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Life Insurance
Life Insurance Buyer's Guide
Click
here for
pdf version to print out.
This guide can help you when you shop for life
insurance. It discusses how to:
Find a Policy That Meets Your Needs and Fits Your Budget
Decide How Much Insurance You Need
Make Informed Decisions When You Buy a Policy
Prepared
by the National Association of Insurance Commissioners
IMPORTANT THINGS TO
CONSIDER
BUYING LIFE INSURANCE
WHAT ABOUT THE
POLICY YOU HAVE NOW?
HOW MUCH DO YOU NEED?
WHAT IS THE RIGHT
KIND OF INSURANCE?
LIFE INSURANCE
ILLUSTRATlONS
FINDING A GOOD VALUE IN
LIFE INSURANCE
IMPORTANT THINGS TO CONSIDER
1. Review your own insurance needs and circumstances. Choose
the kind of policy that has benefits that most closely fit
your needs. Ask an agent or company to help you.
2. Be sure
that you can handle premium payments. Can you afford the
initial premium? If the premium increases later and you
still need insurance, can you still afford it?
3. Don't sign
an insurance application until you review it carefully to be
sure all the answers are complete and accurate.
4. Don't 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. .
5. Don't drop
one policy and buy another without a thorough study of the
new policy and the one you have now. Replacing your
insurance may be costly. .
6. Read your
policy carefully. Ask your agent or company about anything
that is not clear to you.
7. Review your
life insurance program with your agent or company every few
years to keep up with changes in your income and your needs.
BUYING LIFE INSURANCE
When you buy life insurance, you want coverage that fits
your needs.
First, decide
how much you need ? and for how long ? and what you can
afford to pay. Keep in mind the major reason you buy life
insurance is to cover the financial effects of unexpected or
untimely death. Life insurance can also be one of many ways
you plan for the future.
Next, learn
what kinds of policies will meet your needs and pick the one
that best suits you.
Then, choose
the combination of policy premium and benefits that
emphasizes protection in ease of early death, or benefits in
ease of long life, or a combination of both.
It makes good
sense to ask a life insurance agent or company to help you.
An agent can help you review your insurance needs and give
you information about the available policies. If one kind of
policy doesn't seem to fit your needs, ask about others.
This guide
provides only basic information. You can get more facts from
a life insurance agent or company or from your public
library.
WHAT ABOUT THE POLICY YOU HAVE NOW?
If you are thinking about dropping a life insurance policy,
here are some things you should consider:
If you decide to replace your policy, don't cancel your old policy
until you have received the new one. You then have a minimum
period to review your new policy and decide if it is what
you want.
It may be costly to replace a policy. Much of what you
paid in the early years of the policy you have now, paid for
the company's cost of selling and issuing the policy. You
may pay this type of cost again if you buy a new policy.
Ask your tax advisor if dropping your policy could
affect your income taxes.
If you are older or your health has changed, premiums
for the new policy will often be higher. You will not be
able to buy a new policy if you are not insurable.
You may have valuable rights and benefits in the policy
you now have that are not in the new one.
If the policy you have now no longer meets your needs,
you may not have to replace it. You might be able to change
your policy or add to it to get the coverage or benefits you
now want.
At least in the beginning, a policy may pay no benefits
for some causes of death covered in the policy you now have.
In all cases, if you are thinking of buying a new
policy, check with the agent or company that issued you the
one you have now. When you bought your old policy, you may
have seen an illustration of the benefits of your policy.
Before replacing your policy, ask your agent or company for
an updated illustration. Check to see how the policy has
performed and what you might expect in the future, based on
the amounts the company is paying now.
HOW MUCH DO YOU NEED?
Here are some questions to ask yourself:
How much of the family income do I provide? If I were to
die early, 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'd 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?
As you figure
out what you have to meet these needs, count the life
insurance you have now, including any group insurance where
you work or veteran's insurance. Don't forget Social
Security and pension plan survivor's benefits. Add other
assets you have: savings, investments, real estate and
personal property. Which assets would yow family sell or
cash in to pay expenses after your death?
WHAT IS THE RIGHT KIND OF INSURANCE?
All policies are not the same. Some give coverage for your
lifetime and others 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. Your choice should be based on your needs and what
you can afford.
There are two
basic types of life insurance: term insurance and cash value
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 mcome.
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 some 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 that
you have been paying for the term insurance.
Cash Value
Insurance is a type of insurance where the premiums charged
are higher at the beginning than they would be for the same
amount of term insurance. The part of the premium that is
not used for the cost of insurance is invested by the
company and builds up a cash value that may be used in a
variety of ways. You may borrow against a policy's cash
value by taking a policy loan. If you don't pay back the
loan and the interest on it, the amount you owe will be
subtracted from the benefits when you die, or from the cash
value to keep insurance protection for a limited time or to
buy a reduced amount without having to pay more premium. You
also can use the cash value to increase your income in
retirement or to help pay for needs such as a child's
tuition without canceling the policy. However, to build up
this cash value, you must pay higher premiums in the earlier
years of the policy. Cash value life insurance may be one of
several types; whole life, universal life and variable life
are all types of cash value insurance.
Whole Life
Insurance covers you for as long as you live if your
premiums are paid. You generally pay the same amount in
premiums for as long as you live. When you first take out
the policy, premiums can be several times higher than you
would pay initially for the same amount of term insurance.
But they are smaller than the premiums you would eventually
pay if you were to keep renewing a term policy until your
later years.
Some whole
life policies let you pay premiums for a shorter period such
as 20 years, or until age 65. Premiums for these policies
are higher since the premium payments are made during a
shorter period.
Universal Life
Insurance is a kind of flexible policy that lets you vary
your premium payments. You can also adjust the face amount
of your coverage. Increases may require proof that you
qualify for the new death benefit. The premiums you pay
(less expense charges) go into a policy account that earns
interest. Charges are deducted from the account. If your
yearly premium payment plus the interest your account earns
is less than the charges, your account value will become
lower. If it keeps dropping, eventually your coverage will
end. To prevent that, you may need to start making premium
payments, or increase your premium payments, or lower your
death benefits. Even if there is enough in your account to
pay the premiums, continuing to pay premiums yourself means
that you build up more cash value.
Variable Life
Insurance is a kind of insurance where the death benefits
and cash values depend on the investment performance of one
or more separate accounts, which may be invested in mutual
funds or other investments allowed under the policy. Be sure
to get the prospectus from the company when buying this kind
of policy and STUDY IT CAREFULLY. You will have higher death
benefits and cash value if the underlying investments do
well. Your benefits and cash value will be lower or may
disappear if the investments you chose didn't do as well as
you expected. You may pay an extra premium for a guaranteed
death benefit.
LIFE INSURANCE ILLUSTRATlONS
You may be thinking of buying a policy where cash values,
death benefits, dividends or premiums may vary based on
events or situations the company does not guarantee (such as
interest rates). If so, you may get an illustration from the
agent or company that helps explain how the policy works.
The illustration will show how the benefits that are not
guaranteed will change as interest rates and other factors
change. The illustration will show you what the company
guaranteed. It will also show you what could happen in the
future. Remember that nobody knows what will happen in the
future. You should be ready to adjust your financial plans
if the cash value doesn't increase as quickly as shown in
the illustration. You will be asked to sign a statement that
says you understand that some of the numbers in the
illustration are not guaranteed.
FINDING A GOOD VALUE IN LIFE INSURANCE
After you have decided which kind of life insurance is best
for you, compare similar policies from different companies
to find which one is likely to give you the best value for
your money. A simple comparison of the premiums is not
enough. There are other things to consider. For example:
Do premiums or benefits vary from year to year?
How much do the benefits build up in the policy?
What part of the premiums or benefits is not guaranteed?
What is the effect of interest on money paid and
received at different times on the policy?
Once you have
decided which type of policy to buy, you can use a cost
comparison index to help you compare similar policies. Life
insurance agents or companies can give you information about
several different kinds of indexes that each work a little
differently. One type helps you compare the costs between
two policies if you give up the policy and take out the cash
value. Another helps you compare your costs if you don't
give up your policy before its coverage ends. Some help you
decide what kind of questions to ask the agent about the
numbers used in an illustration. Each index is useful is
some ways, but they all have shortcomings. Ask your agent
which will be most helpful to you. Regardless of which index
you use, compare index numbers only for similar policies ?
those that offer basically the same benefits, with premiums
payable for the same length of time.
Remember that
no one company offers the lowest cost at all ages for all
kinds and amounts of insurance. You should also consider
other factors:
How quickly does the cash value grow? Some policies have
low cash values in the early years that build quickly later
on. Other policies have a more level cash value build?up. A
year?by?year display of values and benefits can be very
helpful. (The agent or company will give you a policy
summary or an illustration that will show benefits and
premiums for selected years).
Are there special policy features that particularly suit
your needs?
How are non guaranteed values calculated? For example,
interest rates are important in determining policy returns.
In some companies increases reflect the average interest
earnings on all of that company's policies regardless of
when issued. In others, the return for policies issued in a
recent year, or a group of years, reflects the interest
earnings on that group of policies; in this case, amounts
paid are likely to change more rapidly when interest rates
change.
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ANB Insurance, Aver-Neuwald-Berryessa Insurance, LLC
P.O. Box 1200 • 931 Mission St.• Santa Cruz,CA 95061
California Department of Insurance License Number: 0C47334
TEL: 831-423-4304 • 1-800-245-7398
FAX: 831-423-0120
Email:
anbins@anbins.com |
