Overview
Life Insurance
Life insurance and annuities can be an important part of your family's long-term financial planning. However, shopping for the right coverage can be intimidating. That is why it is important to find a trusted advisor for guidance on which type of policies best fit your risk tolerance and investment objectives. Your state department of insurance provides a list of agents and companies licensed to do business in your state.
All life insurance policies have one thing in common – they're designed to pay money to the "named beneficiaries" when you die. The beneficiaries can be one or more individuals or even an organization. In most cases, policies are purchased by the person whose life is insured, but life insurance policies can be taken out by spouses or anyone who is able to prove they have an insurable interest in the person.
There are many different types of life insurance policies. However, they generally fall into two classes of life insurance products: term and cash value. You can also take out separate "riders" that allow you to modify or add to your policy's benefits. Since each individual's situation is different, please review our descriptions below and our answers to frequently asked questions to help you better understand what you should consider before you speak to a financial advisor.
Term Life Insurance
Term life insurance is a policy that is purchased for a period of time (a term). The policy pays money to the named beneficiaries if the insured dies during the term. Term life insurance is intended to provide lower-cost coverage for a specific period.
Term life policies may include a provision that allows coverage to continue (renew) at the end of the term, even if your health status has changed. However, those premiums may be higher than the original policy. Ask what the premiums will be before you renew. Also, ask if you lose the right to renew at a certain age. If the policy is non-renewable you will need to apply for coverage at the end of the term.
Cash Value Life Insurance
A cash value life insurance policy is different because you can keep it for as long as you need it. These policies also have savings or investment features, which make it possible for policy owners to get money from the policy while they鈥檙e still alive. Whole life, universal life and variable life are types of cash value policies.
Life Insurance Riders
Life insurance riders give you a choice to add coverage that isn't in your life insurance policy. But adding a rider also increases your premium.
With a waiver of premium rider, you can stop paying your life insurance premium if you develop a covered illness or disability named in the rider. Also check if you must wait before the insurer waives the premiums after you're diagnosed.
With an accidental death benefit rider, your policy will pay more than the death benefit if you die in an accident. Some riders pay two to three times the death benefit for certain accidents. Insurers sometimes describe these riders as double or triple indemnity. Be sure to check how the rider defines an accident.
A guaranteed insurability rider lets you increase your death benefit at certain times in the future without a medical exam. How much it costs to increase the benefit will depend on your age and the amount of the increase, not your health or lifestyle.
A long-term care rider lets you use part of your death benefit to pay for long-term care expenses. There may be a limit on how much of the death benefit you can use. Also, you may be able to use the benefit only for certain types of long-term care expenses, such as nursing home or home health care. The rider will state how the insurer will pay benefits. You may have to pay for expenses first and be reimbursed. Or the insurer could pay you a set amount each month. The rider also will tell you what's required to access your death benefit. Usually, you must be unable to do certain activities of daily living. You may also have to wait a set amount of time before you can use the death benefit for long-term care expenses.
An accelerated death benefit is also known as a "living benefit." It lets you take money from your death benefit if you're diagnosed with a terminal illness and expect to die soon. You don't have to use the money to pay for care related to your illness. Be sure to check the rider to learn what terminal illnesses qualify and what else the insurer requires. Ask how much of the death benefit you can receive and how much will be kept to pay beneficiaries after you die.
Annuities
Annuities are a financial contract with an insurance company that make a series of income payments to you at regular intervals in return for a premium and premiums previously paid. The value in an annuity contract is the amount in premiums you have paid, minus any applicable charges, plus any interest your premiums have earned. There are two types of annuity products: deferred annuities and fixed deferred annuities.
Here's what you should know before you purchase an annuity.
Deferred Annuities
A Deferred Annuity is an annuity payment to be made as a single payment or a series of installments to begin at some future date, such as in a specified number of years or at a specified age.
Fixed Deferred Annuities
Money in a fixed deferred annuity earns interest at a rate the insurer sets. The rate is fixed (won't change) for some period, usually a year. After that rate period ends, the insurance company will set another fixed interest rate for the next rate period. That rate could be higher or lower than the earlier rate.
Fixed deferred annuities do have a guaranteed minimum interest rate鈥攖he lowest rate the annuity can earn. It's stated in your contract and disclosure and can't change as long as you own the annuity. Ask about:
- The initial interest rate – What is the rate? How long until it will change?
- The renewal interest rate – When will it be announced? How will the insurance company tell you what the new rate will be?
Consumer Guides
Learn more about life insurance and annuities.
Consumers Guide to Life Insurance
A one-stop-shop for information related to life insurance. This provides useful insight into the types of policies available and helps you estimate how much insurance will provide adequate coverage, depending on your individual need. View the Consumers Guide to Life Insurance to get a better understanding of life insurance products.
Consumers Guide to Annuities
Helps consumers understand the differences among various annuities so they may decide whether purchasing an annuity is right for them and what type might best fits their needs. View the Consumers Guide to Annuities to get a better understanding of annuity products.
Consumers Guide to Cancer Insurance
The decision of whether to purchase cancer insurance can be a challenging one. While cancer treatment accounts for 10 percent of all U.S. health expenses, the policy will only provide benefit if one is afflicted with the disease. View the Consumers Guide to Cancer Insurance to get a better understanding of your options.
Questions
Decided you need life insurance? Ask these questions before you buy.
Ask yourself
- How much of the family income do I provide?
- Will these financial obligations change over time?
- Knowing that the risk of death increases each year, in how many years do you anticipate the need for death benefits?
Ask your agent
- Do I pay the premiums on a set schedule?
- Does the policy have a cash value?
- Do the policy values change from year to year?
- What part of the premium or policy value isn鈥檛 guaranteed?
- Are there guaranteed minimums on my policy?
Have questions? We've got you covered.
Will the life insurance provided at my workplace be enough?
Everyone's needs are different. In order to determine how much life insurance, you need, it helps to understand how much your family depends on your financially, the value of the services you provide as well as expenses that might be involved with end of life medical bills and burials.
Will I get a better deal on the Internet?
While the Internet provides good information, it is not necessarily cheaper. You will likely pay the same premiums if you use an agent or purchase a policy online. An agent can help you figure out how much insurance you need, understand the terms of the policy and help you with the application.
Can I have more than one beneficiary?
Yes, you can have several beneficiaries. You need to note what percentage of your death benefits got to each beneficiary. If one of your beneficiaries is a minor, consider setting up a trust or estate since most insurance companies will pay benefits to minors.
Are all cash value policies the same?
Cash value policies vary. In some policies, the values are low in the early but build later. In other policies the values build up gradually. Be sure to ask your insurance advisor to explain the future values and benefits.
Who needs life insurance?
Your need for life insurance varies with your age and responsibilities. It is a very important part of financial planning. There are several reasons to purchase life insurance. You may need to replace income that would be lost with the death of a wage earner. You may want to make sure your dependents do not incur significant debt when you die. Life insurance may allow them to keep assets versus selling them to pay outstanding bills or taxes.
Consumers should consider the following factors when purchasing life insurance:
- Medical expenses previous to death, burial costs and estate taxes;
- Support while remaining family members try to secure employment;
- Continued monthly bills and expenses, day-care costs, college tuition and retirement.
What is the right kind of life insurance?
All policies are not the same. Some give coverage for your lifetime and other 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. There are two basic types of life insurance: term insurance and permanent insurance.
Term 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 a certain 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.
Permanent Insurance
Permanent insurance (such as universal life, variable universal life and whole life) provides long-term financial protection. These policies include both a death benefit and, in some cases, cash savings. Because of the savings element, premiums tend to be higher.
How much life insurance do I need?
Ask yourself the following questions:
- How much of the family income do I provide?
- If I were to die, how would my survivors, especially my children, get by?
- Does anyone else depend on me financially, such as a parent, grandparent, brother or sister?
- Do I have children for whom I would like to set aside money to finish their education in the event of my death?
- How will my family pay final expenses and repay debts after my death
- Do I have family members or organizations to whom I would like to leave money?
- Will there be estate taxes to pay after my death?
- How will inflation affect future needs?
Some insurance experts suggest that you purchase five to eight times your current income. However, it is better to go through the above questions to figure a more accurate amount.
Tips on Buying Life Insurance
- Make sure you feel confident in the insurance agent and company.
- Decide how much you need, for how long, and what you can afford to pay.
- Learn what kinds of policies will provide what you need and pick the one that is best for you.
- Do not sign an application until you review it carefully to be sure the answers are complete and accurate.
- Do not 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.
- When you buy a policy, make the check payable to the company, not the agent.
Who can take out a policy on my life?
Only someone who has an "insurable interest" can purchase an insurance policy on your life. That means a stranger cannot buy a policy to insure your life. People with an insurable interest generally include members of your immediate family. In some circumstances your employer or business partner might also have an insurable interest.
Insurable interest may also be proper for institutions or people who become your major creditors.
Why is term life often called "temporary" insurance?
Insurance agents sometimes refer to term insurance as "temporary" because the term policy lasts only for a specific period. It is probably no more "temporary" than your auto or homeowner insurance. Just like term, those types of policies provide coverage for a specific period of time, and must be renewed when that period ends.
What do I get when I buy term insurance?
You have bought and received the company's guarantee that if you die during the term of the policy, it will pay a death benefit to your beneficiary.
What happens to the cash value after the policy is fully paid up?
The company plans to use the cash value to pay premiums until you die. If you take cash value out, there may not be enough to pay premiums. The company could require you to resume paying premiums, or reduce the amount of the death benefit to an amount that the remaining cash value will support.
What is a "participating" policy?
That is a policy that may pay you dividends. You have a chance to "participate" in the company's earnings. A life insurance dividend is actually a refund of part of your premium. When a company collects more money in premiums than it needs to pay death claims and maintain the insurance pool for future claims, the company may pay dividends at the end of that year.
An insurance agent has suggested that I buy term instead of whole life. Does it makesense to buy term and invest the difference?
"Buy term and invest the difference" has been a popular sales slogan for term life. The pitch compares term, the least expensive form of life insurance, with other kinds of life insurance.
Example:
- $100,000 death benefit at age 35
- Annual whole life premium: $1,800
- Annual renewable term premium: $250
- Difference: $1,550
What are your choices?
- Buy whole life. The "difference" is used to keep your premiums lower than the actual cost of insurance as you get older.
- Buy term. You keep the difference.
In addition, make sure you consider the following:
- As you get older your term premiums will increase to keep up with the cost of insurance;
- If you invested the difference, you could use your investment to pay the higher cost of insurance;
- If you spent the difference you will have to dip into other savings to pay higher premiums; and
- If your health deteriorates you may not be able to buy a new policy.
How much cash value is in my policy?
Read your policy. It has a table of cash values that should provide the answer. Call your agent if you are still not sure of the cash value amount.
What happens to the cash value in my policy when I die?
When you die, the insurance company will pay the death benefit. No matter how much cash value you may have had in the policy the moment before you died, your beneficiaries can collect no more than the stated death benefit. Any loans you have not repaid (plus interest) will be subtracted from the death benefit.
The result: your beneficiary could wind up with less than the face amount of the policy.
The exception: some whole life policies pay both the death benefit and the cash value when you die.
Tips & Tools
Need help navigating life insurance?
Be prepared before you buy
Review Your Insurance Needs
Talk to an insurance agent. He or she can help you evaluate your needs and give you information about available policies.
Decide How Much Coverage You Need
How much of the family income do you provide? Does anyone else depend on you financially? How will your family pay final expenses and repay debts after your death? Based on the answers to these questions, decide how much coverage you need, for how long and what you can afford to pay. You want to make sure that you buy enough life insurance to cover the financial effects of an unexpected or untimely death.
Assess Your Current Life Insurance Policy
If you already have a life insurance policy, do not cancel it until you have received the new one. Keep in mind that you may not have to cancel your current policy. You may be able to change your policy to get the coverage or benefits you want now.
Compare the Different Kinds of Insurance Policies
There are two basic types of life insurance: term and cash value. Term generally has lower premiums in the early years but does not build up cash values that you can use in the future. Cash value may be one of several types: whole life, universal life and variable life. Your choice should be based on your needs now and in the future and what you can afford.
Be Sure You Can Afford the Premium Payments
Before purchasing a life insurance policy, be sure that you can afford the cost. Can you afford the initial premium? If the premium increases later, will you still be able to afford it?
Have an Insurance Agent Help You Evaluate the Future of Your Policy
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. Ask your agent for a year-to-year display of values and benefits.
Keep Your Current Policy
It is important that you do not drop one policy and buy another without a thorough study of the new policy and the one you have now. Replacing your insurance policy may be costly.
Understand Renewal Policies
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 a certain age.
Read Your Policy Carefully
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? These are all questions that you should be able to answer by reading your policy thoroughly. Your agent can help you understand your policy.
Review Your Life Insurance Program Every Few Years
How will inflation affect your future needs? Do you need more insurance when your family size increases? Review your policy with your agent every few years to keep up with changes in your income and needs.