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A Few Facts About Life Insurance

How to Get the Coverage you Really Need

A fact sheet that discusses several elements of life insurance: who needs it; how to shop for it; how much coverage one needs; differences between Term insurance and Cash-value insurance; and insurance discrimination.

Introduction

Many people are concerned about the financial effect their death might have on their spouses and children. They fear that those who depend on them for support - their dependents - will not have enough income to cover funeral, housing and living expenses.

If you have these concerns, you may have considered buying life insurance - which guarantees that certain people of your choice (your beneficiaries) will receive money if you die.

Many people do not spend enough time learning about life insurance, because thinking and talking about death makes them uncomfortable. They may rely solely on one agent's suggestions. Uninformed insurance buyers can end up paying thousands of dollars more than they needed to.

This document may also be available in the following languages: Chinese, English, Korean, Russian, Spanish, and Vietnamese, among others.
Note: Last revision 1998. Use this information as a general guide only; consult with a local consumer group for laws specific to your state.

How much coverage do I need?

How much money will your survivors need? If you provide all of your family's income, you will need enough coverage for your dependents to live on until they have another source of income. Consider how long it will be until your spouse can find employment. Or if you are a single parent, how much money will relatives or friends need to support your children. How long will it be until your children are grown and supporting themselves? If your children are very young, you may need more coverage than if they are teenagers.

You might want to include potential expenses such as funeral and burial costs; estate, income or property taxes, child careand education.

Consider your family's current income, assets (such as savings, investments, and property), regular expenses and debts (such ascar loans, mortgage, credit cards). Subtract any income your survivors would have from other sources, such as Social Security benefits, pensions or insurance provided by your employer.

Who doesn't need life insurance?

You probably don't need life insurance if you are single with no dependents, or if your spouse has enough income to live on and cover your final expenses, such as your funeral and the handling of your legal affairs.

What kind of insurance should I buy?

There are two basic types of life insurance: term and cash-value. (See the "Term" and "Cash-Value" sections of this fact sheet.) During any sales presentation, make sure you know which one is being talked about.

Generally, term insurance is a more cost effective choice for young families and for healthy people in their 20s, 30s and 40s. Many people who buy cash-value insurance view it as an investment, a tax shelter or a way to pay off estate taxes without burdening their heirs.

Term insurance

Term insurance covers policy holders for a fixed span of time, such as 5, 10 or 25 years.

You pay a premium (payment) in return for a death benefit (the lump sum that will be paid to your survivors if you die while the policy is in force).

At any given company, the more your premium is, the more your death benefit will be. Premiums vary among companies, so shop around.

Policy holders have a choice of two types of premiums: level-term and annual renewal. Level-term premiums are the same throughout the life of the policy, but increase if you choose to renew. Annual renewable premiums increase each year as you age. Level premiums are usually higher than renewable premiums in the first few years of the policy, but lower in later years.

When the term is up, you have three choices:

  1. Drop the policy if you no longer need life insurance protection.
  2. Renew the policy. If you have a "guaranteed renewable" policy you do not need to have a physical exam to renew-otherwise you will have to have an exam. Your premiums always increase when you renew a term policy. If your check-up uncovers any health problems, your premium will be even higher.
  3. Convert it to a cash-value policy. Most policies have a "conversion feature" that allows you to switch without having a physical check-up. If you accept this option, your annual premium could increase by up to 20%. (See the "Cash-value insurance" section.)

Cash-value

Cash-value insurance is also known as "permanent" insurance because it is sold for indefinite periods. Variations on cash-value insurance include whole life, universal life, and variable life.

Cash-value policies divide your premiums (payments). The insurer uses some to pay for the amount due your survivors if you die (called the death benefit) and puts the rest in a reserve fund, where it builds up like savings, and may earn income from dividends or interest. If you decide to end the policy, you get some of the savings back (the cash surrender value). But first the insurer deducts commissions, expenses and other fees.

The premiums for cash-value policies are considerably higher than for term policies.

Cash-value insurance includes three common types of policies:

  1. Whole life remains in effect for the lifetime of the insured or until you no longer pay the premiums and the policy lapses. The rate of return (earnings) on the cash-value portion of whole life historically has lagged behind other investments, such as stock mutual funds.
  2. Universal life allows the customer flexibility in choosing and changing the terms of the policy. As long as you pay the minimum required to maintain the death benefit, you can choose how much you add to the reserve fund.
  3. Variable life gives the policy holder the choice of investing in stocks, bonds and money market funds.

Insurance discrimination

Insurers cannot deny your application - or charge higher premiums - solely because of your sex, marital status, race, religion, national origin or ancestry, or because you are mentally or physically handicapped. (In some states, your sexual orientation is included.)

Discrimination against non-English speakers based on language may be covered under "national origin or ancestry" protection. Civil rights and unfair business practices laws may also protect people from being discriminated against because they do not speak English.

For advice and referrals on language discrimination, call one of these agencies:

  • The Language Rights Project of the American Civil Liberties.
  • Union and Employment Law Center at (800) 864-1664.
  • The Puerto Rican Legal Defense & Educational Fund at (212) 219-3360.
  • The Mexican American Legal Defense & Educational Fund.
  • The Asian Pacific American Legal Consortium at (202) 296-2300.

Planning your funeral

Funerals can be a major expense. You might want to spare your survivors expense and trouble by making sure your life insurance coverage is enough to pay for your funeral and burial expenses.

In order to decide how much to allow for funeral expenses, you can compare options now. Funeral establishments have "preplanning" services that help you figure the potential costs as well as provide a future record of your preferences. Preplanning, a service available at little or no cost, does not require "prepaying" (paying in advance) for your funeral.

Choices for taking care of funeral expenses in advance include investing in a state-regulated trust account (also called "preneed plans") or through a special life insurance policy. Before you sign a contract for either service, check that the company is licensed by calling the appropriate government regulatory agency in your state.

Buying insurance

There are different ways to buy life insurance:

Through an agent or broker: Agents and brokers are paid through commissions deducted from your premiums in the first few years your policy is in effect. They may try to sell you the policy that gives them the biggest commission-not the one that provides you with the most value.

A good agent has a broad knowledge of the industry and can guide you to the best choice for your needs. A good agent will be happy to give you a thorough description of the insurance policy you are considering, and will not hesitate to put the offer in writing for you to take home and study at your leisure. A good agent will not pressure you to buy insurance.

Through insurance companies or banks: You can save money by dealing with an insurance company directly. Some savings banks and commercial banks also sell term life insurance, usually through only one company. Make sure you call several insurers and/or banks to compare prices.

Through your employer or associations that you belong to: Group rates on insurance tend to be lower and you may be able to avoid a medical exam.

Shop around!

Don't buy a policy without getting quotes from several agents or companies - you could end up paying thousands of dollars more than you need to. Ask your attorney, accountant or financial adviser for recommendations. Compare not only premiums, but cash-value, death benefits and fees.

Before you buy

  • Make sure the insurance agent you are dealing with is licensed, by calling your state insurance department. To find this number, look in the state government section in the front of your white pages phone book, or call directory assistance. Ask the agent if she or he is certified as a Chartered Life Underwriter (CLU) or Chartered Financial Consultant (ChFC).
  • Life insurance is a long-term commitment. It's important that your insurer is financially stable. Check out the company with a free insurance rating service such as Standard & Poor's at (212) 208-1527; Moody's at (212) 553-0377; or Duff & Phelps at (312) 368-3198. Ask about the highest ratings each service gives. Stick to companies that have had high ratings for five years or more.

Applying for Life Insurance

How do I qualify? Applicants for life insurance usually have to have a physical check-up by a doctor chosen by the insurance company. People who represent the greatest risk to the company, because of age, illness or dangerous work, for example, pay the most for insurance-if they are able to get a policy at all.

What affects my premium? Life insurance company underwriters - experts who predict risks of injury, illness and death - look at your age, health, occupation, hobbies and habits, as well as your credit report, in setting your premiums.

Smokers pay more for life insurance. Overweight people are usually charged more. Many companies charge women less since they have a longer life expectancy, but there are some that have the same rates for women and men.

Fraud and false statements. When purchasing insurance, you will have to fill out an application form. Answer all questions truthfully; insurers double check your answers against your medical and credit records. A false statement can be enough reason for an insurer to refuse to pay your claim.

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