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Life Insurance Types

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1. Define the various types of life insurance.

2. How are premiums and dividends taxed? How are death benefits taxed?

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Solution Summary

The expert defines the various types of life insurance. How premiums and dividends are taxes are determined.

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The most common type of insurance is term insurance which can otherwise be known as "temporary" insurance. Term life builds no cash value and once either the term is up or you stop paying the insurance, the policy is over. If you die, your heirs will benefit from a tax free payout of the face amount of the policy. Term insurance is very attractive for younger individuals, but still can find its place in a boomer's life insurance plan. There are four basic types of term life insurance:
? Annually renewable term life insurance. Annual Renewable and Convertible Term is term insurance that is automatically renewable at the end of each one-year term period, with generally increasing premiums.
? Convertible term life insurance. It allows you to convert your policy to a whole life insurance policy with no additional underwriting.
? Guaranteed level term life insurance . Guaranteed Level Term insurance offers term insurance protection for the term of the policy with guaranteed level premiums and may be renewed thereafter without evidence of insurability at an annually increasing premium scale.
? Return of premium term life insurance. Return of premium term life insurance (ROP) is unique in that it allows the policy holder to get a full refund of all the premiums paid at the end of the contract. This type of term life insurance policy is a bit more expensive than regular term life insurance, but the premiums are designed to remain level.

Permanent life insurance has the ability to provide coverage for your entire life and will stay in force so as long as you continue to pay for the premium or the built up cash value pays the premium for you. The cash value is the distinguishing factor between permanent life insurance and term life.
Whole life insurance
Whole life insurance is a type of insurance that remains in place for your entire lifetime. Unlike term life, it does not expire, never needs to be renewed, and cannot be revoked. When you take out a whole life policy, the premium will stay level. As you continue to pay your premium, the cash value should build up and as your dividends are reinvested.
Universal life insurance
Another form of permanent life insurance is universal life. Universal life is similar to whole life except that it separates the three components of ...

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