What You Should Know About Buying Life Insurance
What You Should Know About Buying Life
Insurance
LIFE INSURANCE: THE FOUNDATION OF FINANCIAL
SECURITY
BUYING LIFE INSURANCE
Buying life insurance is not like any other
purchase you will
make. When you pay your premiums, you're buying
the future
financial security for your family that only life
insurance can
provide. Among its many uses, life insurance helps
ensure that,
when you die, your dependents will have the financial
resources
needed to protect their home and the income needed
to run a
household.
Choosing a life insurance product is an important
decision, but
it often can be com-plicated. As with any major
purchase, it is
important that you understand your needs and the
options
available to you.
That's where this booklet comes in; read it
thoroughly. It takes
you through the basics, step-by- step, as you
prepare for this
significant purchase. Most important, it will
help you know what
questions to ask when you're buying life insurance.
Life insurance also can be used to help with
other financial
goals, such as funding retirement or education
expenses. However,
it is important to remember that the main purpose
of life
insurance is financial protection. If your primary
goals are
something other than protection, you should consider
what other
financial products are available to meet those
goals.
The information in this brochure has been compiled
by the
American Council of Life Insurance, a trade association
of more
than 600 life insurance companies. Collectively,
these companies
provide about 90 percent of the life insurance
in force in the
United States.
LEARNING THE BASICS
The best way to make an informed decision about
buying life
insurance is to become familiar with the basics.
Why do I need life insurance?
Life insurance is an essential part of financial
planning. One
reason most people buy life insurance is to replace
income that
would be lost with the death of a wage earner.
The cash provided
by life insurance also can help ensure that your
dependents are
not burdened with significant debt when you die.
Life insurance
proceeds could mean your dependents won't have
to sell assets to
pay outstanding bills or taxes. An important feature
of life
insurance is that no income tax is payable on
proceeds paid to
beneficiaries.
How much life insurance do I need?
Before buying life insurance, you should assemble
personal
financial information and review your family's
needs. There are a
number of factors to consider when determining
how much
protection you should have.
These include: any immediate needs at the time
of death, such as
final illness expenses, burial costs and estate
taxes;l funds for
a readjustment period, to finance a move or to
provide time for
family members to find a job; and ongoing financial
needs, such
as monthly bills and expenses, day-care costs,
college tuition or
retirement. Although there is no substitute for
a careful
evaluation of the amount of coverage needed to
meet your needs,
one rule of thumb is to buy life insurance that
is equal to five
to seven times your annual gross income.
What is term insurance?
Term insurance provides protection for a specific
period of time.
It pays a benefit only if you die during the term.
Some term
insurance policies can be renewed when you reach
the end of a
specific period which can be from one to 20 years.
The premium
rates increase at each renewal date. Many policies
require that
evidence of insurability be furnished at renewal
for you to
qualify for the lowest available rates.
What is permanent insurance?
Permanent insurance provides lifelong protection
and is known by
a variety of names, described later. As long as
you pay the
necessary premiums, the death benefit always will
be there. These
policies are designed and priced for you to keep
over a long
period of time. If you don't intend to keep the
policy for the
long term, it could be the wrong type of insurance
for you.
Most permanent policies including whole, ordinary,
universal,
adjustable and variable life have a feature known
as "cash value"
or "cash surrender value". This feature,
which is not found in
most term insurance policies, provides you with
some options:
You can cancel or "surrender" the
policy "in total or in part"
and receive the cash value as a lump sum of money.
If you
surrender your policy in the early years, there
may be little or
no cash value.l If you need to stop paying premiums,
you can use
the cash value to continue your current insurance
protection for
a specific period of time or to provide a lesser
amount of
protection to cover you for as long as you live.
Usually, you may
borrow from the insurance company, using the cash
value in your
life insurance as collateral. Unlike loans from
most financial
institutions, the loan is not dependent on credit
checks or other
restrictions. You ultimately must repay any loan
with interest or
your beneficiaries will receive a reduced death
benefit.
The cash values of many life insurance policies
may be affected
by your company's future experience, including
mortality rates,
expenses and investment earnings. Keep in mind
that with all
types of permanent policies, the cash value of
a policy is
different from the policy face amount. Cash value
is the amount
available when you surrender a policy before its
maturity or your
death. The face amount is the money that will
be paid at death or
at policy maturity.
What are the types of permanent insurance?
There are many different types of permanent insurance.
The major
ones are described below:
Whole Life or Ordinary Life
This is the most common type of permanent insurance.
The premiums
for a whole life policy must be paid periodically
in the amount
indicated in the policy. These premium amounts
generally remain
constant over the life of the policy.
Universal Life or Adjustable Life
This variation of permanent insurance allows you,
after your
initial payment, to pay premiums at any time,
in virtually any
amount, subject to certain minimums and maximums.
You also can
reduce or increase the amount of the death benefit
more easily
than under a traditional whole life policy. (To
increase your
death benefit, you usually will be required to
furnish the
insurance company with satisfactory evidence of
your continued
good health.)
Variable Life
This type of permanent policy provides death benefits
and cash
values that vary with the performance of an underlying
portfolio
of investments. You can choose to allocate your
premiums among a
variety of investments which offer varying degrees
of risk and
reward stocks, bonds, combinations of both, or
accounts that
provide for guarantees of interest and principal.
You will
receive a prospectus in conjunction with the sale
of a variable
product.
The cash value of a variable life policy is
not guaranteed, and
the policyholder bears that risk. However, by
choosing among the
available fund options, the policyholder can create
an asset
allocation that meets his or her objectives and
risk tolerance.
Good investment performance will lead to higher
cash values and
death benefits. On the other hand, poor investment
performance
will lead to reduced cash values and death benefits.
Some policies guarantee that death benefits
cannot fall below a
minimum level. There are both universal life and
whole life
versions of variable life.
What are the advantages and disadvantages of
term and permanent
insurance?
Term Insurance
Advantages
Initially, premiums are generally lower than those
for permanent
insurance, allowing you to buy higher levels of
coverage at
a younger age when the need for protection often
is greatest.l
It's good for covering specific needs that will
disappear in
time, such as mortgages or car loans.
Disadvantages
Premiums increase as you grow older.l Coverage
may
terminate at the end of the term or may become
too expensive to
continue.l Generally, the policy doesn't offer
cash value or
paid-up insurance.
Permanent Insurance
Advantages
As long as the necessary premiums are paid, protection
is
guaranteed for your entire life.l Premium costs
can be fixed or
flexible to meet personal financial needs.l Policy
accumulates a
cash value that you can borrow against. (Loans
must be paid back
with interest or your beneficiaries will receive
a reduced death
benefit.) You can borrow against the policy's
cash value to pay
premiums or use the cash value to provide paid-up
insurance. The
policy's cash value can be surrendered' in total
or in part ' for
cash or converted into an annuity. (An annuity
is an insurance
product that provides an income for a person's
life-time or for a
specific period of time.)l A provision or "rider"
can be added to
a policy that gives you the option to purchase
additional
insurance without taking a medical exam or having
to furnish
evidence of insurability. (For more information
on riders, see
page 19.)
Disadvantages
Required premium levels may make it hard to buy
enough
protection.l It may be more costly than term insurance
if you
don't keep it long enough.
GETTING STARTED
After you have thought about your financial
needs and have become
familiar with the basic types of life insurance,
you will need to
choose a company and agent.
How do I choose a company?
More than 2,000 companies in the United States
sell life
insurance. While some consumers prefer to buy
policies directly
from a company, most people buy life insurance
through agents or
brokers. Much of the information provided here
will be helpful
whichever way you decide to buy life insurance.
Before purchasing a policy, check the company's
financial
condition. You can do this by asking the agent
or requesting
information from your state's insurance department.
A number of
insurance rating services rate the financial strength
of
companies. These ratings can be found in large
public or business
libraries, or can be obtained directly from the
rating service.
There may be a fee forthat information.
Also check with the state insurance department
to be sure the
company is licensed in your state.
How do I choose an agent?
Collect the names of several agents through recommendations
from
friends, family and other sources. The following
are some
questions you may want to ask a potential agent:
Is the agent licensed in your state?
All states require that agents be licensed to
sell life
insurance. In addition, agents who sell variable
products must be
regis-tered with the National Association of Securities
Dealers
and have additional state licenses.
What company or companies does the agent represent?
Does the agent have any professional designations?Professional
designations include Chartered Life Underwriter
(CLU) and Life
Underwriting Training Council Fellow (LUTCF).
Agents who also are
financial planners may have designations, such
as Chartered
Financial Consultant (ChFC), Certified Financial
Planner (CFP) or
Member of The Registry of Financial Planning Practitioners.
Is he or she a member of a professional association?
The major association for agents is The National
Association of
Life Underwriters (NALU). Through NALU's local
associations,
agents can attend educational seminars and can
stay on top of
trends in the business. Similar training and services
are
provided to financial planners through the American
Society of
CLU & ChFC, the Institute of Certified Financial
Planners (ICFP),
and the International Association for Financial
Planning (IAFP).
What can I expect an agent to do for me?
An agent should be willing and able to explain
various policies
and other insurance-related matters. Let your
agent know what you
expect from him or her. You should feel satisfied
that the agent
is listening to you and looking for ways to get
you the right
type and amount of insurance at an affordable
price. If you are
not comfortable with the agent, or you aren't
convinced he or she
is providing the service you want, find another
agent.
THE AGENT VISIT
Now that you have reviewed the basics of life
insurance and
thought about your personal financial needs, you
can shop for a
life insurance policy with more confidence and
knowledge.
What can I expect during an agent visit?
The agent you have selected will meet with you
to discuss
your life insurance needs. He or she will ask
questions about
family income and your net worth. Using the information
you
already have assembled about your financial situation,
you should
be prepared to discuss your insurance options.
Will the agent ask questions about my health?
In this initial meeting, be prepared to answer
questions about
your health (for example, age, medical condition,
medical
history, family history, personal habits). It
is important that
you answer these questions carefully and truthfully;
this
information helps a company charge a fair premium
for your
coverage. For instance, you may pay a lower premium
if you don't
smoke. On the other hand, if you have a chronic
illness, you may
be charged a higher premium.
Also, in the event of a claim, accurate and
truthful answers
enable your beneficiary to receive prompt payment.
Inaccurate or
untruthful answers, however, may cause delay or
even denial of a
claim.
When you apply for life insurance, you may
be asked to have a
medical exam. Often, a licensed medical professional
will make a
personal visit.
YOUR AGENT'S RECOMMENDATION
Once you have discussed your financial needs
and objectives with
your agent, he or she will recommend the type
of life insurance
policy that will best suit your purposes. Often,
the agent
will provide a "policy illustration"
that will show how your
policy will work. (See page 16.)
Carefully study your agent's recommendation
and ask for a
point-by-point explanation if there are items
you don't
understand. Because your policy is a legal document,
it's
important that you know what it provides.
Here are some other questions you should ask:
Does this policy truly meet my needs?
If your agent recommends a term policy, consider
the following:l
How long can I keep this policy?
If you want the option to renew the policy for
a specific number
of years or until a certain age, ask your agent
about the terms
of renewal of the contract.l When will my premiums
increase?
Annually? Or after a longer period of time, such
as five or 10
years?l Can I convert to a permanent policy? Some
policies allow
you to convert the policy to permanent insurance
without a
medical exam, regardless of your physical condition
at the time
of the conversion. These policies are known as
"convertible
term."
If your agent recommends a permanent policy,
consider the
following:
Are the premiums within my budget? Be sure you
want to spend the
money for this type of long-term coverage.l Can
I commit to
these premiums over the long term?l Make sure
you know the amount
you would receive if you surrender your policy.Keep
in mind that
permanent insurance is designed to provide protection
for
your entire life. If you don't plan to keep the
product
for many years, consider another type of policy.
Cashing in a
permanent policy after only a couple of years
can be a costly way
toget insurance protection for a short term.
What does my policy illustration show? An illustration
shows
policy premiums, death benefits, cash values and
information
about other items that can affect your cost of
obtaining
insurance. Some of the items listed in the illustration
are used
by the insurance company to reduce your costs
if its future
financial results are favorable. Your policy may
provide for
dividends to be paid to you as either cash or
paid-up insurance.
Or it could provide for interest credits that
could increase your
cash value and death benefit or reduce your premium.
These items
are not guaranteed. Your costs or benefits could
be higher or
lower than those illustrated, because they depend
on the future
financial results of the insurance company. With
variable life,
your values will depend on the results of the
underlying
portfolio of investments.
Ask your agent for an explanation of the illustration;
some
figures are guaranteed and some are not. Remember
that the
insurance company will honor the guaranteed figures
regardless of
its future financial experience.
If your policy is a variable life policy, be
sure that the
interest rate assumed is reasonable for the underlying
investment
accounts to which you choose to allocate your
premiums. For
example, some investment advisors suggest that
a higher interest
rate assumption may be warrant-ed if you plan
to allocate your
premium to a stock account, while a lower rate
should be assumed
for more conservative alternatives.
It is important to keep in mind that an illustration
is not a
legal document. Legal obligations are spelled
out in the policy
itself.
Here are additional questions to ask about
the policy
illustration:
Is the illustration up to date? Is it based
on current
experience?l Is the classification shown in the
illustration
appropriate for me (i.e., smoker/non-smoker, male/female)?l
When
are premiums due annually, monthly or otherwise?l
Which figures
are guaranteed and which are not?l Will I be notified
if the
non-guaranteed amounts change? Does the policy
have a guaranteed
death benefit, or could the death benefit change
depending on
interest rates or other factors?l Does the policy
pay dividends
or provide for interest credits? Are those figures
incorporated
into the illustration?l Will my premiums always
be the same? Is
it possible that the premium will increase significantly
if
future interest rates are lower than the illustration
assumes?l
If the illustration shows that, after a certain
period of time, I
will not have to make premium payments, is there
a chance I could
have to begin making payments again in the future?l
Is the
premium level illustrated sufficient to guarantee
protection for
my entire life?
What happens if I fail to make the required
premium payments?
If you miss a premium payment, you typically have
a 30- or 31-day
grace period during which you can pay the premium
with no
interest charged. After that, the company can
with your
authorization draw from a permanent policy's cash
value to keep
that policy inforce. In some flexible premium
policies, premiums
may be reduced or skipped as long as sufficient
cash values
remain in the policy. However, this will result
in lower cash
values.
What happens if I become disabled and can't
pay the premiums on
my policy?
Provisions or riders that provide additional benefits
can be
added to a policy. One such rider is a waiver
of premium for
disability. With this rider, if you become totally
disabled for
aspecified period of time, you do not have to
pay premiums for
the duration of the disability.
Are other riders available?
Another rider, called an "accidental death
benefit", provides for
an additional benefit in case of death as a result
of an
accident.
A relatively new rider offered by some companies
provides
"accelerated benefits," also known as
"living benefits." This
rider allows you, under certain circumstances,
to receive the
proceeds of your life insurance policy before
you die. Such
circumstances include terminal or catastrophic
illness, the need
for long-term care or confinement to a nursing
home.
Ask your agent for information about these
and other policy riders.
When will the policy be in effect?If you decide
to purchase the
policy, find out when the insurance becomes effective.
This could
be different from the date the company issues
the policy.
Is a "Buyer's Guide" available?
Most state insurance departments require companies
to provide
consumers with a buyer's guide to help them understand
life
insurance terms, benefits and costs.
Ask your agent for a copy.
FINAL TIPS
Here are a few tips to keep in mind about your
life insurance
purchase:Take your time. On the other hand, don't
put off an
important decision that would protect your family.
Make sure you
fully understand any policy you are considering
and that you are
comfortable with the company, agent and product.
Don't rush into
a decision just because you are feeling pressured.When
you
purchase a policy, make your check payable to
the insurance
company, not to the agent. Be sure you are given
a receipt.After
you have purchased an insurance policy, keep in
mind that you may
have a "free-look" period usually 10
days after you receive the
policy during which you can change your mind.
During that period,
read your policy carefully. If you decide not
to keep the policy,
the company will cancel the policy and give you
an appropriate
refund. Ask your agent.Review the copy of your
application
contained in your policy. Promptly notify your
agent or company
of any errors or missing information.If an agent
or company
contacts you and wants you to cancel your current
policy to buy a
new one, contact your original agent or company
before making any
decisions. Surrendering your policy to buy another
could be very
costly to you.
If you have a complaint about your insurance
agent or company,
contact the customer service division of your
insurance company.
If you still are dissatisfied, contact your
state insurance
department. Most departments have a consumer affairs
division
that can offer help.Review your policy periodically
or when your
situation changes to be sure your coverage is
adequate.
OTHER RESOURCES
Where else can I get information about insurance?Your
personal
insurance agent and company are good sources of
general
information about insurance.Contact the National
Insurance
Consumer Helpline (NICH) at 1-800-942-4242. NICH
is a toll-free
consumer information telephone service sponsored
by insurance
industry trade associations. Look in your local
library for
magazines or books on insurance or personal finance.The
consumer
affairs division of your state insurance department
can provide
useful information. Some departments have toll-free
numbers to
respond to consumer questions.
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