Who Needs Life Insurance?
Your need for life insurance varies with your age and responsibilities. It is a very important part of financial planning. There are several reasons to purchase life insurance. You may need to replace income that would be lost with the death of a wage earner. You may want to make sure your dependents do not incur significant debt when you die. Life insurance may allow them to keep assets versus selling them to pay outstanding bills or taxes.
Consumers should consider the following factors when purchasing life insurance:
- Medical expenses previous to death, burial costs and estate taxes;
- Support while remaining family members try to secure employment; and
- Continued monthly bills and expenses, day-care costs, college tuition and retirement.
What is the Right Kind of Life Insurance?
All policies are not the same. Some give coverage for your lifetime and other cover you for a specific number of years. Some build up cash values and others do not. Some policies combine different kinds of insurance, and others let you change from one kind of insurance to another. Some policies may offer other benefits while you are still living. There are two basic types of life insurance: term insurance and permanent insurance.
Term insurance generally has lower premiums in the early years, but does not build up cash values that you can use in the future. You may combine cash value life insurance with term insurance for the period of your greatest need for life insurance to replace income.
Term insurance covers you for a term of one or more years. It pays a death benefit only if you die in that term. Term insurance generally offers the largest insurance protection for your premium dollar. It generally does not build up cash value.
You can renew most term insurance policies for one or more terms, even if your health has changed. Each time you renew the policy for a new term, premiums may be higher. Ask what the premiums will be if you continue to renew the policy. Also ask if you will lose the right to renew the policy at a certain age. For a higher premium, some companies will give you the right to keep the policy in force for a guaranteed period at the same price each year. At the end of that time you may need to pass a physical examination to continue coverage, and premiums may increase. You may be able to trade many term insurance policies for a cash value policy during a conversion period even if you are not in good health. Premiums for the new policy will be higher than you have been paying for the term insurance.
Permanent insurance (such as universal life, variable universal life and whole life) provides long-term financial protection. These policies include both a death benefit and, in some cases, cash savings. Because of the savings element, premiums tend to be higher.
How Much Life Insurance Do I Need?
Ask yourself the following questions:
- How much of the family income do I provide?
- If I were to die, how would my survivors, especially my children, get by?
- Does anyone else depend on me financially, such as a parent, grandparent, brother or sister?
- Do I have children for whom I would like to set aside money to finish their education in the event of my death?
- How will my family pay final expenses and repay debts after my death?
- Do I have family members or organizations to whom I would like to leave money?
- Will there be estate taxes to pay after my death?
- How will inflation affect future needs?
Some insurance experts suggest that you purchase five to eight times your current income. However, it is better to go through the above questions to figure a more accurate amount.
Tips on Buying Life Insurance
- Make sure you feel confident in the insurance agent and company.
- Decide how much you need, for how long, and what you can afford to pay.
- Learn what kinds of policies will provide what you need and pick the one that is best for you.
- Do not sign an application until you review it carefully to be sure the answers are complete and accurate.
- Do not buy life insurance unless you intend to stick with your plan. It may be very costly if you quit during the early years of the policy.
- When you buy a policy, make the check payable to the company, not the agent.
When I bought my life insurance policy, the agent said it would be "paid up" after ten years, but it’s been that long and I’m still getting bills. Why?
Your contract (insurance policy) may provide for guaranteed interest rates and/or dividends the insurance company will pay on your premiums. But your premiums must make very high earnings before they will "pay up" your policy. The company must stand behind items that are guaranteed in the contract. Promises of "paid up" life insurance are illegal when based on non-guaranteed values. If you have documentation of the agent promising this, your state insurance department may be able to help. Documentation would include any writing containing the promise -- even an informal, handwritten note or a similar notation by agent.
Who can take out a policy on my life?
Only someone who has an "insurable interest" can purchase an insurance policy on your life. That means a stranger cannot buy a policy to insure your life. People with an insurable interest generally include members of your immediate family. In some circumstances your employer or business partner might also have an insurable interest.
Insurable interest may also be proper for institutions or people who become your major creditors.
Must my beneficiary have an insurable interest?
No. If you buy a policy on your own life, you become the owner of the policy. As the owner, you can name anyone as beneficiary, even a stranger!
What about companies that advertise “no physical exam?”
The insurance may be more expensive than if the company required a physical. Although there is no physical, you will probably have to answer a few, broad health questions on your application.
Some life insurance ads claim “you can not be turned down.” What's the catch?
Such ads are for "guaranteed issue" policies that ask no health history questions. The
company knows it is taking a risk because people with bad health could buy their policies. The company balances the risk by charging higher premiums or by limiting the amount of insurance you can buy. The premiums can be almost as much as the insurance. After a few years you could pay more to the insurance company than it will have to pay to your beneficiary. Such policies may offer only the return of your premiums if you die within the first couple of years after you buy the policy.
Why is term life often called “temporary” insurance?
Insurance agents sometimes refer to term insurance as "temporary" because the term policy lasts only for a specific period. It is probably no more "temporary" than your auto or homeowner insurance. Just like term, those types of policies provide coverage for a specific period of time, and must be renewed when that period ends.
Why are some insurance agents reluctant to sell term insurance?
An agent may believe term is risky, but only because you could have a hard time buying a policy in the future if your health deteriorates or you cannot afford the higher premiums. Commissions could also be a reason for an agent who discourages term. The agent often makes less money for selling term than for other forms of life insurance.
What do I get when I buy term insurance?
You have bought and received the company's guarantee that if you die during the term of the policy, it will pay a death benefit to your beneficiary.
Does that mean I've wasted my money if I don't die?
No more than you have wasted money by buying car insurance but never having an accident. You've purchased peace of mind. With term life insurance, if you die during the term, you know the company will pay your beneficiaries.
An insurance agent has suggested I switch term companies every couple of years to take advantage of the company's promotional rates in the first couple of years. Anything wrong with that?
Nothing wrong, but there is always a risk when you switch polices that you could be subject to a new contestability period. You start a new, 2-year contestability period anytime you switch. If you die during that 2-year period, the insurance company can (and probably will) investigate the statements you made on your application. If you've given inaccurate or incomplete answers, the company may (and probably will) refuse to pay the death benefit.
I understand my permanent policy would be “fully paid up” at age 65. What does that mean?
"Fully paid up" means just that. You have made enough premium payments to cover the cost of insurance for the rest of your life.
What happens to the cash value after the policy is fully paid up?
The company plans to use the cash value to pay premiums until you die. If you take cash value out, there may not be enough to pay premiums. The company could require you to resume paying premiums, or reduce the amount of the death benefit to an amount that the remaining cash value will support.
I had a policy that was paid up; now I'm told I don't. What can I do?
You may have signed papers that permitted the cash value of your paid up policy to be used to pay for another, larger policy. If you're not sure or can't remember, call the insurance company.
What is a “participating” policy?
That is a policy that may pay you dividends. You have a chance to "participate" in the company's earnings. A life insurance dividend is actually a refund of part of your premium. When a company collects more money in premiums than it needs to pay death claims and maintain the insurance pool for future claims, the company may pay dividends at the end of that year.
An insurance agent has suggested that I buy term instead of whole life. Does it makesense to buy term and invest the difference?
"Buy term and invest the difference" has been a popular sales slogan for term life. The pitch compares term, the least expensive form of life insurance, with other kinds of life insurance.
- $100,000 death benefit at age 35
- Annual whole life premium: $1,800
- Annual renewable term premium: $250
- Difference: $1,550
What are your choices?
- Buy whole life. The “difference” is used to keep your premiums lower than the actual cost of insurance as you get older.
- Buy term. You keep the difference.
In addition, make sure you consider the following:
- As you get older your term premiums will increase to keep up with the cost of insurance;
- If you invested the difference, you could use your investment to pay the higher cost of insurance;
- If you spent the difference you will have to dip into other savings to pay higher premiums; and
- If your health deteriorates you may not be able to buy a new policy
For 10 years I paid the insurance company $1,000 every year. That's $10,000! But when I cashed in the policy they sent me only $5,800. Where did the rest of my money go?
The rest of the money paid for insurance. You were entitled to only the cash surrender value — that is, the amount you had paid to "pre-fund" insurance in your old age. The amount would have been even less if you had borrowed money that had not yet been repaid.
How much cash value is in my policy?
Read your policy. It has a table of cash values that should provide the answer. Call your agent if you are still not sure of the cash value amount.
What happens to the cash value in my policy when I die?
When you die, the insurance company will pay the death benefit. No matter how much cash value you may have had in the policy the moment before you died, your beneficiaries can collect no more than the stated death benefit. Any loans you have not repaid (plus interest) will be subtracted from the death benefit.
The result: your beneficiary could wind up with less than the face amount of the policy.
The exception: some whole life policies pay both the death benefit and the cash value when you die.
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