Insurance, Part 4
Question 1: Explain some of the advantages and disadvantages of whole life insurance.
Answer 1: Some of the advantages to whole life insurance are that individuals save regularly with periodic payments and there are tax breaks for these earnings. Premium payments can be budgeted over a long time, making them more affordable and eliminating the possibility of being denied life insurance at a later point in time. Premium payments contribute toward the insured’s estate regardless of lifespan. However, whole life insurance does not provide yields as high as other investment types and offer less death insurance per premium dollar than term life insurance.
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Question 2: Explain how different insurance company ownership structures affect premiums.
Answer 2: Depending on how a life insurance company’s ownership is structured, there can considerable differences in insurance policy premiums. For all intents and purposes, the policy holders of a mutual company own the company. If mutual companies are managed well, policy holders receive income or periodic dividends that reduce their premiums. Shareholders of stock companies own the company but they may or may not own policies, and they directly receive any dividends paid. Because of the difference in ownership types, the policy premiums for stock companies should be lower than those issued by mutual companies.
Question 3: Explain what universal life insurance is and how it works.
Answer 3: Universal life insurance is a permanent cash value insurance that combines death benefits with a tax-sheltered savings/investment account that pays interest; this interest is usually paid at a competitive money market rate. Some of the premium pays administrative fees; the remainder is added to the cash value of the policy where it earns a return rate. Although this earnings rate varies with market yields, there is a guaranteed minimum rate. As long as there is enough in the savings part to cover death protection, the policy will remain in effect. If the cash value becomes very large, insurance coverage must be increased in order for the policy to keep its favorable tax treatment.
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