Whole, Universal, and Variable Life Assurances - Research Paper Example

Introduction In order to protect the financial well being of dependents after the death of the ‘bread winner’ in the family, a life insurance policy comes in handy. Life insurance is defined as a financial commodity that is used in creating a financial resilience to inevitable events or accidents resulting in death of a person. The person who purchases the life insurance pays certain amounts of money regularly. These payments are known as premiums. The payment of premiums continues up to the expiry of the policy or when the payment of the policy is stopped by the insured person due to his/her death or due to inability to continue paying for the policy. However, this may depend with the type of policy as will be discussed later in this text. The dependants who are left behind are the ones who benefit from this venture as they are cushioned significantly from the loss of a loved one. Also important is that it can enable the bereaved family to maintain their standards of livening even after the death of their dependable person. Additionally, other debts that were pending before the death of the dependable person can be paid back. Its acquisition, gives the holder of the life policy a peace of mind as the future of the ones left behind will still look bright as the policy payment I usually lump sum. Therefore, the first step in finding a life policy is to know all about this kind of insurance practice. (Mark, 2006) There are two main kinds of life assurance that are in providence. They include the permanent life policy and the temporary type. The former is subdivided into the Whole, Universal and Variable assurances. The temporary kind of insurance is characterized by a time limit in which premiums are to be paid. Once the period of cover elapses, then the cover seizes in application. There is no growth in the cash that was being invested as premiums, thus the policy holder gets back the money he/she invested in to the insurance program. In the permanent type of assurance, the insured makes premium payments until his/her death or to a certain age that would have been prescribed by the insurance company as unproductive for the policy holder. In this type, the invested money in form of premiums grows in terms of interest. The policy holder due to other circumstances may decide to discontinue the policy and consequently obtain his/her money. This money is termed as the surrender value. In addition, the policy is different in the sense that it can allow the insured to borrow the money while the policy is still functioning. The permanent policy has other policies incorporated in it and one of them is the whole life policy. This policy allows the insured to borrow the money while the policy is still functioning. The premiums are the same in the entire period of being insured. However, upon maturity from subsequent death, the benefit accruing from the premiums paid is what is given to the beneficiaries. The other sub part of the permanent policy is the Universal life assurance. This insurance type has a premium that can be manipulated during the course of the policy. Hence it is not constant and yields high interests. Upon maturity, the surrender value paid is equivalent to the remainder cash in the account. In the Variable life insurance, upon maturity the surrender value is equivalent to the cash account balance. The money invested has a high potential growth through investments done by the insurer. However, the loss in some money is inevitable due to occasions where stock trading taken up by the insurer fall, therefore risky policy. (Tuner, 2006) The important considerations to be put into account before choosing a type of policy should be: The cost of the policy in terms of premium price to be paid. If one is looking for a temporary insurance cover, then a comparison in price of at least three insurance providers of that kind should be scrutinized. This is because there exist a few insurance providers of the temporary type due to its low capabilities of capitalization by the insurers. Insurance is a business and therefore the companies venture into area where they can make more money, which is in the permanent assurance. The comparison in cost between different insurance companies would give a guide to the best optional price to settle at. This is in relation to the financial strength of the buyer of the policy. Temporary premiums tend to be cheaper than permanent life insurance premiums. This is because the temporary policy do not earn in additional interests. Therefore, this type of policy would be best for an old person since age plays a major factor in the premium quote. This is looked upon in the sense that an old person’s life is nearing its end and he/she intends to cash in quickly. This then discourages on from the permanent life policies which are more expensive. Looking at the case of the whole life policy which has a fixed and high premium, that when payment of the premiums seizes by he insured due to financial difficulties, sees it being canceled with out a refund. An important factor also to consider is the risks involved in choosing a specific life policy. The temporary policy is not linked to any risks as the money invested is what is got back at the end of the transaction. However, in the permanent policies is where the risks lie. This is because these policies rely on investment in the stock market to capitalize on its gains. In cases where the market stocks depreciate, then the cash balance in a policy holder’s account is reduced. This becomes risky to operate a permanent life insurance policy especially in this times when we are facing a global financial melt down. Lodging of returns by the assurance company should be another factor to be considered. Though, life insurance premiums are not taxed by the government in the US, circumstances can occur where it is imposed on the money of a policy holder. This is characteristic in premiums that as not constant in pay; specifically the universal policy. Huge amounts of premium could make the policy be said as a “Modified Endowment Contract”. This according to the Internal Revenue service means that the policy can be subjected to taxation. This consequently reduces the surrender value of to the beneficiaries of the policy. (LII, 2009) In conclusion therefore, a temporary life policy would be of my choice because of its cheap cost. According to the findings by Life Search, the cost of temporary life insurance has seen it slashed by 50% over the decade. For £100,000 worth of cover, a 30 or so year old man and non-smoker can foresee paying around £8 a month, where as a woman would cash out just £7 a month. This fall in price of life assurance is because of the reduced mortality rate of both males and females, with female’s lower mortality rates providing them access to significantly lower premiums. (Johns, 2008) References: Johns C., (2008). What Make Insurance Premiums Rise? Buzzle.com. Retrieved on April 24th 2009. From http://www.buzzle.com/articles/what-makes-life-insurance-premiums-rise.html Mack J., (2006). What is Life Insurance? Buzzle.com. Retrieved on April 24th 2009. From http://www.buzzle.com/editorials/7-27-2006-103655.asp Tuner O., (2006). Life Insurance explained. Buzzle.com. Retrieved on April 24th 2009. From http://buzzle.com/editorials/8-27-2006-106735.asp Legal Information Institute (LII) (2009) Title 26: Internal Revenue Code. Cornwell University Law School. Retrieved on April 24th 2009. From http://www4.law.cornell.edu/uscode/html/uscode26/usc_sup_01_26.html Read More