Life Insurance BasicsMany of us buy life insurance because we want to make sure that our loved ones, especiallydependents, remain financially secure after we die. Income replacement is the No. 1 reason peoplebuy life insurance.Non-earning caregivers also have an important - and often overlooked - economic value that shouldbe covered by life insurance.Life insurance is also purchased by those interested in achieving specific business or estate-transfergoals.There are many types of life insurance policies depending on your goals, and there are huge pricedifferences among different companies offering identical coverage. Policies are available fromhundreds of life insurance companies in the United States. Most financial planners recommend thateach family income provider carry no less than 10 times their annual income in life insurance.Heres an orderly way to go about shopping for life insurance:• 1) Assess your needed life insurance amount..• 2) Decide on the most appropriate policy type for your goals.• 3) Choose possible companies by setting high standards for financial stability ratings.• 4) Shop until you find the best price.• 5) Look at ways to get the best possible life insurance rate.Life insurance is a long-term proposition, so you should pay particular attention, at time of purchaseand throughout the life of the policy, to the financial stability ratings of your life insurance company.Ratings indicate a companys ability to pay claims.Assessing your life insurance needsThe first step in life insurance planning is to analyze your life insurance needs - meaning theeconomic needs of dependents left behind. A great way to determine your coverage needs is to usean online calculator like Insure.coms Life Insurance Needs Estimator Tool.• Before purchasing a life insurance policy, consider your financial situation and the standard of living you want to maintain for your dependents or survivors. For example, who will be responsible for your final medical bills and funeral costs? Would your family have to relocate or otherwise change their standard of living after losing your income? The assumption of immediate death is necessary to determine the current life insurance needs for a family or individual.• Add in the longer term financial needs of the remaining family members, such as: childrens expenses, income for the surviving spouse, mortgage and other debt payoffs, college education funds and an additional emergency fund.Because life insurance needs change over time, your life insurance amount should be reevaluatedperiodically. We recommend a review at least once every five years or whenever you experience amajor life event such as a change in income or assets, marriage, divorce, the birth or adoption of achild, or a major purchase such as a house or business.
In theory, you should have a declining need for life insurance as you age because fewer peopleremain dependent upon you for income support. Exceptions would be protecting a business entity orpaying taxes on a large estate for heirs. If the purpose of buying life insurance is to pay estate taxes,then youll need permanent life insurance, which is in-force as long as you live and pay premiums.Policy choicesLife insurance policies[http://www.insure.com/quotesmith/controller?REF=99998&reqid=qstermindex&redirx=x] are dividedinto two main types:• Term life insurance, which provides only death protection without any side funds or "cash values" (offering the least expensive cost per $1,000 of death coverage purchased).• Permanent life insurance, which has "cash value" accounts in which a return-on-investment component becomes an often complex and expensive part of the policy (most expensive cost per $1,000 of coverage).Term life insuranceThe simplest of all life insurance to understand and the cheapest to buy: Term life insurance providesdeath benefit protection without any savings, investment or "cash value" components for the term ofthe coverage period.Term life insurance is available for set periods of time such as 10, 15, 25 or 30 years. With "annualrenewable term life," your policy automatically renews each year and premiums increase as you getolder. Choose "level term insurance" if you want your premium to stay the same for the duration ofthe policy. Also available is "decreasing term insurance," where premiums remain level but yourdeath benefit declines over time. This is good if you want to cover only a specific debt that decreases,such as a mortgage or business loan.As long as you pay your premiums, the company cannot cancel you.Term life insurance is a popular choice because of the long rate-guarantee periods and because ofthe ability to get a low cost life insurance policy. However, if you get to the end of your policy term andstill need life insurance, youll need to shop for a new policy, which will then be priced based on yourolder age and health status.Choosing an initial rate-guarantee period is easy: Match the period of time your dependents needyour income to the available rate-guarantee periods. For example, if your children are young and youhave decades to go on your mortgage, try 30-year term life. If your children are leaving the nest andyour home is paid off or nearly paid off, 10-year term might fit the bill.Other policy provisions that drive the popularity of term life insurance are guaranteed renewal andguaranteed convertibility.• Guaranteed Renewal. Before you buy a term life policy, ask the agent or company to confirm to you that the policy contains a guaranteed renewable option, which grants you the right to continue coverage beyond the initial rate-guarantee period without a medical exam. This feature, found in most term life policies sold today, is extremely important should you become sick and uninsurable
toward the end of your rate-guarantee period.For example, say that youve been paying $800 per year on a $500,000, 20-year level term life policyand develop cancer near the end of the 20-year period, thus making you uninsurable. Assuming thatyou want to continue the coverage, a guaranteed renewable clause would allow you to continue thecoverage beyond 20 years on an annual renewable basis without an exam, albeit at a much higherannual premium of, say, $8,000 in year 21, $11,000 in year 22, and so on.You may have sticker shock right now but these premiums dont look so high when you are very sickand uninsurable but still in need of coverage.• Guaranteed Convertible. Another built-in feature of most term life policies is the right to convert your coverage to any cash value policy that the company might offer at current rates without having to take another physical exam. This feature may be of use in the future if you decide you want cash value life insurance.If youd like term insurance to cover you for a certain period of time but youre confident youll outlivethe policy, consider a "return of premium" (ROP) term life insurance policy. Under this type of policy, ifno death benefit has been paid by the end of your insurance term, you receive all your premiumsback (tax-free). Return of premium term life insurance generally costs 50 to 150 percent more than acomparable term policy but it provides a way to hedge your bets no matter what happens.Term life insurance is widely available on the Internet, from direct-to-consumer life insurancecompanies and from insurance agents and brokers.Cash value life insuranceIf you want more than a death benefit from your life insurance policy and like the idea of a long-termsavings account (not insured by any federal agency) or stock market investment, you might considercash value life insurance such as whole life, universal life or variable life. But be prepared to paymuch higher premiums per $1,000 of coverage precisely because you are now funding a cash valueaccount and paying fees and expenses.In many cash value policies, the annual premium does not increase from year to year. Universal lifepolicies allow you to fluctuate or even skip premium payments, which in turn adjusts your deathbenefit amounts.Unlike term life insurance, which is easily compared online, cash value insurance is often marketedby agents and brokers in a face-to-face setting, where needs and strategies can be discussed.Because of the complexity and dizzying array of possible outcomes for permanent life insurance,regulators insist that cash value insurance be sold using pre-approved illustration formats. Theseillustrations can run to 15 or more pages. Cash value life insurance illustrations are divided into twomajor sections: guaranteed values and projected or "illustrated, non-guaranteed" amounts.Illustrations can be complex and hard to compare in an apples-to-apples way.Pay particular attention to the guaranteed death benefit and premium-payment sections becausethese columns contain the actual company promises. If you dont like what you see there, walk away.Another caveat: Many cash value policies contain harsh penalties for surrendering the policies in theearly years. Changing your mind within the first few years is an expensive decision.
Whole life insuranceOrdinary whole life insurance offers "permanent protection" with a cash value account that grows overtime. Whole life provides a level death benefit and level premiums throughout your life and for as longas you continue to pay the premiums. For example, a healthy 40 year-old female might pay $4,200per year for a $500,000 whole life policy. The premium remains level at $4,200 per year for the rest ofher life and, in the event of death at any age, the policy will pay $500,000 to her beneficiary.Whole life also contains a cash value account that builds over time, slowly at first and gaining steamafter several years. You can withdraw your cash value or take out a loan against it, but remember, ifyou die before you pay back the loan, the death benefit paid to your beneficiaries will be reduced. Forexample: Susan has a $500,000 whole life policy in force and, over the years, has borrowedcontinually from the cash value. Her total loan amount and accrued interest totals $300,000. WhenSusan dies, her beneficiary will receive $200,000 because the life insurance company will first payitself back from the death benefit.Understand what your beneficiaries will receive upon your death. If you have a traditional whole lifepolicy, your beneficiaries receive only the death benefit no matter how much cash value youve builtup. Other payout options available for higher premiums are:• Death benefit plus cash value• Death benefit plus return of premiumWhole life policies can be issued as "participating" or "nonparticipating." Participating policies typicallycost more but may return annual dividends if the insurer has a good financial year. Dividends arenever guaranteed. Nonparticipating whole life insurance offers no dividends.Buyers of whole life insurance like the certainty of fixed premiums with a known death benefit for life.They also appreciate the "forced savings" component and watching their cash value account build up.Universal life insuranceThis kind of policy offers greater flexibility than whole or term life. Universal life has many movingparts to understand before you buy.After your initial premium payment, you can reduce or increase the amount of your death benefit.Also, after your initial payment, you can pay premiums any time and in any amount, as long as youdont miss a minimum payment level. In some cases, there are limits to how much extra you can payin advance. If you choose to increase your death benefit, you may have to provide medical proof thatyour health has not deteriorated.You will need to manage these policies to maintain sufficient funding, especially because theinsurance company can increase charges.Some new universal life policies perform like term life insurance: They can be configured at the timeof purchase to provide both level death benefits and level premiums that are guaranteed for life aslong as you pay the scheduled premium.Variable life insuranceVariable life offers a death benefit with a side fund that operates like an investment account. It shiftsthe uncertainties of investment gains and losses to the policyholder.
The insurance company invests your premiums and offers you a choice of funds in which your moneywill be invested. Returns are not guaranteed. The amount of money your beneficiaries will receiveand the cash value of your policy depend on how well the underlying accounts perform. Theoretically,the cash value can go down to zero and, if so, the policy will terminate. Some variable life policies willguarantee a minimum death benefit.Other permanent life insurance considerationsWhen your cash value account grows large enough, it can be used by the insurer to pay yourpremiums for the rest of your life. This is known as being "paid up." You can still withdraw your cashvalue, but youll have to resume premium payments to keep the policy in force or settle for a reducedbenefit that the remaining cash value can support. Your policy illustration will show you how long itmay take for your whole life policy to be "paid up."If you no longer want your whole life policy, you can surrender it to receive the current cash surrendervalue or convert it into an annuity, but keep in mind that cashing in a permanent policy after only acouple of years is an expensive way to get insurance protection for a short time.Riders add benefitsYou can add riders to your life insurance policy that guard against a number of unpleasant situations.Your insurer will have its own list of available riders, but here are a few:• Accelerated death benefit rider (aka living benefits rider): Pays the benefit early if you become terminally ill.• Accidental death benefit rider: Pays an extra benefit if you die as the result of an accident.• Long term care rider: Pays for long term care expenses should you not be able to do some of the "activities of daily living," such as dressing or toileting.• Waiver of premium rider: Waives premium payments should you become totally disabled.How life insurance is pricedYour life insurance rate is based on your life expectancy, the face amount you request and the lengthof the policy, whether its the duration of your life (whole life) or a specific period (term life). Obtaininga low cost life insurance policy depends, in large part, on your current and past health.Because your current and past health conditions impact your life expectancy, insurers want to knowas much as possible about your health condition. Common conditions such as high blood pressure,heart disease, obesity, cancer and depression can all raise your life insurance rate or even result in adeclination.Based on your medical history, youll be grouped into a category such as "preferred plus," "preferred,""standard" and "substandard." Your category ultimately determines your premiums.Insurance buyers with severe health conditions or a combination of conditions can find it hard orimpossible to find life insurance. They are known as "impaired risks." Local agents may not beexperienced enough to find a company that specializes in insuring people with certain medicalconditions. Fortunately, impaired-risk specialists have expertise in knowing where to directapplications for folks with medical conditions.
The life insurance buying processThe life insurance applications process is paper-intensive, can take weeks and often seems intrusivefor people who value their privacy. A face-to-face paramedical examination is generally required forpolicies in excess of $100,000, which means, at minimum, giving of both blood and urine samples tothe paramedical professional.Expect questions in detail regarding your lifestyle, intended foreign travel destinations, your familyhealth history and your personal health history. Do you intend to scuba dive? Have you had parentsor siblings with heart disease or cancer before age 60? Have you ever taken any medicine for anxietyor depression? These, and more, are the kinds of questions to expect.Sometimes multiple interviews are required in order to verify your information. The paramed examinertypically asks these questions face-to-face and often insurance companies will conduct follow-uptelephone interviews so that you can verify the first set of answers. Regardless of the type of lifeinsurance you buy, most policies require you to meet certain guidelines regarding your lifestyle andhealth history.If it sounds tempting to shortcut this process by fudging on an answer or withholding information,dont do it. Its a crime in all 50 states to lie about or conceal information on a life insuranceapplication. Besides, policies obtained through fraud can be voided at claim time.Insurers will likely report your medical exam results (reported as numbered codes) to the MedicalInformation Bureau (MIB), which maintains a database of those who have applied for life insurance inthe last seven years. If youve given different answers to medical questions in the past, it will raise ared flag with the MIB. The goal of the MIB database is to reduce fraud.All standard life insurance policies generally cover death by any cause at any time in any place,except for death by suicide within the first two policy years (one year in some states).If you dont care to go through the underwriting process, you have two other, more expensive,options:• Simplified issue life insurance can be purchased after answering only a few medical questions. There is no medical exam required. However, if you report health problems, you will likely be declined. Also, if you are healthy, or even if you have some negative medical history, an underwritten policy is still going to be your least expensive.• Guaranteed issue life insurance is sold to anyone who applies (up to an age limit) and is by far the most expensive way to purchase life insurance. This should be considered only by those who are declined for everything else but still need life insurance. These policies have graded death benefits, meaning your beneficiaries wont receive the full death benefit until several years into the policy.In naming a beneficiary, keep in mind that the life insurance company will want to see only the namesof those who are financially dependent upon you. An acquaintance, friend or relative, absent of afinancial relationship, will not do.Working with an agentAfter reviewing the various life insurance policies available, you might still be unsure about which bestmeets your needs. The American Council of Life Insurers (ACLI) recommends consulting an
insurance agent. ACLI spokesman Jack Dolan says an agent can recommend policies that will meetyour needs. "Look at the recommended policy with care to be sure it fits your personal goals," Dolansays.Carefully study your agents recommendations and ask for a point-by-point explanation. Make surethe agent explains items you dont understand. Because your policy is a legal document, it isimportant that you know what it provides.Insure.com offers these recommendations for deciding which type of life insurance topurchase:If your agent recommends a term life policy, ask:• What is the Standard & Poors, A.M. Best, Fitch, Moodys and Weiss ratings of this insurance company?• What is the initial rate-guarantee period? Is this policy renewable past the initial rate-guarantee period without a physical exam? If so, what are the premiums?• Is this policy convertible to permanent insurance without a physical exam? If so, for what period of time do I have the right to convert?If your agent recommends a cash value policy, ask:• What is the Standard & Poors, A.M. Best, Fitch, Moodys and Weiss ratings of this insurance company?• Can you tell me, in writing, why you are recommending cash value insurance for me at this time?• Why should I combine my life insurance protection needs with my investment objectives?• Can you please prepare an analysis for me that shows the true cost of this cash value insurance policy over 5, 10, 15, 20, 25 and 30 years vs. Buying term life and investing the difference in long term bonds over those same time periods?• How much is your first-year commission on this proposed cash value policy vs. Your commission on an equivalent term life insurance policy?• Are these proposed annual premiums within my budget?• Why do you think that I can commit to paying these premiums over the long term, perhaps decades?• How much will I receive if I surrender the policy?Additional Resources• Consumer Federation of Americas Insurance "Rate of Return" Service• Insurance Information Institute: Learn about life insurance• Your states department of insurance may also have life insurance buying guides online• For a free life insurance quote or more information on the types of life insurance available, please visit Insure.com.Over 50 life insurance