Life
Insurance Questions
How much life insurance
do I need?
What is the difference
between term and whole life?
What are the three types
of permanent life insurance?
How do Variable &
Fixed Annuities work?
How do Accelerated Death
Benefits work?
What does the medical
test look for?
Who should I name as
beneficiaries?
Should I replace my old
policy?
Do single people need
life insurance?
What happens if I miss
a payment?
What if I disabled and
can’t pay the premium?
When will the policy be
in effect?
It is expected that
during the life insurance buying process, you will have many questions. You
should feel free to ask your agent for answers to any of your questions.
The following are answers to many common
questions that you may have:
How
much life insurance do I need?
If you are
providing financial support for people who are depending on you, you need life
insurance. To determine how much you need to replace your lost income, deduct
the total income that would be lost upon your death from the sum required for
your family's ongoing financial stability. Beyond that, it depends on your particular
circumstances (e.g., whether you have considerable net worth or few backup
resources) and whether you want insurance for other purposes, such as
educational funds. The solution to your particular needs may entail a
combination of several policies, and the combination may be changed as your
situation evolves.
What's
the difference between term, convertible term, and whole life insurance?
Whole life
insurance, the most traditional form of "permanent" insurance, can be
kept in force for as long as you live. The face amount and the premium (the
amount you pay for protection each year) are fixed at the time you buy your
policy and stay the same even as you age. The policy's cash value grows at a
fixed rate of return specified in the policy and can be used as collateral to
borrow against your policy. While permanent insurance is usually recommended as
the core of an insurance strategy, term insurance is good for people who need
coverage for short periods of time -- younger families, say, who need large
amounts of protection for one year, five years, or more. Lower premiums at
younger ages increase as policyholders age and renew their policies. Benefits
are paid only if death occurs during the period covered. If you stop paying
premiums, the insurance stops. "Convertible" term policies can be
exchanged for permanent insurance without a medical examination, but with a
higher premium. Term policies generally have no cash value and no residual
rights if the policy is canceled.
Back to top
What
are the three types of permanent insurance?
Whole life
(discussed above), universal, and variable life are all permanent insurance and
can provide lifetime protection and accumulate cash value. Unlike whole life,
the cash value in universal life is linked to interest rates, and the cash
value of variable life is linked to invested options. With universal life
insurance you can reduce or increase the amount of the death benefit and vary
the amount or timing of premium payments, subject to certain limitations.
Variable life allows you to allocate your premiums among a variety of
investment options offering varying degrees of risk. The cash value of
universal and variable policies is not guaranteed, although some policies set a
minimum death benefit.
How
do variable and fixed annuities work?
Annuities are
long-term vehicles used to provide retirement income to individuals without
pensions, to supplement a pensioner's income, or to build assets over a more
limited period. With variable annuities, the value varies according to the
worth of the insured's investment options chosen. Payments can be fixed or
variable. Under a fixed annuity (also called a fixed-dollar annuity), money is
invested in assets with fixed rates of return. Because annuities are designed
to be held for many years, the interest in an annuity builds up on a
tax-deferred basis, and purchasers are generally not taxed until regular
payments begin after retirement. Early withdrawals, however, result in
substantial penalties in addition to income taxes.
How
do accelerated death benefits work?
More than 200
insurers now offer this "living benefits" option to ease the
financial burdens of the seriously ill or incapacitated. It allows
policyholders to receive all or part of the policy's proceeds prior to death
under certain circumstances. Because payments may affect tax status and
Medicare eligibility, and will be deducted from the overall benefits paid later
to beneficiaries, policyholders should thoroughly investigate using this
benefit in advance.
Are
medical tests designed to eliminate applicants likely to develop a serious
health condition?
Medical tests
provide accurate and current information about an applicant's health, thus
enabling insurers to charge premiums that reflect the level of risk an
applicant represents. Because some health conditions are easily managed through
proper medication, therapy or lifestyle changes, medical information makes it
possible for insurers to cover applicants with certain health conditions. More
serious or incurable conditions present an enormous risk that an insurer simply
cannot assume.
What
should I consider in naming life insurance beneficiaries?
A: Always name a
"contingent," or secondary, beneficiary, just in case you outlive
your first beneficiary.
B: Select a
specific beneficiary, rather than having the proceeds of your life insurance
paid to your estate. One of the great advantages of life insurance is that it
can be paid to your family immediately. If it is payable to your estate,
however, it will have to go through probate with the rest of your assets.
C: Be very
specific in wording beneficiary designations. Saying "wife of the
insured" could result in an ex-spouse getting the proceeds. Naming
specific children may exclude those born later. If your child dies before you,
do you want the proceeds to go to that child's children? Changing the
beneficiary designation is easy, but you have to remember to do it. Due to the
various issues involved, an agent can be an excellent source of information to
help you properly set up your beneficiary designation.
Does
it make sense to replace a policy?
Think
twice before you do, because in many situations it may not be to your
advantage. Before dropping any in-force policy, consider:
A. If your health status has changed over the years, you may no longer be
insurable at standard rates.
B. Your present policy may have a lower premium rate than is required on a new
policy of the same type (if, for no other reason, that you have grown older).
C. If you replace one cash-value policy with another, the cash value of the new
policy may be relatively small for several years and may never be as large as
that of the original one.
D. You will be subject to a new contestability period.
You should ask
insurance agents for a detailed listing of cost breakdowns of both policies,
including premiums, cash surrender value, and death benefits. Compare these as
well as the features offered by both policies.
If
you decide to surrender or reduce the value of the policy you now own and
replace it with other insurance, be sure that:
A. the agent making the proposal puts it in writing;
B. you pass any required medical examination; and
C. your new policy is in force before you cancel the old one.
As
a single person, do I need insurance?
The answer almost
definitely is yes. You may want to consider these options:
Disability
income insurance -- especially
important for self-supporting singles without sizable assets, this can replace
a good part of the income you would lose if you were unable to work because of
accident or illness. If you don't have long-term disability coverage at work,
ask your life insurance agent about an individual policy designed to replace at
least 60 percent of your income.
Health
insurance -- if you don't have
on-the-job coverage, an individual policy is your first line of defense against
ever-escalating medical and hospital costs. You can keep premium costs down by
electing a large deductible, thereby "self-insuring" as much as you
can afford.
Life insurance -- even if you have no dependents now, you may
later. If you buy now when you are younger and healthier, you can "lock
in" term coverage at a reasonable rate, including conversion features.
What
happens if I fail to make the required premium payments?
If you miss a
premium payment, you typically have a 30- or 31-day grace period during which
you can pay the premium with no interest charged. After that, the company with
your authorization can draw from a permanent policy's cash value to keep that
policy in force. In some flexible-premium policies, premiums may be reduced or
skipped as long as sufficient cash values remain in the policy. However, this
will result in lower cash values and a shortened coverage period.
What
if I become disabled and can't pay the premiums?
Provisions or
riders that provide additional benefits can be added to a policy. One such
rider is a waiver of premium for disability. With this rider, if you become
totally disabled for a specified period of time, you don't have to pay premiums
for the duration of the disability.
When
will the policy be in effect?
The date that
insurance goes into effect could be different from the date the company issues
the policy. If you decide to purchase the policy, always check precisely when
the insurance becomes effective.
Last revised: July 8, 2003