types: level term, increasing term, and decreasing term. Level term means that the death benefit remains the same throughout the term of the policy. Increasing term means the death benefit gets larger throughout the term of the policy. Decreasing term means the death benefit gets smaller.

 

2.      Endowment Life Insurance: Endowment life insurance generally guarantees that a sum of money will be available to you or your beneficiaries, whether you live until the policy ends (or “matures,”) or in case of an untimely death. Endowment insurance usually provides a guaranteed death benefit and has a savings component called the “cash value.”

 

Generally, if you buy an endowment policy and keep it until maturity, it will provide a lump-sum cash payout equal to the insurance amount, or “death benefit.” In case of death before maturity, the death benefit would be paid to your beneficiary.

 

Endowment insurance can be useful for people who know that they will have to incur a specific expense in the future — like a wedding or college tuition. They know that regardless of what the future may hold, the expense will have to be paid. Endowment insurance allows them to be certain that the money will be there.

 

3.      Whole Life Insurance: Whole life insurance has many of the same features as Endowment insurance, but it is designed to remain in force during the insured's entire lifetime. Like Endowment insurance, it provides a guaranteed death benefit, and has a savings component called the “cash value.” As you pay your premiums, a portion of each payment is set aside to create the cash value. The insurance company typically invests the cash value, which continues to grow as long as the policy is in force.

 

Some of the advantages of a policy's cash value are that:

 

-         You can cancel or surrender the policy in total or in part and receive the cash value; however, since this is a long-term policy, in the early years the cash value may be small or even equal to zero.

-         If you find that you need to skip a premium payment, you can use the cash value to continue your current insurance protection for some time.

-         In most cases, you may borrow from the insurance company, using the cash value in your life insurance as collateral.

 

Other types of whole life insurance:

 

Universal Life Insurance: Universal life insurance has all the features of Whole life insurance. In addition to those features, it offers flexibility in premium payment and face amount, and it provides current interest rates. Unlike whole life and term, Universal life allows you, after payment of your initial premium, to pay premiums at any time, in virtually any amount, subject to certain minimums and maximums. You also can reduce or increase the death benefit more easily than under traditional whole life policy.

 

Variable Universal Life Insurance: Variable universal life insurance has all the features of Universal life insurance coverage, but, instead of earning an interest rate, its cash value is linked to non-guaranteed equity investment funds, bond investment funds, or similar investments. Your premiums will be invested in the various investment options that you have chosen, and you assume the investment risks. The amount of the policy benefit is dependent on the performance of your investments.

 

 

A number of supplementary benefits can also be added to the various forms of life insurance policies. These additional benefits are usually provided by adding riders to the life insurance policy. The most common supplementary benefits include:

 

-         Accidental Death Benefit: If the insured dies as a result of an accident, the insurer will pay an amount of money in addition to the basic death benefit provided by the life insurance policy.

 

-         Waiver of Premium for Disability Benefits: The insurer waives its right to collect premiums that become due while the insured is totally disabled.

 

-         Disability Income Benefits: The insurer provides a monthly income benefit to the policy owner insured if he becomes totally disabled.

 

-         Critical Illness Benefits: The insurer agrees to pay a portion of the policy's face amount to a policy owner insured who suffers from one of a number of specific, critical illnesses.