Consumer Information – Understanding Life InsuranceFlexible Premium Universal Life
Who Needs Life Insurance?Life insurance protects your family by replacing your lost income if you die prematurely. Some policies also accumulate cash and pay distributions during your lifetime. When purchasing life insurance, consider your individual circumstances, the standard of living you want for your dependents, and the assets that you want to protect. In most cases, you need life insurance only if someone depends on you for support. The following can be used as a guide to determine if you need life insurance.
Term LifeTerm life policies cover you only for a "term"-or a specific period of time-usually for one, five, 10, 15, or 20 years or until a specified age, such as 65. Most term life policies provide only death benefits in the form of a check to your beneficiary for the amount of the policy if you die. Because they usually have no savings feature, term life policies generally are less expensive initially and easier to understand than cash value life policies. Except for people past middle age, term life policies usually offer the best value for your money by giving you the biggest death benefit for your premium dollar. The price of a term life policy increases as you grow older. At the same time, your insurance needs may decrease as children grow up and savings and investments increase in value. Renewable and Convertible Policies Because term life expires at the end of the term, you should look for a renewable policy with a guaranteed term that will cover the duration you will need life insurance. A renewable policy allows you to continue your insurance as long as you pay the premium, regardless of your health. However, renewal rates increase significantly if you cannot pass a physical exam. Some term insurance policies are convertible. This means that as your insurance needs change, you can exchange your term life policy for a cash value policy without taking a medical exam or answering health questions. You may choose to convert your term life policy if your health declines and it becomes difficult to qualify for a new term policy at standard rates. You also may convert your term life policy if you decide to use insurance as a way of accumulating funds instead of providing only death benefits. Insurance companies usually allow conversion until age 65.
Cash Value LifeCash value life policies provide a death benefit and a way to accumulate funds over time. However, the primary purpose of a cash value policy is to provide permanent life insurance protection, not to be a savings or retirement plan. Cash value life policies differ from term life policies in several ways, including
Remember that surrender charges and other expenses may consume all or most of a policy's cash value if you cash it in early. It usually takes at least three to five years to build any cash value. If you buy a cash value policy, try to continue your premium payments for at least 15 to 20 years. Illustrations Life insurance agents use charts or illustrations as sales tools to show how a life policy's cash value might grow. You should confirm that the illustration shows the guaranteed values based on the guaranteed interest rate the company promises to pay. Don't buy a policy based on projected future or current values. These are only estimates and may be higher than what you will actually receive. Understand the pattern of policy values, surrender charges, and other expenses. Ask your agent for this information if the illustration doesn't show it. Get copies of all the illustration pages, including those showing the guaranteed values. Paid-Up additions - This is additional insurance purchased with interest or dividends paid on your policy. Some policies include a column showing the paid-up additions increasing the death benefit over time as its based on dividends which are not guaranteed. Remember, this additional insurance is not guaranteed. Vanishing premium - Be careful if an agent tells you that interest or dividends on your policy will cause your premiums to "vanish" during the life of the policy. If interest rates or dividends drop, you may have to pay additional premiums for a longer time. Also, the amount you pay may be greater than you estimated. Whole LifeWhole life policies are a type of cash value life insurance that offer protection throughout a lifetime-that is for a person's "whole life." You pay the scheduled premium from the day you buy the policy. As long as you pay the premium when due, the policy remains in force throughout your life or until you cash it in. The scheduled premium may be level or increase after a fixed time period, but the premium is determined when issued and will not change from the amounts shown in the policy schedule. It is important that you look at the policy schedule and understand what your premium payments will be and that you can afford them. An insurance company will base the premium on your age and insurability at the time of purchase. Initially, the premium for a whole life policy will be higher than that for a term policy. You likely will pay a lower premium when you are older, if you keep the policy for a long time. Part of each premium payment goes to the cash value growth, part for the death benefit, and part for expenses such as commissions and administrative costs. There are two types of traditional whole life policies:
Some companies fail to pay dividends at the originally projected rate, while others exceed their original projections. When making your purchase decision, remember that dividends are not guaranteed and may differ from those shown in illustrations. Ask for a company's history of projected dividends versus paid dividends. Flexible Premium Universal LifeThe key characteristic of a universal life policy is flexibility. Within limits, you can choose the amount of insurance and the premium you will pay. Later, depending on the policy value and your financial needs, you can change your premium amount. The policy stays in force as long as its value is enough to pay its costs and expenses. The policy value is "interest-sensitive," which means the cash value grows in response to the general financial climate. The flexible premium feature of the policy allows you to change your premium payments, depending on the policy value and your current financial needs. For example, you may be able to skip a premium payment or decrease/increase your premium payments. Lowering the death benefit and raising the premium will increase the growth rate of your cash value. Raising the death benefit and lowering the premium will slow the growth of your cash value. If insufficient premiums are paid, the policy could lapse without value before it reaches a maturity date. The maturity date is the date your policy ceases and its cash surrender value is payable if the policyholder is still living. Therefore, it is your responsibility to consistently pay a premium that is high enough to ensure that your policy's value is adequate to pay the policy's monthly cost. The company must send you an annual report and notify you if you are in danger of losing your policy because of insufficient value. Other Insurance CoverageA variable life policy allows the owner to invest the policy values in a selection of separate accounts similar to mutual funds. Separate accounts could include money market funds and mutual funds invested in stocks and bonds. A variable life policy presents a higher risk to the owner because the cash value varies based on the investment performance of the separate account. The value of a variable policy is directly related to the investment funds and is not protected by the Guaranty Association. A group life policy provides coverage to a group of people under one contract. Most group life contracts are sold to businesses to cover their employees. Associations buy group life policies to cover their members. Lending institutions will offer a group policy to cover real estate loans. Most group life policies are for term insurance. Generally, an insurance company issues a master policy, and each person in the group receives a certificate of insurance. If you terminate your employment, you may be able to convert to an individual whole life policy and keep your coverage. A group life policy isn't always a low-cost policy. Compare the cost of your coverage under a group policy to the cost of an individual policy and shop around for the best deal. Employers should compare prices and coverages to get the best group policy for their employees. If your policy has an accelerated death benefit provision, it will pay you-under certain conditions-the policy's death benefit while you are still alive. If your life insurance policy contains this type of benefit, you can receive often all or a portion of the death benefit early if you have a terminally ill condition or are confined to a nursing home. You may want to consult with a tax consultant. An accidental death benefit can be a policy or a rider attached to another type of life or health policy. It can be individually purchased or part of a group policy. The important thing to remember is that this coverage pays only if you die from an accident. You also need to read the exclusion section because there are certain accidents it will not cover, such as deaths while participating in a hazardous sport, accidents involving alcohol or illegal drugs, and participating in riots. A viatical settlement is the sale of a life insurance policy of a person with a catastrophic or life-threatening illness or condition. A life settlement is the sale of a life insurance policy of a person who does not have a life-threatening or terminal illness. The policy is sold to a licensed viatical/life settlement company in return for a cash payment. The cash payment is a percentage of the policy's death benefit. For example, a viatical/life settlement company buys a life insurance policy that will pay a $100,000 face amount (death benefit) for $80,000. In this example, the death benefit is discounted by 20 percent. The company may pay the policy owner directly or place the payment in an escrow or trust fund. The policy owner may spend the money from the sale of the policy as he or she chooses. A medical examination and life expectancy that may vary between companies determine the sale price. Policy owners should seek offers from several companies to get the best price for their policy. To determine the sales price of the policy, the viatical/life settlement company will consider several factors, including
If you sell a life insurance policy to a viatical/life settlement company, the payment you receive may affect your eligibility for Medicaid or other government benefits. Persons interested in entering into a viatical/life settlement should consult an attorney, financial advisor, or social services agency such as Senior Disability Services Division and social security regarding potential consequences. Before signing a viatical/life settlement contract, investigate possible alternatives to ensure that you obtain the maximum amount possible from your life insurance policy. Alternatives include accelerated death benefits offered by the insurance company issuing your policy, loans secured by the policy, or surrender a portion or all of the policy for cash value. Questions and Answers
Key TermsAdministrative expense - an amount deducted, usually monthly, from an insurance policy. Assignment - the transfer of all or part of a policy owner's legal title and rights to a policy to another person. It is possible to change this type of transfer at a later date. Under an "irrevocable assignment," you transfer all of your rights to a third party and can never change this agreement. Beneficiary - the person, persons, or entity designated to receive the death benefits from a life insurance policy or annuity contract. Death benefit - amount paid to the beneficiary upon the death of the insured. Evidence of insurability - information an insurance company uses to decide whether to insure you and at what price. To qualify you for a particular policy at a particular price, companies have the right to ask you for information about your health and lifestyle. Face value - the initial amount of death benefit provided by the policy as shown on the face page of the contract. The actual death benefit may be higher or lower depending on the options selected, outstanding policy loans, or premium owed. Grace period - the time during which a policy remains in force after the premium is due but not paid. Incontestability - a provision that places a time limit (up to two years) on a company's right to deny payment of a claim because of suicide or a material misrepresentation on your application. Insured - person on whose life a company writes an insurance policy. Material misrepresentation - a significant misstatement in an application form. If a company had access to the correct information at the time of application, the company might not have agreed to accept the application. Policy owner or policyholder - the person or party who owns an insurance policy. This person may be the insured, the beneficiary, or another person. The policy owner usually pays the premium and is the only person who may make changes to a policy. Premium expense charges - an amount deducted from each premium payment, which reduces the amount credited to the policy. Rated policy - a policy issued at a higher premium to cover a person classified as a greater-than-average risk, usually because of impaired health or a dangerous occupation or hobby. Rider - written agreement attached to the policy expanding or limiting the benefits otherwise payable under the policy. Surrender charges - charges an insurance company may deduct if you cash in-or surrender-your life insurance policy or annuity. Companies also deduct these charges if you borrow money on your policy or your policy lapses for nonpayment. Underwriter - the person who reviews an application for insurance and decides if the applicant is acceptable and at what premium rate. Variable life - a type of whole life policy in which the death benefit and the cash value fluctuate according to the investment performance of a separate account fund that the policyholder selects. |
