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What are the basic
types of life insurance and annuities? |
Term Life Insurance
Term life insurance provides death benefit protection
for a term of one or more years. Death benefits are paid only
if the insured dies within the specified term of years. Term
life insurance typically provides the largest immediate death
benefit for each premium dollar.
Most term life insurance policies are renewable
for one or more additional years even if the insured's health
has changed. Each time the policy is renewed for a new term,
premiums increase.
Term life policies generally contain a conversion
feature. This enables the policyowner, prior to the final
conversion date, to exchange the term life policy for a permanent
plan of life insurance such as whole life or universal life,
without evidence of insurability. Premiums for the new policy
will be higher than what the policyowner had been paying for
the term life insurance.
Whole Life Insurance
Whole life insurance provides death protection,
as its name suggests, for the whole of life. Typically the
policyowner would pay the same premium for as long as the
insured should live. Premiums can be several times higher
than premiums you would pay initially for the same amount
of term life insurance, but they are smaller than the premiums
you would eventually pay if you were to keep renewing the
term life insurance policy until the insured's later years.
Although you pay a higher premium initially
for whole life than for term life insurance, whole life policies
develop cash values which may be available to the policyowner.
Additionally, the policy's cash value can be
used as collateral for a loan. If the policyowner borrows
from the policy, interest is charged at the rate specified
in the policy. Any money owed on a policy loan is deducted
from the benefits upon the insured's death, or from the cash
value if the policyowner surrenders the policy for cash.
Universal
Life
Universal Life has several unique features not
found in whole life policies. Specifically, the policyowner
is provided with the flexibility to vary the timing and amount
of premiums and the face amount, depending upon present needs.
Cash values are a function of past and present
premium payments, interest crediting rates, mortality charges
and expense charges. The interest rate credited to the policy
cash value is based on current rates of interest, subject
to a stated guaranteed minimum interest rate. In addition,
current mortality and expense charges are deducted from the
accumulation value, but the only guarantee is that these charges
will not exceed certain maximums. As a result, the policyowner
bears more of the risk of adverse trends in mortality and
expenses than if a traditional whole life insurance policy
were purchased. On the other hand, if the insurance company's
mortality costs and expenses improve, the policyowner may
benefit through lower charges.
Second-To-Die
or Survivorship Life Insurance
This is one policy that covers the lives of
two insureds, typically a married couple. The death benefit
is payable only when the last of two insureds dies. Typically
this policy type is used to provide liquidity to pay estate
taxes when the second spouse dies. Other uses of this form
of life insurance include: to protect dual income families,
to provide key person business insurance, to replace an asset
gifted to charity and to fund a business buyout.
Because of the timing of the death benefit payment,
the premium charges for survivorship life insurance plans
are generally lower than those of comparable single life plans.
Second-To-Die life insurance policies are available
in whole life, universal life and variable life versions and
can be funded on either a single premium or annual premium
basis.
Variable
Life Insurance
This product combines permanent life insurance
protection with a flexible investment plan that allows the
policyowner to choose to invest premiums and cash values among
a broad range of investments. Under such a policy, there is
no guaranteed minimum cash value. The policyowner bears all
the investment risk associated with the policy. There are
two types of variable life insurance - variable whole life
and variable universal life.
Under a variable whole life policy the death
benefit may increase or decrease depending on investment performance,
but will not fall below the guaranteed minimum, provided the
required premium is paid.
Variable universal life policies (VUL) provide
the policyowner with the flexibility to vary the timing and
amount of premiums and the face amount of coverage, much like
the fixed interest rate universal life policy. The primary
difference is that under the VUL design the policyowner directs
the investment of cash values among a variety of investments
and assumes all of the investment risk. In addition, most
variable universal life policies do not guarantee a minimum
death benefit.
Annuities
Annuities are either deferred or immediate.
- Deferred annuities provide income payments
that begin at a later date. The primary reason for purchasing
a deferred annuity is to accumulate money on a tax-deferred
basis, which can then provide an income at a later date.
- Immediate annuities are contracts which begin
paying installments generally within 12 months of the premium
payment. The main reason for purchasing an immediate annuity
is to obtain a regular income, most frequently for retirement
purposes.
Deferred annuities can be either single
premium or flexible premium.
- Single premium contracts, commonly referred
to as Single Premium Deferred Annuities (SPDAs), do not
permit additional premiums after the initial premium.
- Flexible premium contracts on the other hand
permit the contract owner to make additional contributions
after the initial premium.
Annuities may be either fixed or variable.
- A fixed annuity provides for tax-deferred
accumulation at a fixed rate of interest.
- The value of a variable annuity is dependent
upon the performance of an underlying portfolio of investments
such as stocks, bonds and money market accounts.
Income Tax Considerations of Non-Qualified
Annuities
- Under current tax law, a contract owner is
not taxed on increases in the value of an annuity contract
until distributions occur, either as a lump sum, withdrawal
or as annuity payments. For a lump sum payment received
as a total surrender, the recipient is taxed on the portion
of the payment that exceeds the cost basis of the contract.
- Withdrawals are taxable up to the amount
of contract earnings.
- For annuity payments, the taxable portion
is determined by a formula which establishes the ratio that
the cost basis of the contract bears to the total value
of the annuity payments for the term of the annuity contract.
- Note: Annuity distributions that begin prior
to age 59 1/2 may be subject to a 10% federal penalty tax.
- The above information does not necessarily
apply to Qualified contracts (contracts used under various
types of Qualified retirement plans), separate tax withdrawal
penalties and restrictions apply.
Note: Security Mutual Life Insurance
Company of New York does not provide tax, legal or accounting
advice. The above information is based upon the Company's
understanding of current federal income tax law applicable
to annuities in general. Purchasers are cautioned to seek
competent tax advice regarding the tax consequences of
annuities.
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