This article focuses on life insurance. It provides an overview of the U.S. life insurance industry. The main types of life insurance, including term life insurance and permanent life insurance, will be described. The various forms of permanent life insurance, such as whole life, variable life, and universal life, will be summarized. The main components of life insurance, including death benefits, beneficiaries, brokers, riders, premiums, and insurance illustrations, are addressed and the issues related to state-based regulation of the life insurance industry are discussed.
Keywords Insurance Illustrations; Life Insurance; Permanent Life Insurance; Term Life Insurance; Universal Life; Variable Life; Whole Life
Life insurance is a financial instrument used to help protect assets, accumulate long-term savings, and ensure a secure retirement. Life insurance, which is offered in two main forms including term or permanent, protects individuals, families, and businesses against risks and life-crisis such as premature death of a family member or key employee. The main components of life insurance include policyholders, premiums, brokers or agents, primary beneficiaries, and death benefits. Factors that influence the cost of life insurance include the policyholder's age, health, family medical history, job risk factors, life-style habits, value of the policy, policy riders, and the term or permanent classification of the policy. A common form of policy rider is the accelerated death benefit. The accelerated death benefit, which became common as a tool to finance the costs associated with AIDS care, allows the policyholder to receive the proceeds of his or her life insurance policy prior to their death. Death benefits are tax-deductible while life insurance premiums are not. Factors that influence an individual or business' life insurance choice include the transparency, flexibility, and performance of the life insurance product, the individual or business' needs, and the products available in their geographic region and price bracket (Daily, 1992).
According to the American Council of Life Insurers, the U.S. life insurance industry, which began in the eighteenth century, manages 28 percent of the assets of employer-based retirement plans in America. The life insurance industry, which currently has over $4 trillion invested in the U.S. economy, practices long-term economic investment for its policyholders and shareholders. The life insurance industry is one of the largest corporate sources of investment capital. Projects financed through life insurance companies include the Sears Tower and the Empire State Building. The life insurance industry, as represented by the American Council of Life Insurers, promotes itself as serving a dual function for America: Providing long-term financial protection for families and long-term financial growth for the national economy.
State governments are primarily responsible for overseeing and regulating life insurance companies and agent or broker licensing requirements, market conduct and financial examinations, and product approvals. The state governments' interest in and intense oversight and regulation of the life insurance industry is motivated by two factors. First, state governments function as an agent of consumer protection. Second, state governments regulate life insurance to ensure that Americans will have sufficient retirement income and savings to remain independent of government support and subsidy.
The following section provides an overview of the U.S. life insurance industry. This section will serve as the foundation for later discussion of the main types of life insurance including term life insurance and permanent life insurance. The various forms of permanent life insurance, such as whole, variable, universal, and variable-universal life insurance, will be described. The main components of life insurance, including death benefits, beneficiaries, brokers or agents, riders, premiums, and insurance illustrations, will be summarized. The issues related to state-based regulation of the life insurance industry will be discussed.
The U.S. Life Insurance Industry
The primary professional life insurance association is the American Council of Life Insurers (ACLI). Regulation of the life insurance industry is overseen by the National Association of Insurance Regulator (NAIR). The American Council of Life Insurers, which represents the interests of 373 U.S. life insurance companies, helps shape the tax, retirement, and accounting laws affecting the life insurance industry. According to the American Council of Life Insurers, the main products offered by life insurers include life insurance, annuities, disability income insurance and long-term care insurance, and workplace savings plans such as pensions, 401(k), 403(b), 457 deferred compensation plans, and individual retirement accounts (IRAs). These financial instruments are used for risk protection, financing, and investing.
Life insurance refers to insurance that guarantees a specific sum of money to a designated beneficiary upon the death of the insured or to the insured if he or she lives beyond a certain age. Both individuals and businesses purchase life insurance. Individual life insurance has two main functions. First, life insurance protects individuals and families against the financial loss of a premature death of a family wage earner. Second, life insurance is a common financial tool for retirement savings and planning. Individual life insurance benefits have no restrictions on use. Life insurance death benefits may be saved or used, for example, for expenses related to school, home, food, and travel. Life insurance death benefits are intended to help families who have lost a family member maintain their financial independence. Business life insurance is purchased by a firm for the following reasons: To protect against the potential financial losses caused by the death of the business owner and key employee; to provide perquisites for valued employees; to fund business continuity plans; and to fund employee post-retiree health benefits. Businesses tend to select life insurance as one of their main financial instruments due to the tax benefits of life insurance and the ability of life insurance to guarantee a predetermined death benefit payment when the insured dies (Chassen, 1993).
Annuities tend to be used and favored by individuals who do not have workplace savings plans. An annuity is a financial contract issued by a life insurance company that offers tax-deferred savings and a choice of payout options to meet an owner's needs in retirement. Annuity pay-out options include income for life, income for a certain period of time, or a lump sum.
Disability Income Insurance
Disability income insurance and long-term care insurance are forms of insurance that provide financial protection for persons who become unable to care for themselves because of chronic illness, disability, or cognitive impairment such as Alzheimer's disease. The American Council of Life Insurers estimates that 45 percent of individuals aged 35 to 65 will experience a period of long-term disability. The insurance industry paid $6.3 billion in disability benefits to plan members in 2001.
Workplace Savings Plans
The life insurance industry is one of the major private sector actors in employer-based retirement and savings plans. Workplace savings plans are a form of financial risk protection. The insurance industry oversees and administers pensions, individual retirement accounts, 457 deferred compensation plans, 401(k) plans, and 403(b) plans. Pensions are programs that provide employees with retirement income after they meet minimum age. Individual retirement accounts (IRAs) are accounts to which an individual can make annual contributions of earnings up to a pre-determined amount. A 457 deferred compensation plan is a supplemental retirement savings program that allows individuals to make contributions on a pre-tax basis. The 401(k) plan is a retirement investment plan that allows an employee to put a percentage of earned wages into a tax-deferred investment account. The 403(b) plan is a retirement investment plan, which is offered by non-profit organizations, that allows an employee to put a percentage of earned wages into a tax-deferred investment account.
The U.S. insurance industry invests policyholder premiums and retirement savings to create the maximum profit and return for both the company shareholders and policyholders. The insurance industry's long-term investment capital is distributed throughout numerous investment areas. Life insurance industry assets are invested in long-terms bonds, private placements, commercial mortgages, secondary mortgages, and infrastructure. The life insurance industry is responding to market and regulatory changes by forming strategic alliances with foreign insurance companies, other domestic insurance companies, commercial banks, technology companies, and...
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