Life insurance is protection against financial loss resulting from the death of the wage earner.
What types of life insurance are there?
Term
Term insurance is protection that insures your family for a specified period of time–usually a specific number of years or until age 65. A term policy pays a benefit only if you die during the specified time or it decreases over time. There are actually several types of term insurance including level term and decreasing term. The amount of protection provided by a level term policy remains the same throughout the time period of coverage. In contrast, the protection level of the decreasing term policy gradually declines over the coverage period. Level term can usually be renewed at the expiration of the term up to a certain age. With each renewal the premium will increase.
For example, Federal Employee’s Group Life Insurance (FEGLI) pays a full benefit if the employee dies prior to age 65. Beginning at age 65 or retirement, whichever is later, FEGLI begins to reduce.
Term insurance is initially cheaper than other types of policies for the same amount of protection. Therefore term insurance gives the largest immediate coverage for the dollar.
Term life insurance should not be used in Estate Planning.
Term insurance does not build up a cash value and cannot be borrowed against.
Whole-Life — is permanent life insurance. It is the traditional type of life insurance, premiums are fixed and there are guarantees covering the death benefit.
Universal Life — There is less certainty regarding cash values or death benefits; they could be higher or lower depending on the investments of the insurance company. This type of insurance does give you more flexibility in paying premiums.
Variable Life — is permanent life insurance but you direct where your premiums will be invested. This could increase the cash value and death benefit or not. This type of insurance does guarantee a minimum death benefit.
Why are you carrying insurance?
There are four reasons for carrying life insurance:
1. To cover final expenses.
2. To provide an estate.
3. To replace lost income in case of death of the wage earner.
4. Transition money–to assure that your heirs can carry on in the fashion of living they have grown accustomed to until your estate is probated.
How much life insurance do you need?
Some experts suggest that life insurance should equal five times your total annual take-home income. However no two people are the same. You may have special circumstances which warrant more or less insurance. If you identify your responsibilities, your monetary resources and in the event of your death, who should be protected financially and to what extent you will make a wiser life insurance purchase.
After you have answered the above items the next area of consideration would be to find an agent.
Choosing An Agent
After you’ve identified your beneficiaries’ needs, the next order of business is to find an agent. There are a number of ways to do this. The best method is by word of mouth. Collect several names and then shop around. A life insurance agent is an important person in your life and, like a doctor, lawyer or banker, you should be satisfied with an agent’s reputation and qualifications.
In all states agents must be licensed to sell life insurance. Professional qualifications too, such as CLU–Chartered Life Underwriter–following an agent’s name indicate that an agent has spent considerable time studying life insurance and family financial services. In addition, membership in the National Association of Life Underwriters indicates that the agent subscribes to both the professional and ethical standards of the industry.
When you first talk to an agent, be sure that he or she is willing and able to explain various policies and other insurance-related matters. An agent should look for ways to get you the most protection at an affordable cost. Make certain that your agent intends to review your coverage from time to time, advises you about other financial services and assists you when problems develop. If you’re not convinced that a particular agent understands your needs and will give you the service you want, seek another agent.
Comparing Costs
The next order of business is to shop for a good buy. Your chances are better if you use a special cost index developed to aid in shopping for life insurance. The price of policies can vary considerably from one company to the next. Moreover, companies are not equally competitive for all policies. Thus it is possible that one company might have a competitively priced policy for 24-year-olds but not for 35-year-olds. The cost index provides the consumer with a number that reflects the price of the policy–a policy with a smaller index number is generally a better buy than a comparable policy with a larger index number. Your agent or life insurance company can provide you with more information about the cost index. In addition, the following rules are important to remember.
1. Cost comparisons can only be made between similar plans of life insurance.
2. Compare index numbers only for the kind of policy, for your age and for the amount of insurance you intend to buy.
3. Small differences in index numbers might be offset by other policy features or differences in the quality of service you get from the company or agent.
4. Base your decision not only on a low index number but also on whether the policy meets your needs; whether you can afford the premium; whether you understand its cash values, if any, its dividends, if any, and its death benefits; and
5. The cost index should only be applied to new policies and not be used to determine whether your current policy should be replaced by a new one.
Before The Purchase
When you buy life insurance read every word of the contract, and if necessary ask your agent for a point-by-point explanation of the language. To help the consumer, many insurance companies have rewritten their contracts to make them more understandable. Keep in mind that these are legal documents and you should be familiar with what they promise.
In addition, the National Association of Insurance Commissioners and many state insurance departments have prepared Buyer’s Guides to further help you understand life insurance terms, benefits and relative costs. The Buyer’s Guide is distributed through your agent and insurance company so be sure to ask for one. If you have more questions about companies or policies, you can check with your State Insurance Commissioner’s office.
No matter how they are put together, however, life insurance policies can be divided into three parts. There’s The First Page, which outlines the basic features of the contract; The Details, which spell out the basic agreement; and The Application, which is the information you give the company about yourself and which becomes part of the policy.
After The Purchase
After purchasing new life insurance, keep in mind that you usually have a 10-day “free look” which entitles you to change your mind. If you do so, the company will return your premium, without penalty. It’s often overlooked, but it’s a good idea to give your beneficiaries a photocopy of your policy, the company’s name and the amount of coverage. Your lawyer should likewise have this information and know who your beneficiaries are.
Your beneficiaries should know where your policy is kept, because it will have to be sent to the company upon your death, along with a copy of the death certificate in order to obtain the life insurance proceeds. It’s not necessary to keep life insurance policies in a safe deposit box, but copy down the name of the company and policy number in case the policy is mislaid or lost.
Your beneficiaries need not take your insurance proceeds in one lump sum. Many people select other options, such as a monthly income and a specific sum set aside for other purposes, perhaps education. Ask your agent about the settlement options available to you.
Switching Policies
If you already own whole life insurance, think twice if someone suggests that you replace it.
Before you give up this protection make sure you are still insurable (check medical and any other qualification requirements). Also remember that you are now older than when you first purchased your policy, and a new one will cost more because of your age. Moreover, an older policy may have provisions that are not duplicated in some new ones today. This does not mean that you should reject the idea of replacing a policy you already have, but rather that you should proceed with caution. It is recommended that you ask your agent or company for an opinion about the new proposal, so as to get both sides of the argument.
Eight Things To Do
Remember that life insurance is not a static product. Your needs may change; your income might vary; your family size might change. Therefore your basic life insurance needs can vary over time. It is wise to review your coverage periodically.
Here are eight rules of thumb to remember when buying life insurance. For further clarification you may want to consult with your agent, if you have one, or your State Insurance Commissioner.
1. Understand and know what your life insurance needs are before any purchase.
2. Buy your life insurance from a company that is licensed in your state.
3. Select an agent who is competent, knowledgeable, and trustworthy.
4. Shop around and compare costs.
5. Buy only the amount of life insurance you need and can afford.
6. Read your policy and make sure you understand it.
7. Inform your beneficiaries about the kinds and amount of life insurance you own and where the policies are kept.
8. Check your coverage periodically or whenever your situation changes to be sure it meets your current needs.
Conclusion
You’ve been exposed to some of the thinking that should go into any life insurance purchase and the ways you can utilize the product to protect your family. Equally important is your understanding that there is a lot to learn before you make a final decision about your life insurance purchase. By knowing the product, your needs and price differences, you will have gone a long way toward solving your own insurance requirements. It will take time and patience on your part, but as an educated consumer you can make a wise decision about your life insurance purchase.