Professional Documents
Culture Documents
Index
Life Insurance
Sr.No.
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Topic
Executive Summary What is Life Insurance History of Life Insurance in India Indian Insurance and Life Insurance Industry in India
6 7 8
Market Share of Major Life Insurers Legal Facets of Life Insurance Types of Life Insurance
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Executive Summary
The performance of the insurance sector in financial year 2008-09 was largely influenced by the sub-prime crisis. The sub-prime crisis started in the United States in late 2007, evolved as a financial crisis in US and later engulfed Europe and UK. By late 2008 it seeped into Asia. As a result, the financial crisis deepened among many countries of the world, thus forcing the respective governments to take necessary steps to come out of the crisis. Besides increased unemployment in various countries, economic growth was also hampered and the IMF and World Bank lowered the world economic contraction for 2008-09 to 1.1 per cent lower than what was projected earlier. Fall of financial institutions and lack of confidence in the banking system impacted the financial markets. Money and capital markets tumbled down to their lowest levels across the world. As a result, many investors lost their wealth. Internationally, except for a few large companies, insurance companies were fairly insulated, though for the first time since 1980, insurance premiums declined in real terms with non-life premiums falling by 0.8 per cent and life premiums falling at a much higher rate of 3.5 per cent. Further, because of higher volatility in the financial markets, insurance companies, lost heavily on investment income. As such, the profitability of the insurance companies deteriorated in 2008 not only due to low investment yields but also because of high cost of guarantees and lower revenues from management fees. As a consequence of the impairment of the value of their investments both banks and insurance companies were forced to recapitalize to meet regulatory requirements. This has thrown a big challenge, as investors lost substantial wealth and were reluctant and unable to make further investments and there was scarcity of capital. The governments across the world have started infusing capital into the financial system so as to bring back stability into the system. Though well insulated, India, could not totally escape the tide of the financial crisis. Due to its higher levels of income growth during the past five years as also because of prudent financial management underpinned by sound and solid banking system supporting the payment and settlement procedures, India had limited the contagion effect. However, the stock values declined sharply effecting capital availability. India also had to lose some of its policies and adopted both conventional and unconventional methods to contain the contagion effect. The Indian economy which had grown at an average of 8.8 per cent before 2008-09 could grow only at 6.7 per cent. This project report looks at the scenario of how the life insurance sector is performing amongst the entire global crisis.
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Allocate income funds for the children's education. Provide a retirement income throughout old age. Provide a reliable savings plan for the future. Supplement income when earning power is destroyed by illness of accidents, such as covering medical expenses. Furnish surplus earnings for the investors should disaster strike.
Do You Really Need Life Insurance? If there is someone who would suffer economic hardship if you died, then the answer is yes... you need life insurance! Families with young children have a clear need for life insurance. If both spouses work, the loss of one income will cause the family immediate economic hardship and make it harder for them to realize future goals, such as paying for the children's' education. But even if one spouse works "inside the home" and doesn't bring in a formal income, his or her death will require the surviving spouse to hire child care, housekeepers and other professionals to help run the household - and that can be a significant new expense. If you are married without children or single, then you may need life insurance to protect your partner or surviving family members against the costs associated with your death. Funeral expenses, probate and administrative fees, outstanding debts, special obligations to charities, and federal and state taxes are costs that all of us must consider. And, they can add up quickly. Unless you already have sufficient financial resources, your survivors will probably need life insurance to cover these expenses. What Happens To Your Family If You Don't Have Enough Coverage? Under any circumstances, the loss of a loved one is a traumatic experience. But, if your family is also left without sufficient money to meet basic living needs or prepare for future goals, they will have to cope with a financial crisis at the same time. Depending upon their current financial resources and ability to "get back on their feet" emotionally and financially, your family might be forced to move to a less desirable home or community, abandon education and career plans, reorder family priorities (such as the amount of time spent with the children) and, in general, cut back on the quality of life you have worked hard to achieve. A good life insurance program does more than just replace the loss of income that occurs if you die. It should also provide money to cover the new costs that arise after your death funeral expenses, taxes, probate costs, the need for housekeepers and child care, and so on. And these cash benefits should provide for your family's future needs as well, including college education for your children and part or all of your spouse's retirement needs. In almost all cases, your beneficiary can use the cash benefits in the way he or she sees fit, without restriction. Your family might even be forced to go into debt simply to pay the expenses, like funeral costs, taxes, and medical bills that result from your death. A moment's reflection will tell you that the lack of sufficient life insurance coverage when a loved one dies can have devastating consequences for a family...consequences that can last for years. The bottom line is this: While Life Insurance is not always the insurance product at the forefront of your thoughts; Life insurance is always a friend in time of need. Following are some
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important basic terms that will help you in understanding Life Insurance better: 1) Beneficiary: People who have been named in the policy to be eligible for getting the earnings of your policy, after your death. 2) Cash or Surrender Value: The cash amount against which you can get a loan and which is available for withdrawal in case of urgency. If you choose to use this value, your death benefit goes down and increases the likelihood of policy lapsing. 3) Sum assured: It is the smallest amount assured to the policy owner. It plays an important part in deciding the amount paid as premium. In case of your death, the policy holder gets minimum of this amount. 4) Premium: The amount you have to pay to the insurer so as to avail life insurance protection. It depends on your age, kind of insurance policy selected and your health status. 5) Endowment policy: A policy which is a combination of life insurance protection as well as investment. It invests money in debt instruments. The life cover is in vogue till the policy matures. 6) Policy term: Period during which you have to pay premiums to enjoy life insurance protection. 7) Term policy: A policy providing just the life covers without any investment aspect. There are no returns on this policy, making it the cheapest policy. 8) Whole life policy: A policy providing life insurance protection till your death, as well as returns on the premiums paid. The premiums are invested in different debt instruments. 9) Unit link insurance policy: A policy with life insurance protection and returns on the premiums paid. Here you invest in debt, equity or a mixture of both. Policy holder has the option of deciding where his premiums are invested. This is one of the most expensive insurance plans in the market. 10) Policy holder: The person named on the policy bought. It may be the person paying the premiums or a person who receives an insurance policy as gift.
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11) Paid-up policy: A policy that is in vogue but there are no more premiums paid. 12) With profits policy: A policy where the insurance company awards the policy holder a part of its profits as bonus. Bonuses can be either yearly or on the expiry of the policy. 13) Policy loan: A loan given by the insurer to the policy holder from its general funds. It uses the policys cash value as collateral for the loan.
Providing protection The elementary purpose of insurance is to allow security against future risk, accidents and uncertainty. Insurance cannot arrest the risk from taking place, but can for sure allow for the losses arising with the risk. Insurance is in reality a protective cover against economic loss, by apportioning the risk with others. Collective risk bearing Insurance is an instrument to share the financial loss. It is a medium through which few losses are divided among larger number of people. All the insured add the premiums towards a fund and out of which the persons facing a specific risk is paid. Evaluating risk Insurance fixes the likely volume of risk by assessing diverse factors that give rise to risk. Risk is the basis for ascertaining the premium rate as well. Provide Certainty Insurance is a device, which assists in changing uncertainty to certainty. Is a savings and investment tool Insurance is the best savings and investment option, restricting unnecessary expenses by the insured. Also to take the benefit of income tax exemptions, people take up insurance as a good investment option.
Is Life Insurance A Good Choice? Experts agree that the primary reason to buy life insurance is to protect your dependents if you die. Though Whole Life Insurance and Universal Life Insurance policies do build cash values, much of your premium is used to fund the insurance element of your policy (the "mortality charge"). Thus, by comparison with stocks, bonds or mutual funds where all your money, minus expenses, is invested life insurance is an inefficient investment.
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However, if you are looking for an efficient way to fund your life insurance, Whole Life Insurance or Universal Life Insurance can be a smart way to build value. Here's how: Your policy's cash value can be accessed as cash (through a loan or by canceling your policy) or used within the policy to replace your premiums. Since the cash value grows on a tax-free basis, using your cash value to replace your premiums allows you to use tax-free dollars to maintain your insurance. You get to keep the money you would otherwise have to pay in taxes.For example, suppose your premium was $1000 and you had to earn $1300 before taxes to pay that premium. You would pay $300 in income taxes plus the $1000 to buy your insurance. However, if you paid the $1000 premium from your policy's tax-free cash value, you would pocket the $300 you would otherwise have to pay in taxes. Your life insurance policy would, in effect, have earned you an extra $300. However, this example assumes that your chief goal is to fund your life insurance, not earn money through an investment.
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business. In 1928, the Indian Insurance Companies Act was enacted to enable the Government to collect statistical information about both life and non-life business transacted in India by Indian and foreign insurers including provident insurance societies. In 1938, with a view to protecting the interest of the Insurance public, the earlier legislation was consolidated and amended by the Insurance Act, 1938 with comprehensive provisions for effective control over the activities of insurers. The Insurance Amendment Act of 1950 abolished Principal Agencies. However, there were a large number of insurance companies and the level of competition was high. There were also allegations of unfair trade practices. The Government of India, therefore, decided to nationalize insurance business. An Ordinance was issued on 19th January, 1956 nationalizing the Life Insurance sector and Life Insurance Corporation came into existence in the same year. The LIC absorbed 154 Indian, 16 non-Indian insurers as also 75 provident societies245 Indian and foreign insurers in all. The LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector. This millennium has seen insurance come a full circle in a journey extending to nearly 200 years. The process of re-opening of the sector had begun in the early 1990s and the last decade and more has seen it been opened up substantially. In 1993, the Government set up a committee under the chairmanship of RN Malhotra, former Governor of RBI, to propose recommendations for reforms in the insurance sector. The objective was to complement the reforms initiated in the financial sector. The committee submitted its report in 1994 wherein, among other things, it recommended that the private sector be permitted to enter the insurance industry. They stated that foreign companies be allowed to enter by floating Indian companies, preferably a joint venture with Indian partners. Following the recommendations of the Malhotra Committee report, in 1999, the Insurance Regulatory and Development Authority (IRDA) was constituted as an autonomous body to regulate and develop the insurance industry. The IRDA was incorporated as a statutory body in April, 2000. The key objectives of the IRDA include promotion of competition so as to enhance customer satisfaction through increased consumer choice and lower premiums, while ensuring the financial security of the insurance market. The IRDA opened up the market in August 2000 with the invitation for application for registrations. Foreign companies were allowed ownership of up to 26%. The Authority has the power to frame regulations under Section 114A of the Insurance Act, 1938 and has from 2000 onwards framed various regulations ranging from registration of companies for carrying on insurance business to protection of policyholders interests. In December, 2000, the subsidiaries of the General Insurance Corporation of India were restructured as independent companies and at the same time GIC was converted into a national re-insurer. Parliament passed a bill de-linking the four subsidiaries from GIC in July, 2002.
Life Insurance
Today there are 14 general insurance companies including the ECGC and Agriculture Insurance Corporation of India and 14 life insurance companies operating in the country. The insurance sector is a colossal one and is growing at a speedy rate of 15-20%. Together with banking services, insurance services add about 7% to the countrys GDP. A well-developed and evolved insurance sector is a boon for economic development as it provides long- term funds for infrastructure development at the same time strengthening the risk taking ability of the country. Yet, nearly 80 per cent of Indian population is without life insurance cover while health insurance and non-life insurance continues to be below international standards. And this part of the population is also subject to weak social security and pension systems with hardly any old age income security. This itself is an indicator that growth potential for the insurance sector is immense. A well-developed and evolved insurance sector is needed for economic development as it provides long term funds for infrastructure development and at the same time strengthens the risk taking ability. It is estimated that over the next ten years India would require investments of the order of one trillion US dollar. The Insurance sector, to some extent, can enable investments in infrastructure development to sustain economic growth of the country. The insurance sector in India has come a full circle from being an open competitive market to nationalization and back to a liberalized market again. Tracing the developments in the Indian insurance sector reveals the 360 degree turn witnessed over a period of almost two centuries.
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attractive for global insurance majors. The insurance market in India has witnessed dynamic changes including entry of a number of global insurers. Most of the private insurance companies are joint ventures with recognized foreign institutions across the globe. Life Insurance The total capital of the life insurers at end March 2009 stood at `18253.04 crore, with additional infusion of capital to the extent of `5956.62 crore. There had been no infusion of capital in the case of LIC, which continued to be `5 crore. The infusion of additional capital of Rs. 5956.62 crore comprised of Rs. 987.05 crore from new companies and remaining Rs. 4969.57 crore from existing private insurers. Table 1: Paid Up Capital of Life Insurers Insurer LIC Private Sector Total March 31,2008 5.00 12291 12296 Additions During 2008-09 0.00 5956 5956 (RS. Crore) March 31, 2009 5.00 18248 18253
New policies underwritten by the life insurers were 509.23 lakh in 2008-09 as against 508.74 lakh during 2007-08 showing a marginal increase of 0.10 per cent. The private insurers exhibited a growth of 13.19 percent, which is much lower than 67.40 per cent recorded in the previous year. LIC, showed a negative growth for the second consecutive year at 4.52 percent as against its previous year negative growth of 1.61 per cent. In terms of number of policies underwritten, private insurers have increased their market share from 26.07 per cent in 2007-08 to 29.48 per cent in 2008-09. To that extent, LIC has lost its market share. All life insurance companies in India have to comply with the strict regulations laid out by Insurance Regulatory and Development Authority of India (IRDA). Therefore there is no risk in going in for private insurance players. In terms of being rated for financial strength like international players, only ICICI Prudential is rated by Fitch India at National Insurer Financial Strength Rating of AAA(Ind) with stable outlook indicating the highest claims paying ability rating. Life Insurance Corporation of India (LIC), the state owned behemoth, remains by far the largest player in the market. Among the private sector players, ICICI Prudential Life Insurance(JV between ICICI Bank and Prudential PLC) is the largest followed by Bajaj Allianz Life Insurance Company Limited (JV between Bajaj Group and Allianz).Among others, Kotak Life Insurance emerging as a one of the best product provider in the current market. It has been estimated that customer growth of Kotak Life Insurance is better than any private insurance company in India. The private companies are coming out with better products which are more beneficial to the
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customer. Among such products are the ULIPs or the Unit Linked Investment Plans which offer both life cover as well as scope for savings or investment options as the customer desires. Further, these type of plans are subject to a minimum lock-in period of three years to prevent misuse of the significant tax benefits offered to such plans under the Income Tax Act. Hence, comparison of such products with mutual funds would be erroneous. As per the current (Mar 06) FDI norms, foreign participation in an Indian insurance company is restricted to 26.0% of its equity / ordinary share capital. The Union Budget for fiscal 2005 had recommended that the ceiling on foreign holding be increased to 49.0%.The government approved the much-awaited comprehensive Insurance Bill that seeks to raise foreign direct investment (FDI) cap in private sector to 49 per cent from 26 per cent. Innovative products, smart marketing and aggressive distribution. That's the triple whammy combination that has enabled fledgling private insurance companies to sign up Indian customers faster than anyone ever expected. Indians, who have always seen life insurance as a tax saving device, are now suddenly turning to the private sector and snapping up the new innovative products on offer. The growing popularity of the private insurers shows in other ways. They are coining money in new niches that they have introduced. The state owned companies still dominate segments like endowments and money back policies. But in the annuity or pension products business, the private insurers have already wrested over 33 percent of the market. And in the popular unit-linked insurance schemes they have a virtual monopoly, with over 90 percent of the customers. The private insurers also seem to be scoring big in other ways- they are persuading people to take out bigger policies. For instance, the average size of a life insurance policy before privatization was around Rs 50,000. That has risen to about Rs 80,000. But the private insurers are ahead in this game and the average size of their policies is around Rs 1.1 lakh to Rs 1.2 lakh- way bigger than the industry average. Buoyed by their quicker than expected success, nearly all private insurers are fast- forwarding the second phase of their expansion plans. No doubt the aggressive stance of private insurers is already paying rich dividends. But a rejuvenated LIC is also trying to fight back to woo new customers Quoting Mckinsey report, he said the market is forecast to grow by 17% per annum and reach a size of Rs 3,435 Billion- Rs 4 122 Billion by 2012. The private players growth is driven by significant capital infusion to build distribution scale. Since 2000, the level playing field has allowed them to compete effectively against the public sector LIC. While these players have opportunities to increase share, key challenges facing them are retention of talent ( high churn of employees), no benchmarks available for costing and outdated risk tables ( more than a decade old). Like at the global level, there are other challenges like climate change, terrorism, regulatory intervention, inflation, legal risks etc., Insurance is every bodys need. But, nobodys want. That is why life insurance is never bought but sold. Everyone thinks, he or she is safe and has no risks in life. This poses challenges in selling products with cover well as promising high return on the investment. Luckily, India scores high over China when it comes to demographic profile (young population), premium growth rate, penetration level ( 4% of GDP) and as an investment destination. India is among the fastest growing markets and its share has been growing rapidly over the years except the
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marginal decline in 2008. Rising affluence is expected to increase the insurable population significantly by 2015. By then, 100 million people are estimated to be added to the working population.
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smaller insurance company (or one in a niche industry), there is the chance that person will be enticed away by larger companies looking to move into a particular market. Power of Buyers. The individual doesn't pose much of a threat to the insurance industry. Large corporate clients have a lot more bargaining power with insurance companies. Large corporate clients like airlines and pharmaceutical companies pay millions of dollars a year in premiums. Insurance companies try extremely hard to get high-margin corporate clients. Availability of Substitutes. This one is pretty straight forward, for there are plenty of substitutes in the insurance industry. Most large insurance companies offer similar suites of services. Chances are there are competitors that can offer similar services. In some areas of insurance, however, the availability of substitutes are few and far between. Companies focusing on niche areas usually have a competitive advantage, but this advantage depends entirely on the size of the niche and on whether there are any barriers preventing other firms from entering. Competitive Rivalry. The insurance industry is becoming highly competitive. The difference between one insurance company and another is usually not that great. As a result, insurance has become more like a commodity - an area in which the insurance company with the low cost structure, greater efficiency and better customer service will beat out competitors. Insurance companies also use higher investment returns and a variety of insurance investment products to try to lure in customers. In the long run, we're likely to see more consolidation in the insurance industry. Larger companies prefer to take over or merge with other companies rather than spend the money to market and advertise to people.
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Reliance Life Insurance Co Ltd Total collected was Rs 2,792.76 crore and its market share went up to 2.96% from 1.23% a year back. It now ranks 5th in new business premium and 4th in number of new policies sold in 2007-08. HDFC Standard Life Insurance Co Ltd with an income of Rs 2,680 crore in FY2007-08, registering a year-on-year growth of 64%. Its market share is 2.88% and it ranks 6 th among the insurance companies and 5th amongst the private players. Birla Sun Life Insurance Co Ltd market share of the company increased from 1.22% to 2.11% in 2007-08. The company moved to the 7th position in 2007-08 from 8the a year before, pushing down Max New York Life insurance company. Max New York Life Insurance Co Ltd has reported growth of 73% in 2007-08. Total new business generated was Rs 641.83 crore as against Rs 387.51 crore. The company was pushed down to the 8th position from 7th in 2007-08. Kotak Mahindra Old Mutual Life Insurance Ltd the fiscal 2007-08, the company reported growth of 80%, moving from the 11th position to 9th. It captured a market share of 1.19% in 2007-08. Last year the company doubled its branch network to 150 from 74. Aviva Life Insurance Company India Ltd ranking dropped to 10th in 2007-08 from 9th last year. It has presence in more than 3,000 locations across India via 221 branches and close to 40 bancassurance partnerships. Aviva Life Insurance plans to increase its capital base by Rs 344 crore. With the fresh investment, total paid-up capital of the insurer would go up to Rs 1,348.8 crore.
interest must exist insurance on a person is involved. The concept requires that the insured have a "stake" in the loss or damage to the life or property insured. What that "stake" is will be determined by the kind of insurance involved and the nature of the property ownership or relationship between the persons.
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3. Utmost good faith the insured and the insurer are bound by a good faith bond of
behalf of the insured; for example, the insurer may sue those liable for insured's loss
6. Causa Proxima or Proximate Cause the cause of loss (the "peril") must be covered
under the insuring agreement of the policy, and dominant cause must not be excluded. Parties to contract There is a difference between the insured and the policy owner (policy holder), although the owner and the insured are often the same person. For example, if Ajay buys a policy on his own life, he is both the owner and the insured. But if Smita, his wife, buys a policy on Ajay's life, she is the owner and he is the insured. The policy owner is the guarantee and he or she will be the person who will pay for the policy. The insured is a participant in the contract, but not necessarily a party to it. However, "insurable interest" is required to limit an unrelated party from taking life insurance on, for example, Smita or Ajay. The beneficiary receives policy proceeds upon the insured's death. The owner designates the beneficiary, but the beneficiary is not a party to the policy. The owner can change the beneficiary unless the policy has an irrevocable beneficiary designation. With an irrevocable beneficiary, that beneficiary must agree to any beneficiary changes, policy assignments, or cash value borrowing.
Term Insurance
Permanent Insurance
Whole Life Insurance Universal Life Insurance Variable Life Variable Universal Life
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Why It's Called "Term. Term life insurance is called "term" because it provides coverage for a specific period or term (most often 1, 5, 10, 15 or 20 years). For this reason, it is also called "temporary" insurance. If death occurs during the term, the policy pays cash benefits to the beneficiary. However, once the term is over, and if the policy is not renewed, the coverage ceases. If death occurs after the coverage ceases, no cash benefits are paid out. Term insurance is the most straightforward type of life insurance and the easiest to understand. Sometimes it is called "pure" insurance, since the policy has no financial investment value and most of your premium goes to pay for coverage, with only a small amount used to pay the insurance company's costs. If you are looking for the maximum amount of coverage for your dollar, term life insurance will give you the most "bang for your buck". Different Terms for Different Needs All term life insurance policies cover you for a specific amount of time - the term. The term that's right for you depends on how old your children are, how many years before you retire, and other factors. Many people like to know they're insured until they're ready to retire, usually at age 65. Many just want to have insurance until their youngest child graduates from college, and so they make sure their life insurance coverage includes money to pay for all of the college tuition. Most experts agree that you should carry insurance at least until your youngest child is 18. So if your child is 3 now, you would want to carry your insurance for at least 15 years. But that doesn't mean you have to lock into a 15-year term - you could instead buy an annual renewable policy and renew it for 14 years in a row. You should compare the total 15-year cost of the annual renewable policy and the 15-year term policy, making adjustments for the time and value of money, to determine what the best value is for you.
Advantages of Term Life Insurance: WHAT IT DOES It pays a death benefit to the beneficiary you name. It will cover your final expenses and provide a lump sum for your dependents. It covers you for the full amount of life insurance you choose. It can be convertible and renewable depending on the policy. It gradually increases annual premium as you get older. It traditionally works well to meet temporary insurance needs. It doesn't provide a cash value account for some later point such as retirement. It doesn't provide you permanent life insurance protection.
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Here's an overview of the different types of term policies available and, most importantly, a look at what happens when the term is over. Annual renewable term insurance. With annual renewable term insurance, your policy is automatically renewable each year up to a specific age limit, often 65, but sometimes older. Since the chances of your dying increase statistically the older you get, your premiums go up each year as you renew. However, if you buy your policy when you are young and unlikely to die, you can obtain substantial coverage for an inexpensive premium. Renewable term insurance. With renewable term insurance, the insurance company automatically allows you to renew your coverage after the term of the policy is over (generally 5 to 20 years), even if your health has deteriorated. This is the same way annual renewable works, but for a longer period of time. Since a lot can happen to your health in 5 or 20 years, renew ability can be a valuable feature. But since it involves a greater financial risk for the insurance company, renewable term coverage generally costs a bit more than annual renewable policies. The conditions associated with renewable term may differ from company to company. For example, though you are guaranteed the right to renew at the end of your term, you may or may not be able to renew for the same amount of coverage or for the same term. Moreover, your premiums will almost definitely go up upon renewal. Level premium term insurance. Level premium term insurance guarantees your premium will stay the same each year for the term of your policy, generally 5 to 20 years. Insurance companies keep your premiums the same by charging you an average of the premiums they would ordinarily charge you with an annual renewable policy. As a result, you will probably pay more in the early years and less in the later years than you would if you had an annual renewable policy. You will probably also encounter a big increase in premiums at the end of your term when you apply for a new insurance policy. The big advantage of level premium term insurance is that your premiums stay the same throughout your policy, even as you get older. However, if for some reason you change policies in the early years - when your level term policy is most expensive - you will end up paying more than you need to for coverage. Decreasing term insurance. With decreasing term insurance, your cash benefits decrease each year while your premiums remain level for the duration of the term. Decreasing term is typically used to cover an item whose costs decrease over time, such as your home's mortgage. It isn't a wise choice for your general life insurance needs which, due to the effects of inflation, tend to increase over time. Convertible term insurance. Convertible term insurance enables you to convert your term insurance into any of the other types of insurance policies offered by the issuing insurance company. Convertibility can be an advantage if your insurance needs change over time, as they are likely to do. And, since it
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involves greater risk for the insurance company, it generally costs more than annual renewable term. What's "Permanent" About This Insurance? As its name implies, permanent life insurance is insurance you keep for life, (also known as whole life). It doesn't expire unless you stop paying premiums. While you buy term insurance to cover you for a specified period of time to pay benefits if you die before your children graduate from college, for example or before your spouse is eligible for retirement benefits you buy permanent coverage to keep permanently. Permanent life policies, most commonly Whole Life and Universal Life, pay cash benefits whenever you die, as long as the policy is in force. Benefits are not limited to a specific term. Additionally, permanent policies accumulate cash value, so you can borrow against or "cash in" the current value of the policy while you're still alive to fund your retirement or pay for your children's education, for example. Of course, these benefits come at a price. Permanent life insurance coverage typically costs significantly more in the early years of the policy than term life for the same amount of coverage, and becomes more economical later. What Is Whole Life Insurance? Whole Life Insurance remains in force your entire life and pays out a cash benefit to your beneficiary on your death whenever it occurs. Thus, it is well-suited to cover needs that do not diminish during your lifetime, and may even grow, such as estate settlement costs and taxes. Generally, Whole Life Insurance premiums don't change. In a typical term life policy (except for level term), the premiums are lower in the early years, when you're less likely to die and the insurance company is less likely to have to pay a claim. The premiums - and your risk of death and the insurance company's risk of having to pay out - go up as you get older. But with Whole Life Insurance, the variable costs of insuring your life are averaged out over time. Whole Life Insurance policies develop a cash value that grows on a tax-free basis over the life of the policy. You can access this cash value either by canceling your policy or by borrowing against its current value. Your cash value's rate of growth depends on a number of factors, including the investment success of the issuing insurance company. What Is Universal Life Insurance? Universal Life Insurance gives you the control over the key elements of your policy: the premium, the life insurance protection, and where the insurance company invests your policy's cash value. Your financial resources and need for either growth or insurance protection will change over your life. Universal Life insurance gives you the flexibility to tailor these elements of your policy to your current needs. For example, if finances are tight, you can change the amount you pay in premiums and, in some cases, stop paying premiums altogether. Conversely, if you're in a good financial period, you can increase your premiums, which will help you to increase the cash value of your policy. If your need for life insurance protection is greater than your need for growth, you can increase your insurance protection and decrease your policy's cash value. Similarly, if your children are grown and your need for insurance protection has diminished, you can direct more of your premium
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toward building your policy's cash value. With variable universal life insurance, you can control how your money is invested by selecting the financial vehicle stocks, bonds, mutual funds, etc. used to build your policy's cash value from among the insurance company's offerings. Variable Life Variable life insurance is designed to combine the traditional protection and savings features of whole life insurance with the growth potential of investment funds. This type of policy is comprised of two distinct components: the general account and the separate account. The general account is the reserve or liability account of the insurance provider, and is not allocated to the individual policy. The separate account is comprised of various investment funds within the insurance company's portfolio, such as an equity fund, a money market fund, a bond fund, or some combination of these. Because of this underlying investment feature, the value of the cash and death benefit may fluctuate, thus the name "variable life". Variable Universal Life Variable universal life insurance combines the features of universal life with variable life and gives the consumer the flexibility of adjusting premiums, death benefits and the selection of investment choices. Unfortunately, all the investment risk lies with the policy owner; as a result, the death benefit value may rise or fall depending on the success of the policy's underlying investments. However, policies may provide some type of guarantee that at least a minimum death benefit will be paid to beneficiaries.