Personal Life Insurance Guide
What About the Policy You Have Now?
What Is the Right Kind of Life Insurance?
Finding a Good Value in Life Insurance
Prepared by the National Association of Insurance Commissioners The National Association of Insurance Commissioners is an association of state insurance regulatory officials. This association helps the various insurance departments to coordinate insurance laws for the benefit of all consumers. This guide does not endorse any company or policy. |
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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.
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?
Don’t sign an insurance application until you review it carefully to be sure all the answers are complete and accurate.
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.
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.
Read your policy carefully. Ask your agent or company about anything that is not clear to you.
Review your life insurance program with your agent or company every few years to keep up with changes in your income and your needs.
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 of 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 case of early death, or benefits in case 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. |
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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 wanted.
• 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 in 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 brought 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. |
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There are a number of methods of determining one's need for life insurance. A significant part of your conclusion will be based on your philosophy with respect to family security issues.
1. A simplistic method of determining your need is known as "programming". That is to say, "I want my family to have a certain number of years of my income", i.e., five to seven years plus the cost of funeral expenses, college costs and emergency funds. Total these amounts, discount liquid assets and the result will be the amount of coverage that you will require. A 'capital needs' approach considers your family's long-term needs.
2. In order to do a long-term approach to your family's security needs, you would take a "capital needs" approach. With this method, you determine your family's monthly and annual budgetary needs (i.e., 75% of your gross income) and capitalize that amount, assuming a conservative interest rate, such as 3% to 4%. An example: if your gross income is $50,000, your family may need $37,500 or 75% of that amount per year to maintain their lifestyle. At 3.75% annual interest, your family would need $1,000,000 of liquid capital, or insurance, to produce that income indefinitely. Other considerations would be the inflationary impact on the income needs, lifestyle changes and other objectives.
3. There are many other reasons why you would need insurance, such as business reasons, debts, pension planning, estate planning, etc.
Which Plan Is Right For Me?
Currently, insurance companies offerings include 1 year increasing term and level payment 5, 10, 15, 20 and 30 year term prices. The 1, 5, & 10 year policies are best for people who want to keep their policies for no more than 10 years. Usually, if you feel that your need is at least 5 years, you may best be served by a 10 year policy because the cost will be substantially less than the 1 or 5 year basis when looked at on a cumulative basis. There are extenuating circumstances and unique situations that arise with some applicants. The 15 year and 20 year policies are very well priced. A brief evaluation of the figures with respect to your personal family situation will quickly reveal which alternatives are best. Additionally, you may layer coverage to coincide with diminishing needs. This is something that you could benefit from a brief discussion with an expert.
Are There Special Discounts For Multiple Lives?
Yes, but companies that are offering multiple discounts are a minority.
Why Is One Insurance Company More Expensive Than Another?
Factors that make one insurance company more competitive than another are as follows. A company may decide to specialize in a sale of a particular product and gauge their profits based on volume. Secondly, companies profit margins on a line of business, underwriting considerations, are very important and the overall financial integrity of the company can be a factor as well as contractual provisions dealing with conversion and renewability may differ.
How Does My Health Affect My Quote?
Underwriting considerations are most important in evaluating companies and determining what the actual price for your insurance will be once the company has completed their evaluation. Factors that most commonly affect your rate are blood pressure, the need to take certain medications, cholesterol readings and ratios, family history, smoking status and history as well as other health history. If there are any questions on any of these issues, a consultation with an expert would be useful before selecting a company.
Why Should I Buy From Orchard Financial and Insurance Services?
Orchard Financial and Insurance Services monitors and selects from the entire universe of insurance products in the market. We search for the most competitive rates from financially sound companies. Our firm will assist you in evaluating all alternatives. You will receive a personalized approach in the selection, processing and ongoing service once you have made your decision.
| 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 your family sell or cash in to pay expenses after your death? |
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What Is the Right Kind of Life 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 income.
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 than you have been paying for the term insurance.
Cash Value Life 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 if you stop paying premiums and take out the remaining cash value. You can also use your cash value to keep insurance protection for a limited time or to buy a reduced amount without having to pay more premiums. 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 quality 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.
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 illustrations will show you what the company guarantees. 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 in 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 amount 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 of 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 the 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.