How Does Term Life Insurance Work?

Discussion in 'Life Insurance Forum' started by James Smith, Apr 19, 2010.

  1. James Smith
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    James Smith New Member

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    Whats the difference between regular life insurance and term? How does term work?
     
  2. ticker_shuffle
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    ticker_shuffle Super Genius

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    [FONT=Geneva, Arial, Helvetica, sans-serif]Term Life[/FONT]
    Term life is temporary insurance usually sold in 5, 10, 15 or 20 year plans. This is an inexpensive way to protect against any number of financial risks.
    Good use of Term Insurance includes:
    There is a temporary need for protection, such as for a mortgage or student loan.
    Limited funds are available or lower cost protection makes sense.
    There is a need to cover outstanding loans for business owners or other personal debts that you do not want to burden others with unexpectedly.

    [FONT=Geneva, Arial, Helvetica, sans-serif]Whole Life[/FONT]
    Whole life is permanent insurance. Not only does it provide the protection of term life with regards to death benefit, whole life also provides the policy holder a tax advantaged cash value. Cash value is built and paid by the insurance company in the form of dividends based on the insurance companies performance. The cash value built up in the policy is yours and available to borrow against or withdraw completely if the need were to arise.
    Good use of Whole Life includes:
    You need lifetime protection for your family or a business
    You want to accumulate cash value for use during your lifetime.
    You have unique needs - the policy can be customized in many ways.
    You need traditional insurance protection, mortgage protection, supplemental retirement funding, supplemental education funding, or other cash value needs.
     
  3. Mark
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    Mark Guru

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    Just wondering, are you an insurance agent?
     
  4. Newby
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    Newby Guru

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    This part is wrong information "Cash value is built and paid by the insurance company in the form of dividends based on the insurance companies performance. The cash value built up in the policy is yours and available to borrow against or withdraw completely if the need were to arise."

    It's not necessary for cash value life insurance to pay dividends. It grows the cash value simply by the policy design. No dividends are ever required.

    As far as the original question...term life insurance is "regular" insurance. You pay your premium for one year and at the end of that year it's over and you can renew. Just like your car insurance.

    Every kind of insurance is based on the cost of the one year term insurance. They just add more features and cost on it to get it to last 10-years, 20-years, lifetime, limited payment periods, cash value accounts, return of premium, disability riders, and everything else you can imagine.
     
  5. LGilmore
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    LGilmore Guru

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    "It's not necessary for cash value life insurance to pay dividends. It grows the cash value simply by the policy design. No dividends are ever required."

    The poster probably cut and pasted from a mutual company's website. You are correct as it depends on if the company is a stock or mutual company.


    As others have posted with term you are buying coverage for a certain period of time. However, most term policies are written to extend coverage into the 90's age wise. But term is also a product that can increase in cost every year as you grow closer to mortality.

    Term is the cheapest insurance to start with and the most expensive to finish with if you live a long life.
     
  6. arnguy
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    arnguy Guru

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  7. ticker_shuffle
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    ticker_shuffle Super Genius

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    It's arguable that any cash value that is accumulated is a dividend, paid as a return of excess premium paid, however not necessarily based on company performance. Why would someone buy a whole life policy from an insurance company that doesn't pay a dividend based on company performance, ie. mutual insurance company. You might as well just by term and put the rest in a savings account.
     
  8. Newby
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    I don't understand your logic.

    Whole-life policies ALL pay GUARENTEED cash value. You know when you buy the policy exactly how that will perform. When you reach age 100 (or 120 nowdays) you KNOW your cash value will be exactly equal to your original death benefit.

    The only difference with participating policies is that you pay higher premiums so that you can recieve dividends that you may CHOOSE to buy additional paid up insurance which will include it's own cash value.

    Your dividends will never affect your original base policy's cash value.

    The dividends are never guaranteed but are assumed based on past company performance.
     
  9. LGilmore
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    LGilmore Guru

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    "I don't understand your logic."

    That's because there's no logic behind it. Just another person who's sat through training at a company that doesn't offer the product. Thus the product is a bad choice.



    "It's arguable "

    No, it's tax code. There's no argument at all. It's not what you think it should be, it is what the IRS says it is.


    "Why would someone buy a whole life policy from an insurance company that doesn't pay a dividend based on company performance, ie. mutual insurance company. "

    I don't know maybe you should ask the mutual company's stockholders?


    (yes, I know the answer, just checking if this guy does.)
     
  10. Robert Barney
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    Robert Barney Guru

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    Term insurance is the purest form of life insurance. It's focus is on you paying a premium in return for protection - nothing more. The most basic form of term insurance is ART - Annually Renewable Term. It has a premium that goes up annually.

    Unlike fire or car insurance, life insurance (mortality) costs increase with age. The reason is simple, the older a given group of people, the more of those people who die per year. Therefore, as you get older you can expect term insurance costs to rise which is why ART premiums go up each year.

    Whole life insurance is an attempt to level the increasing cost of term insurance. Essentially you pay relatively more in the early years, to pay relatively less in later years (by comparison to term insurance). What is happening is that that the life insurance company is taking the extra money you are paying, over and above the cost of term insurance, and investing it ahead in order to keep costs lowere in the future.

    A number of term insurance policies incorporate a pay ahead concept to level costs for a limited period of time. A 20 year term charges you more in beginning, and less later, versus an ART product. However, both policies have annually increasing term insurance costs at the end of 20 years.

    In a whole life plan, the leveling concept is a lifetime objective. That is where cash values come from. Essentially cash values are created by all the extra money, plus interest earned, that you have paid the life company in the early years. The cost difference between whole life and term can be huge.

    The question as to which to buy are:

    1. Do you need life insurance for your whole life? For most the answer is NO.

    2. Is the company giving me a "good deal" versus buying term and investing elsewhere? In some cases the deal can be very good, when taking into account the tax deferral benefits.

    But generally it is a VERY BAD idea to buy a whole life policy with the plan to cash it out in the future.
     
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