Question

1. Explain the difference between term and cash value life insurance. Discuss the difference between the following cash value life insurance types: ordinary, variable, and universal.

Answer 1

Term Insurance is a type of life insurance policy that provides coverage for a certain period of time, or a specified "term" i.e , for a number of years. If the insured dies during the time period specified in the policy and the policy is active, then a death benefit will be paid.

Cash value insurance is permanent life insurance because it provides coverage for the policyholder's life. Traditionally, cash value insurance has higher premiums than term insurance because of the cash value element. Most cash value life insurance policies require a fixed level premium payment, of which a portion is allocated to the cost of insurance and the remaining deposited into a cash value account. The cash value account earns a modest rate of interest, with taxes deferred on the accumulated earnings.

The decision of whether an individual should go for a term or a cash value insurance depends on the requirements and maturity of an individual. If someone believes that some cash payout may be required in the future, than he may opt for a Cash value. Or if someone wants to pay lower premium just for insuring his life, the term insurance is always better.

	ORDINARY LIFE INSURANCE	VARIABLE LIFE INSURANCE	UNIVERSAL LIFE INSURANCE
Duration	Life	Life	Life
Guaranteed Death Benefit?	Yes	Yes	Yes
Guaranteed Cash Value?	Yes	No	Protected from risk, but can be depleted to pay premiums
How Cash Grows (or Shrinks)	Earns interest at pre-determined rate	Sub-accounts - pool of investor funds offered by insurer	Fixed interest rate
Premiums	Level	Level	Varies, up to the customer (subject to federal tax laws)
Notes	No risk compared to other permanent types, but there may be better investment options	Risk of holding expensive insurance policy with little to no cash value	-