If you want to make provisions for the welfare of your loved ones
after your death but find the subject of life insurance confusing or
intimidating, read on. It's easier to understand than you think, and
the rewards can be substantial.
What is life insurance?
Life insurance is a financial resource for your loved ones in the
event of your death. You enter into a contract with an insurance company,
which promises to provide your beneficiary(ies) with a certain amount
of money upon your death. In return, you make periodic payments, known
as premiums. The amount of the premiums generally depends on factors
such as your age, gender, occupation, medical history and whether you
intend to build up cash value in your policy. Some policies may require
a medical exam.
Certain types of life insurance may also provide benefits for you
and your family while you're still living. Such policies accumulate
cash value on a tax-deferred basis that can be used for future needs
such as supplementing your retirement income or helping provide for
a child's education.
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Do I need life insurance?
The ability to earn an income can be considered your family's most
valuable asset because your income allows you to obtain other assets,
particularly the necessities of life and, of course, the creature comforts.
However, as we know, the ability to earn an income is not guaranteed.
Yet, the need for income may continue for those who were financially
dependent upon you. Consequently, your need for life insurance and
the amount will depend upon your personal and financial circumstances.
If any of the following statements apply to you, you probably do need
to consider life insurance:
- You have a spouse.
- You have dependent children.
- You have an aging parent or disabled relative who depends on you
for support.
- You have another loved one that you wish to provide for.
- You have business or estate planning needs that life insurance
can satisfy
- Your retirement pension and savings are not enough to insure your
lived ones' futures against a rising cost of living.
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What are some other reasons you may want
to consider life insurance?
In addition to the comfort of knowing that you have provided for
your loved ones after your death, there are several other reasons you
may want to consider life insurance, including:
- If your policy has cash value, the cash value may be used to help
with big-ticket items such as college education or a downpayment on
a home. Most cash-value policies enjoy a tax-deferred status, meaning
that you do not pay taxes on any cash value accumulation until you
receive funds from the policy.
- Life insurance can be used to pay estate taxes and funeral expenses.
If an individual dies in 2004 and his or her estate is worth more
than $1,500,000, federal estate taxes at rates as high
as 48% may be payable, usually due within nine months of death. So,
even if you have a substantial sum of money, life insurance can be
a benefit. The proceeds usually go directly to your beneficiaries
without going through the probate process.
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How can I choose the policy that's right
for me?
Life insurance is a long-term commitment. Before buying any policy,
ask yourself these very important questions:
- How much insurance do I need? If I were to die,
what would my spouse and dependents need in order to live comfortably?
- In addition to protection, what am I trying to accomplish
with life insurance? Am I accumulating funds for education
costs? Providing away to pay estate taxes? Do I need some additional
supplemental income for my retirement or emergencies? Remember that
Term life pays a death benefit only, while Whole, Universal and Variable
policies can supplement your income through withdrawals or loans
against a policy's cash value.
- How much can I afford to pay for a policy?
- Is the insurance company I'm considering financially secure? Do
they have a good claims payment history, good customer service and
competitive prices? Independent companies such as Standard and Poor's,
A.M. Best, Moody's, Fitch and Weiss rate insurance companies and their
publications can be found in your local library.
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What are my options?
There are four basic types of life insurance to meet your individual
needs.
Term life insurance is the least expensive type
of coverage, at least initially, and the simplest. These policies do
not build up a cash value. Coverage is in effect for a fixed term or
period of time - usually one to 30 years - and usually can be renewed.
The policy pays your beneficiary a fixed amount of money if you die
during the term of the policy. The premiums are lowest when you are
young and increase upon renewal as you age. Be sure to check your policy
for age or other renewal restrictions.
Whole life insurance provides protection as well
as a cash value. The premiums remain at a fixed level for the duration
of the contract. Over time, the policy generally builds up cash value
on a tax-deferred basis. Many companies pay policyholders a dividend.
Dividends provide both flexibility and increased value to your life
insurance policy. They can add more coverage to your overall insurance
benefit and can build a sizable cash value.You may prefer this type
of coverage since the cash value can benefit you while you're still
alive. You can use it to supplement retirement funds or help provide
for a child's education - it's your money to use as you need. You should,
however, keep in mind that life insurance should not be purchased solely
for accumulation. Its primary purpose is protection. Also, withdrawals
and/or loans will decrease the death benefit.
Universal life insurance is a flexible life insurance
plan. These policies are interest-sensitive and permit the owner to
adjust the death benefit and/or premium payments, within limits, to
fit the owner's situation. Your net premium payments are applied to
the accumulation fund, which earns a guaranteed interest rate. The
monthly cost of the death benefit and policy administration is deducted
from the accumulation fund. As with whole life insurance, the cash
value is yours — you may withdraw it or borrow against it at
any time. Read your policy carefully to understand how withdrawals
may affect the death benefits.Since you decide how much premium to
pay, within limits, some universal life policies even allow you to
skip payments. If you skip a premium payment, the administrative and
death benefit costs are deducted from your cash value. The policy stays
in effect until your cash value can no longer cover these costs. Make
sure you understand your annual statement so you know how much interest
your policy is earning and how much cash value you have. Universal
life insurance rates are subject to change, but the rate will never
fall below the minimum rate guaranteed in the contract.
Variable life insurance is for those who want to
tie their life insurance policy to the performance of the financial
markets. You decide how your net policy values are to be invested.
Your cash value may have the opportunity to accumulate more rapidly
than with other cash value policies, but you incur additional risk.
If market performance is poor, your death benefit may decrease, and
you may have to pay higher premiums to keep the policy in effect. As
with whole and universal life policies, you may borrow against or withdraw
the cash value at anytime. Keep in mind that loans and withdrawals
may reduce cash values and the death benefit. Read your policy carefully
for any possible charges associated with these transactions. These
policies are sold by prospectus, a valuable disclosure document, that
you should also read carefully.
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How can I conserve costs?
Here are some ways you can save money when purchasing the life insurance
that's right for you.
- Don't buy insurance if you don't need it, and don't buy more insurance
than you actually need to provide for your loved ones.
- Shop for a competitively-priced policy while you are in good health.
Don't smoke. Take care of yourself by exercising regularly and maintaining
a moderate weight.
- If you buy term insurance, look for guaranteed renewable policies.
That way you won't have to shop for a new policy (with higher premiums)
when you're older.
- Buy additional riders, which are optional forms of coverage, only
if you need them.
- Shop around and compare prices and coverage. There are over 2,000
companies selling life insurance policies. Get at least three quotes
on comparable policies, and ask questions about the policy's renewal
and withdrawal provisions.
- Participate in your employer's sponsored life insurance program,
even if you have to contribute or pay for it. This form of life
insurance coverage, known as group insurance, pools good, average
and poor risks to offer a benefit that can be less expensive than
comparable plans offered outside of work. You may be able to obtain
coverage up to a certain level without providing evidence of good
health, a key advantage. Additionally, group insurance plans often
provide for continued coverage during periods of disability. Many
plans are administered through payroll deduction, a very convenient
way to pay for coverage. And finally, many plans allow you to
continue your coverage even after you leave employment by continuing
payment of premiums or converting coverage to an individual policy.
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What if I already have life insurance
coverage?
Even if you have life insurance, keep in mind that life changes and,
as it changes, so do your needs for protection. Your life insurance
needs should be reviewed every few years. Any of the changes listed
below should prompt you to sit down with your insurance agent to make
sure your plan is still appropriate.
- You have recently married or divorced
- A child or grandchild has been born or adopted
- Your health or your spouse's health has deteriorated
- You have begun to provide care or financial help to a parent
- A loved one will require assistance or long term care
- You have recently purchased a new home
- Your children or grandchildren are about to enter school or college
- You or your spouse retired or will retire early
- You or your spouse has been promoted recently
- You have refinanced your home mortgage in the past six months
- You or your spouse has received an inheritance
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Can I trade or replace my policy?
You can trade or replace your policy, but it's not something to be
considered lightly, regardless of whether you are thinking of switching
policies within the same company or switching from one company to another.
New policies typically have high costs the first few years and there
is normally a new "contestability period" during which the insurer
can cancel the policy and refuse to pay death benefits if an application
was misleading. If you want to increase your total life insurance,
it is probably better to keep your old policy and simply add a new
one, or increase your specified face amount under the same life insurance
policy. For example, suppose your objective is to have $100,000 of
life insurance and you currently have $50,000. It maybe better to keep
the existing $50,000 policy and buy a second $50,000 policy to reach
your goal of $100,000. Your existing policy premiums will generally
be less than those for the new policy, because you bought it when you
were younger and you won't lose any existing cash value. Be sure to
ask your agent, financial advisor or insurance company about the best
alternative for your specific situation.
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Additional resources
In addition to Standard and Poor's, A.M. Best, Moody's, Fitch and
Weiss rate insurance companies. Other sources available to advise you
on finding a good insurance carrier include your state insurance department
and the Better Business Bureau. You also can write to the Consumer
Federation of America Insurance Group (formerly known as NICO), 1424
16th Street, N.W., Suite 604, Washington, D.C. 20036, or call 202/387-6121.
It has several informative publications and will, for a fee, help you
evaluate a policy you are considering. Before buying any life insurance
product, remember to read the policy carefully and get answers to any
questions you may have.
