BUYING LIFE INSURANCE
Buying life insurance is not like any other purchase you will
make. When you pay your premiums, you’re buying the future
financial security for your family that only life insurance can
provide. Among its many uses, life insurance helps ensure that,
when you die, your dependents will have the financial resources
needed to protect their home and the income needed to run a
household.
Choosing a life insurance product is an important decision, but
it often can be com-plicated. As with any major purchase, it is
important that you understand your needs and the options
available to you.
That’s where this booklet comes in; read it thoroughly. It takes
you through the basics, step-by- step, as you prepare for this
significant purchase. Most important, it will help you know what
questions to ask when you’re buying life insurance.
Life insurance also can be used to help with other financial
goals, such as funding retirement or education expenses. However,
it is important to remember that the main purpose of life
insurance is financial protection. If your primary goals are
something other than protection, you should consider what other
financial products are available to meet those goals.
The information in this brochure has been compiled by the
American Council of Life Insurance, a trade association of more
than 600 life insurance companies. Collectively, these companies
provide about 90 percent of the life insurance in force in the
United States.
LEARNING THE BASICS
The best way to make an informed decision about buying life
insurance is to become familiar with the basics.
Why do I need life insurance?
Life insurance is an essential part of financial planning. One
reason most people buy life insurance is to replace income that
would be lost with the death of a wage earner. The cash provided
by life insurance also can help ensure that your dependents are
not burdened with significant debt when you die. Life insurance
proceeds could mean your dependents won’t have to sell assets to
pay outstanding bills or taxes. An important feature of life
insurance is that no income tax is payable on proceeds paid to
beneficiaries.
How much life insurance do I need?
Before buying life insurance, you should assemble personal
financial information and review your family’s needs. There are a
number of factors to consider when determining how much
protection you should have.
These include: any immediate needs at the time of death, such as
final illness expenses, burial costs and estate taxes;l funds for
a readjustment period, to finance a move or to provide time for
family members to find a job; and ongoing financial needs, such
as monthly bills and expenses, day-care costs, college tuition or
retirement. Although there is no substitute for a careful
evaluation of the amount of coverage needed to meet your needs,
one rule of thumb is to buy life insurance that is equal to five
to seven times your annual gross income.
What is term insurance?
Term insurance provides protection for a specific period of time.
It pays a benefit only if you die during the term. Some term
insurance policies can be renewed when you reach the end of a
specific period which can be from one to 20 years. The premium
rates increase at each renewal date. Many policies require that
evidence of insurability be furnished at renewal for you to
qualify for the lowest available rates.
What is permanent insurance?
Permanent insurance provides lifelong protection and is known by
a variety of names, described later. As long as you pay the
necessary premiums, the death benefit always will be there. These
policies are designed and priced for you to keep over a long
period of time. If you don’t intend to keep the policy for the
long term, it could be the wrong type of insurance for you.
Most permanent policies including whole, ordinary, universal,
adjustable and variable life have a feature known as “cash value”
or “cash surrender value”. This feature, which is not found in
most term insurance policies, provides you with some options:
You can cancel or “surrender” the policy “in total or in part”
and receive the cash value as a lump sum of money. If you
surrender your policy in the early years, there may be little or
no cash value.l If you need to stop paying premiums, you can use
the cash value to continue your current insurance protection for
a specific period of time or to provide a lesser amount of
protection to cover you for as long as you live. Usually, you may
borrow from the insurance company, using the cash value in your
life insurance as collateral. Unlike loans from most financial
institutions, the loan is not dependent on credit checks or other
restrictions. You ultimately must repay any loan with interest or
your beneficiaries will receive a reduced death benefit.
The cash values of many life insurance policies may be affected
by your company’s future experience, including mortality rates,
expenses and investment earnings. Keep in mind that with all
types of permanent policies, the cash value of a policy is
different from the policy face amount. Cash value is the amount
available when you surrender a policy before its maturity or your
death. The face amount is the money that will be paid at death or
at policy maturity.
What are the types of permanent insurance?
There are many different types of permanent insurance. The major
ones are described below:
Whole Life or Ordinary Life
This is the most common type of permanent insurance. The premiums
for a whole life policy must be paid periodically in the amount
indicated in the policy. These premium amounts generally remain
constant over the life of the policy.
Universal Life or Adjustable Life
This variation of permanent insurance allows you, after your
initial payment, to pay premiums at any time, in virtually any
amount, subject to certain minimums and maximums. You also can
reduce or increase the amount of the death benefit more easily
than under a traditional whole life policy. (To increase your
death benefit, you usually will be required to furnish the
insurance company with satisfactory evidence of your continued
good health.)
Variable Life
This type of permanent policy provides death benefits and cash
values that vary with the performance of an underlying portfolio
of investments. You can choose to allocate your premiums among a
variety of investments which offer varying degrees of risk and
reward stocks, bonds, combinations of both, or accounts that
provide for guarantees of interest and principal. You will
receive a prospectus in conjunction with the sale of a variable
product.
