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 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.
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.
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 down payment 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.
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 and their publications can be found in your
local library.
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.
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.
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
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.
