3 min to read
9 Things to Know About Insurance
I explain the different types of Insurance or annuities that exist.
Life Insurance
Universal Insurance
A form of permanent insurance which is flexible. By that I mean the policy owner can change both their premiums and death benefit.
Term Life Insurance
This is pure life insurance with no investment features. If you die while covered a beneficiary gets paid. It’s as simple as that. Normally you pay for a one-year term and the policy premiums get more expensive as you get older. People over 65 usually can’t purchase this.
Whole Life Insurance
This is permanent insurance unlike Term life insurance. As long as you are paying your premiums you’re covered. The premiums that you have to pay are higher than what you would see in term life insurance as a result. Any extra amount paid due to the higher premiums is known as your cash value and gets invested in the firms general account. It grows with interest and is used to offset the rise in premiums that would occur due to you aging. That’s part of how they’re able to keep the premiums level or “straight”.
Variable Life Insurance
This is very much like whole life insurance. However, the money is invested in a separate account instead of the firm’s general account. Unlike whole life insurance there is no guaranteed growth rate, the growth rate is dependent on the performance of the securities in the account.
Annuities
A derivative contract sold by insurance companies where the annuitant(policy owner) makes regular payments over time or makes a lump sum payment. At a later date the annuitant receives payments - this typically happens upon retirement. There are two payment methods: life annuity, life annuity period certain.
Variable Annuity
The payments during the annuity period are variable based on the value of the securities underlying the contract.
Variable Payout Period Risk
The Insurance Company assumes mortality and expense risk. The policyholder could live longer than anticipated and the Insurance Company’s expenses could rise faster than they anticipated.
The Policy Owner on the other hand assumes the investment risk and market/purchasing power risk. The investments could do poorly causing the payout to bbe smaller or not beating inflation.
Fixed Annuity
Payments are level and fixed throughout the annuity period.
Equity Indexed Annuity
An Annuity contract that is tied to an index like the S&P 500. There is a participation rate which is the max percentage of the performance’s index that the annuitant receives. In other words this is a cap on how much growth you can receive. For instance, if there is a 90% participation rate and the S&P goes up by 10% then you will only receive a 9% gain in that year. There is also a max that the annuity is willing to factor into the value of that year. They also provide a minimum return to mitigate losing money in a bear market.
The value within the annuity is compounded each year and there are a few different methods that are used to determine the gain.
Annuity Taxation
The money put into the account is taxed up front, so any withdrawal of principal is just a return of capital. However, annuities are LIFO, so the first thing pulled out is the growth. Annuities are taxed at normal income rates, and are subject to a penalty if withdrawn before 59 1/2.
