The cash value of a variable life policy is not guaranteed, and
the policyholder bears that risk. However, by choosing among the
available fund options, the policyholder can create an asset
allocation that meets his or her objectives and risk tolerance.
Good investment performance will lead to higher cash values and
death benefits. On the other hand, poor investment performance
will lead to reduced cash values and death benefits.
Some policies guarantee that death benefits cannot fall below a
minimum level. There are both universal life and whole life
versions of variable life.
What are the advantages and disadvantages of term and permanent
insurance?
Term Insurance
Advantages
Initially, premiums are generally lower than those for permanent
insurance, allowing you to buy higher levels of coverage at
a younger age when the need for protection often is greatest.l
It’s good for covering specific needs that will disappear in
time, such as mortgages or car loans.
Disadvantages
Premiums increase as you grow older.l Coverage may
terminate at the end of the term or may become too expensive to
continue.l Generally, the policy doesn’t offer cash value or
paid-up insurance.
Permanent Insurance
Advantages
As long as the necessary premiums are paid, protection is
guaranteed for your entire life.l Premium costs can be fixed or
flexible to meet personal financial needs.l Policy accumulates a
cash value that you can borrow against. (Loans must be paid back
with interest or your beneficiaries will receive a reduced death
benefit.) You can borrow against the policy’s cash value to pay
premiums or use the cash value to provide paid-up insurance. The
policy’s cash value can be surrendered’ in total or in part ‘ for
cash or converted into an annuity. (An annuity is an insurance
product that provides an income for a person’s life-time or for a
specific period of time.)l A provision or “rider” can be added to
a policy that gives you the option to purchase additional
insurance without taking a medical exam or having to furnish
evidence of insurability. (For more information on riders, see
page 19.)
Disadvantages
Required premium levels may make it hard to buy enough
protection.l It may be more costly than term insurance if you
don’t keep it long enough.
GETTING STARTED
After you have thought about your financial needs and have become
familiar with the basic types of life insurance, you will need to
choose a company and agent.
How do I choose a company?
More than 2,000 companies in the United States sell life
insurance. While some consumers prefer to buy policies directly
from a company, most people buy life insurance through agents or
brokers. Much of the information provided here will be helpful
whichever way you decide to buy life insurance.
Before purchasing a policy, check the company’s financial
condition. You can do this by asking the agent or requesting
information from your state’s insurance department. A number of
insurance rating services rate the financial strength of
companies. These ratings can be found in large public or business
libraries, or can be obtained directly from the rating service.
There may be a fee forthat information.
Also check with the state insurance department to be sure the
company is licensed in your state.
How do I choose an agent?
Collect the names of several agents through recommendations from
friends, family and other sources. The following are some
questions you may want to ask a potential agent:
Is the agent licensed in your state?
All states require that agents be licensed to sell life
insurance. In addition, agents who sell variable products must be
regis-tered with the National Association of Securities Dealers
and have additional state licenses.
What company or companies does the agent represent?
Does the agent have any professional designations?Professional
designations include Chartered Life Underwriter (CLU) and Life
Underwriting Training Council Fellow (LUTCF). Agents who also are
financial planners may have designations, such as Chartered
Financial Consultant (ChFC), Certified Financial Planner (CFP) or
Member of The Registry of Financial Planning Practitioners.
Is he or she a member of a professional association?
The major association for agents is The National Association of
Life Underwriters (NALU). Through NALU’s local associations,
agents can attend educational seminars and can stay on top of
trends in the business. Similar training and services are
provided to financial planners through the American Society of
CLU & ChFC, the Institute of Certified Financial Planners (ICFP),
and the International Association for Financial Planning (IAFP).
What can I expect an agent to do for me?
An agent should be willing and able to explain various policies
and other insurance-related matters. Let your agent know what you
expect from him or her. You should feel satisfied that the agent
is listening to you and looking for ways to get you the right
type and amount of insurance at an affordable price. If you are
not comfortable with the agent, or you aren’t convinced he or she
is providing the service you want, find another agent.
THE AGENT VISIT
Now that you have reviewed the basics of life insurance and
thought about your personal financial needs, you can shop for a
life insurance policy with more confidence and knowledge.
What can I expect during an agent visit?
The agent you have selected will meet with you to discuss
your life insurance needs. He or she will ask questions about
family income and your net worth. Using the information you
already have assembled about your financial situation, you should
be prepared to discuss your insurance options.
Will the agent ask questions about my health?
In this initial meeting, be prepared to answer questions about
your health (for example, age, medical condition, medical
history, family history, personal habits). It is important that
you answer these questions carefully and truthfully; this
information helps a company charge a fair premium for your
coverage. For instance, you may pay a lower premium if you don’t
smoke. On the other hand, if you have a chronic illness, you may
be charged a higher premium.
Also, in the event of a claim, accurate and truthful answers
enable your beneficiary to receive prompt payment. Inaccurate or
untruthful answers, however, may cause delay or even denial of a
claim.
When you apply for life insurance, you may be asked to have a
medical exam. Often, a licensed medical professional will make a
personal visit.
