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Questions & Answers about Life Insurance

A training manual for community-based advocates

An 8-page manual written to help agency staff answer their clients' questions about life insurance.

Questions & Answers about Life Insurance

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This manual was created by Consumer Action with a court award resulting from the settlement of a lawsuit brought by the Language Rights Project and the Mexican American Legal Defense & Educational Fund (MALDEF) against the Northwestern Mutual Life Insurance Co. The suit contended that people were unfairly denied insurance just because they couldn't speak English well. A consumer fact sheet, "A few facts about life insurance," is available in Chinese, English, Korean, Spanish, Vietnamese and Russian.

Introduction

Many individuals and small business owners are concerned about the financial effect their death might have on their spouses and children, or business partners. They fear that those who rely on them for support—their dependents—will not have enough income to cover burial expenses, future housing costs and living expenses. If you have these concerns, you may have considered buying life insurance—which guarantees that your dependents will receive money if you die.

Life insurance is one of the most important, and expensive, purchases you may ever make. Deciding whether you need it—and choosing the right policy from dozens of options—takes time, research and careful thought.

Many people do not spend adequate time learning about life insurance, because thinking and talking about death makes them uncomfortable. Sometimes it is the sheer complexity of the subject that causes people to avoid life insurance. In the U.S., most life insurance companies market their services in English, so limited-English speakers buying life insurance are especially vulnerable to misunderstandings and misleading sales presentations.

Many people who set out to purchase life insurance rely solely on one agent's suggestions. Uninformed or confused buyers can end up paying thousands of dollars more than they need to. They can also be the target of unscrupulous sales practices and outright fraud.

Take the time to consider why you need life insurance and to find a sales agent who speaks your language. Discover which companies offer translated sales materials and contracts you can understand. If you learn about life insurance options and compare policies and companies, you are more likely to make an informed purchase and know you are buying the type of life insurance that best benefits you and your family.

About life insurance

Q. What is "term" life insurance?

Term insurance is a basic "no frills" form of life insurance. You purchase a specific amount of coverage by signing a contract for a specific time period. If you have kept up with the monthly payments (premiums) called for in the contract, your survivors will be paid the agreed-upon amount if you die within this time period.

Term insurance is the best deal for most consumers. The premiums for policy-holders in their 20s and 30s are much less expensive than for another common type of life insurance called "cash-value" (see below). Many families need coverage most while they are raising young children. Term life insurance premiums keep increasing as you age, but as your children grow up and your assets (the value of your savings, investments, home, autos, etc.) increase, you can reduce your coverage.

Term policies must be renewed when each term ends. Before buying a term policy, ask about renewal provisions. These are some typical options:

  • Annual-renewable—the premiums go up each year.
  • Level term (also called straight term)—the premium stays the same for 5, 10, 15 or 20 years, then increases sharply.
  • Either type may be guaranteed (or automatic-renewable)—you'll pay more for this feature. Other options on term life insurance policies may include:
    • Re-entry. This feature requires a lower premium than an automatically renewable policy. You can renew at the same low rate offered to new customers—but you'll have to pass a physical. If you've developed any health problems, your premium could go up and cost more than an automatic-renewable policy.
    • Convertible term. You have the option to convert to a cash-value policy in later years. Consider this if you want cash-value life insurance and can't afford it now, but expect to be able to in the future.

Q. What is cash-value life insurance?

Cash-value policies—also known as "whole life: policies—provide a death benefit and a savings account. Insurance salespeople often highlight the "forced savings" aspect of cash-value insurance. Part of your premiums go into a reserve fund—or accumulation fund—that builds up over the years your policy is in effect. If you drop the coverage, you get back the cash surrender value—the value of the reserve fund minus the amount you are paying for the life insurance death benefit (mortality charge), commissions, administrative expenses, fees and charges. You can also borrow against the cash-value of your policy.

There are just a few basic types of cash-value policies, but insurers offer hundreds of variations under different names. Ask your agent or insurer if it is a term or cash-value policy. If it is cash-value, ask which of the following it is:

  • Whole life—the premiums are usually fixed for as long as you pay them regularly. Most whole life policies pay you income in the form of dividends. These payments vary depending on how the company invests the money, its expenses, the death benefits it pays and your own policy's terms. There is always a minimum earnings guarantee—income you will receive in the form of periodic dividends. You do not owe income taxes on this income until you withdraw it.
  • Universal life—these policies give you more choices than whole life. You can decide how often and how much of a premium to pay. However, there is always a minimum payment due. The less you pay, the smaller your cash-value and death benefit will be. Premiums go into an accumulation fund which pays interest. Some universal life policies pay only death benefits; other, more expensive policies also increase in cash-value.
  • Variable life—you can invest the reserve fund in stocks, bonds, or money market funds offered by the insurance company. These policies earn variable returns and almost never pay dividends. Look for a feature that guarantees a minimum cash-value.

Q. I got some insurance brochures, but there aren't any "term," "universal life" or "whole life" policies. They have "Guardian" and "Select Prime Life." What kinds of insurance are these?

Insurance companies create "brand names" they believe customers will respond to emotionally, using words that convey strength, security and high quality. Brand names tell you nothing about the insurance being offered or its terms and conditions. Ask your agent or insurer what type of insurance it is (term or cash-value) and make sure that you receive complete explanations of any words or concepts you are not familiar with.

Q. My agent wants to sell me a convertible term policy. Is this a good idea?

A convertible policy lets you convert from term to a cash-value (whole life) policy in later years. Consider this if you want cash-value and can't afford it now, but expect to be able to afford it in the future.

Who needs life insurance?

Q. My husband and I both work—should we each have our own policy?

Maybe. Consider how much each of you contributes to the family's support—and how much it would cost to replace. This might include income from a salary and/or unpaid services that would need to be covered if you or your husband died, such as housekeeping, shopping and cooking, child care, bookkeeping, tax preparation or home maintenance. If you find that a substantial part of the family's support system would be lost with the death of either you or your husband, then you might decide that two policies are in order.

Q. A salesperson came to my door and offered me a "burial policy" to pay for my funeral so that I wouldn't have to burden my survivors. He said it would cost only a few pennies a day—should I buy it?

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. However, policies sold specifically to pay for funeral and burial expenses can be bad deals because the benefit is limited and the premiums, while they seem low on a weekly or monthly basis, add up to a lot over time. Before purchasing such a policy, especially from someone who came to your door uninvited, compare the cost of a term policy with the same face value by calling a few local insurance agents.

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. Other choices for taking care of funeral expenses in advance include investing in a state-regulated trust account (also called a "preneed" plan) sold by funeral establishments or with a term life insurance policy. Before you sign a contract for either service, check that the company is licensed by calling your state insurance department.

Q. Our insurance agent says we should buy a policy for our six-year-old son; she says it's a great way to start saving for his future. Do children really need life insurance?

Children don't need life insurance, unless they are supporting you. There are better options for saving and investing—such as regular automatic deposits to your savings account, money market funds, mutual funds or stocks and bonds.

Q. Are whole life policies more suitable for some people than for others?

Whole life may be a good choice only for people starting families in their 40s and 50s, or people who are concerned about their heirs being responsible for significant estate taxes. Whole life policies are not the best way to save for the future. (Most insurers greatly exaggerate their "projected earnings" charts and indexes.) If you borrow against your policy and do not pay the insurer back, it will reduce the cash benefit paid when you die.

Before you buy a whole life policy for investment purposes, look into other options for saving and investing—certificates of deposit (CDs), money market funds or conservative mutual funds.

Q. My agent says term insurance is just "temporary" and a waste of money. He says whole life is "permanent" because my money will be invested and my family will get it back, with earnings. Is this true?

Life insurance is a temporary need, for when your dependents are young and you have few assets and little savings that would help support them if you die. You'll need less insurance as your term premiums get higher, so you can reduce your coverage—and your premiums—when you renew. Most "permanent" whole life policy-holders let them lapse before they collect, just as most term policy-holders do. Insurance agents make more money from selling cash-value policies than from term, so they're motivated to recommend cash-value. If you've done your homework and feel term is the right choice for you, keep looking for an agent or company that will sell you a term policy.

Discrimination and unfair sales practices

Q. My mother does not read or write English very well. She was told by an insurance agent that she could not buy life insurance because of her limited English. Is this legal?

State laws prohibit insurers from denying an insurance application—or charging higher premiums— solely because of a person's sex, marital status, race, religious, 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" protections. Civil rights and unfair business practices laws may also protect people from being discriminated against because they do not speak English. If you suspect you are being discriminated against by an insurance company or agency for any of these reasons, contact your state's insurance department and ask to speak to someone who can address a discrimination complaint. 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 1-800-864-1664.
  • The Puerto Rican Legal Defense and Education Fund at 1-212-219-3360.
  • The Mexican American Legal Defense and Education Fund at 1-213-629-2512.
  • The Asian Pacific American Legal Consortium at 1-202-296-2300.

Q. I was told that because I am a smoker, I will have to pay more for life insurance. Isn't this discriminatory?

No. Insurance actuaries—experts who predict risks of death, illness, fire or theft—look at your age, health, occupation, hobbies, and habits, as well as your credit report in setting your premiums. Nonsmokers pay far less for life insurance. (Some insurers won't give former smokers the nonsmokers' rate until they've quit for one to five years.) Insurers also consider alcohol consumption and hazardous occupations or hobbies. Many companies charge women less since they have a longer life expectancy but there are some that offer unisex life insurance rates.

People who represent the greatest risk to the company, because of illness or dangerous hobbies, for example, pay the most for insurance—if they are able to get it. When purchasing insurance, you will have to fill out an application form, and may have to undergo a medical exam. Answer all questions truthfully; insurers double check your answers against your medical and credit records.

Q. I live in a run-down neighborhood that many people in my city consider dangerous. When I went to buy life insurance, I was told I would have to pay more because of where I live, even though I am young, healthy and have a very safe occupation. Is this legal?

Probably not. While life insurers set premiums based on risk, charging more to every resident of a certain neighborhood is considered an unfair business practice, and it is probably illegal. Life insurance companies must adhere to sound underwriting and actuarial principals related to actual or reasonably anticipated loss experience and must not discriminate between individuals based on geographic location alone. When there are drastic differences in availability and/or affordability in a community, this is known as insurance "redlining" and is illegal under the laws of most states. If you suspect you have been discriminated against by an agent or an insurer, call your state department of insurance and ask for help in filing a complaint.

Q. My mother's insurance agent is trying to convince her to buy a new life insurance policy although she already has one. Is this a good idea?

Advise your mother to be very cautious about accepting such an offer. Your mother's agent may be trying to "churn" her policy—a term for selling new policies to people who already have adequate life insurance just to earn additional fees and commissions. If your mother owns a whole life policy and she upgrades, she could lose all of the accumulated cash-value of the policy. This may be a case of insurance fraud—call your state insurance regulator for more information.

Understanding sales presentations

Q. I've found some term policies I can afford now, but I know they can raise the premium. How can I find out what they'll cost in 5 or 10 years?

For both term and life policies, insurers will usually show you what your future premiums might be using two premium scales: current (also called projected), and guaranteed. The current scale shows what the company charges now—and promises to charge for a one-, five- or ten-year period. After that, the rates could go up, to the guaranteed maximum scale. To find out how often the company usually raises its premiums, look for comparisons of insurers' rate-increase histories, in books or consumer magazines, or from insurance comparison and rating services. (See How to shop for insurance.)

Q. What are some tips for buying a cash-value policy?

  • Ask about the guaranteed cash surrender value, including the early years of the policy. This information will be part of the "performance projection" or "illustration" that accompanies the policy you are being offered. Unless the word "guaranteed" accompanies the figures, they are estimates, not guarantees. These sometimes show projected values from the 20th or 25th year—by then most policy-holders have cashed in. Look for companies that offer a higher guaranteed cash surrender value in the first ten years.
  • Look for a low-load—or low expense—whole life policy. Even though you pay much less for low-load policies up front, the eventual returns can be just as attractive.
  • With back-load policies, expenses are deducted from your cash surrender value if you close the policy. This could reduce your cash surrender value in the first few years to almost nothing.
  • Some insurers offer to pay your premiums out of the dividend and income you receive. It is better to pay the premiums yourself, because relying on your earnings may not be enough to ensure that the death benefit you planned on will be fully funded, which could lead to your beneficiaries having less than they need to survive.

Q. I've found one term policy that charges the same premium for ten years, and another that's cheaper now, but goes up at five years. Which would be a better deal?

When comparing such policies—known as variable premium term policies—don't look at just the premium. Ask your agent or company for an "interest-adjusted net payment cost index." This shows the cost per $1,000 of insurance over time, comparing policies with low early-year premiums and high later-year premiums, versus those with more level premiums. With inflation, you will pay the later, higher premiums with cheaper dollars.

Q. Is whole life a good investment?

It's best to consider life insurance for its real purpose: to replace funds and cover expenses resulting from a death. Don't use a whole life policy primarily as an investment. Consider all your other options for saving and investing. Agents like to point out the "forced savings" value of a life insurance policy. If you have found it difficult to establish the savings habit, this sales pitch may tempt you—but you may find making premium payments just as hard as putting money into a savings account. Most companies greatly exaggerate the "projected earnings" of their policies, showing dividends growing in the reserve fund. If they are able to persuade you later to spend your dividends on paid-up additions for more death benefit coverage instead, you may fall short of your investment goal. Insurers may also inflate the projected cash-surrender value of a policy with terminal dividends. Very few policy-holders hold a policy long enough to collect these. Don't be lured by the chance to borrow against a whole life policy, unless you're prepared to pay back the loan at whatever interest rate the insurer charges. Otherwise, you'll have spent part of your beneficiaries' death benefit.

Q. Should I get a front-load or a back-load policy?

With front-load, the commission and expenses are deducted from your premiums before they're added to your death benefit and reserve fund. With back-load, these are deducted from your cash surrender value as surrender charges if you close the policy. If you close a back-loaded policy in the first few years, your cash surrender value could be reduced to almost nothing.

Q. I'd like to get a low-load whole life policy, but my agent said she doesn't handle them—she says the returns from "cheap policies" aren't as good. Who sells these?

Low load—or low cost—policies are generally sold directly by insurers. To get free quotes from several low-load policies, call The Wholesale Insurance Network at 1-800-808-5810. Agents get bigger commissions from high-load policies, so they may downplay the availability of low cost insurance. But you pay much less for low-load policies up front, and the returns can be just as good.

Q. I still can't figure out exactly how my cash-value insurance payments are divided up. Can I get that information in writing before I buy?

Yes. Before buying a cash-value policy, insist on seeing a complete written illustration, signed by the agent. This shows all possible costs (commission, mortality charges, administrative fees, surrender charges) and earnings (interest and dividends). But keep in mind that insurance illustrations are estimates about the future worth of your policy. Parts of the information you are given is "guaranteed"—this shows how your policy would perform even in the worst market conditions—while other information is at best an educated guess. Compare the guaranteed columns from several insurers, because this is the only part of an illustration that you can count on. Examine illustrations carefully. Check the page numbers for missing pages, make sure all footnotes are provided and read all the fine print. Ask about anything that puzzles you, and insist on a satisfactory explanation.

Q. If I choose term insurance, can the insurer drop my coverage if I get seriously ill?

Term insurance must be renewed periodically, and you could lose coverage if your policy expires and you have developed serious health problems in the interim. If you're concerned about becoming ill, you can pay more to buy an automatic-renewable (or guaranteed renewable) policy.

Q. When my beneficiaries collect on my insurance, will they have to pay any taxes?

Life insurance death benefits are not taxable. If you withdraw money from the reserve fund portion of your cash-value policy, you will owe taxes on any income the reserve fund has earned. Don't buy cash-value insurance just for the tax advantages, without having a tax professional review your situation. There are many other tax-deferred retirement savings and investment options, such as IRAs, Keoghs and 401(k)s.

How to shop for insurance

Q. How can I find a good insurance agent?

Look for an agent who sells insurance full time, as either a Chartered Life Underwriter (CLU) or Chartered Financial Consultant (ChFC). Call your state insurance department to verify the agent's license and ask whether or not he or she has ever had a disciplinary license suspension. When you buy insurance from an agent the commissions (sales charges) are deducted from your early premiums. It pays to shop around before choosing an agent, because agents may be motivated to sell you the policy that nets them the biggest commission—not the one that gives you the most value at best price. On the other hand, an experienced agent whose license and background checks out with the appropriate state regulatory agencies may have broad knowledge of the industry that can save you time in finding the policy that makes most sense for you. For example, your agent may know which insurers accept customers with specific medical conditions.

Q. Are there any services that can compare term policies for me?

Yes. For a modest charge, Insurance Information Inc. (1-800-472-5800) provides a report listing five of the lowest cost insurance companies that offer policies to fit your needs. Unlike some such services, the company does not sell insurance.

Q. I found some Web sites that offer to get quotes and come up with the best deal. Is this a good way to shop?

There are advantages: you can shop on your own schedule, with lots of options, and without the pressure of meeting with an agent face to face. Some offer on-line quotes; others provide them by e-mail. Here are the web addresses and phone numbers of some services:

Keep in mind that these companies are not always unbiased. Most sell insurance themselves, and may recommend more coverage than you need. Ask them to quote you the rate that each insurer charges most of its policy-holders—not the best rate, for which few customers qualify. Compare quotes from several sources.

Q. I like my auto insurance company, and they are one of the biggest insurers, so I'm thinking of buying life insurance from them. Is this a good idea?

Don't assume that a big company with a familiar name offers good value in life insurance. Some well-known providers of other insurance (such as home and auto) have a poor track record when it comes to life insurance. Compare the company's past record and quotes with those of other insurers.

Q. I read about an insurance company that went bankrupt, and people lost all their savings. How can I check on a company's finances?

Unfortunately, there is no federal guarantor for life insurance reserve funds, as there is for bank accounts. Each state has an insurance guaranty association that backs up insurers with guaranty funds. Your state insurance department can tell you whether an insurance company has come under regulatory scrutiny for any reason, or been convicted and penalized.

You can find information about the financial standing of insurance companies at your library, on the Internet or by calling one of the insurance rating companies. Many reference libraries carry A. M. Best's annual "Best's Insurance Reports." On the Internet, use a search engine to find "insurance company ratings." You can get free ratings by calling Moody's 1-212-553-0377, Standard & Poor's 1-212-208-1527 or Duff & Phelps 1-312-368-3157. Weiss Research at 1-800-289-9222 charges a small fee (about $15).

Each rating service uses a different grading system, so it can be difficult to compare among them. Look at several years of ratings to see whether a company's rating has gone up or down. For about $25 each, you can get a written report from the rating company or your agent. It's important to check the financial standing of a company, but don't buy life insurance based on a rating alone—compare premiums, benefits, and charges.

About your policy

Q. What is a "rider?"

Riders are amendments to a policy outlining special coverage that is not part of your basic policy. You pay more in premiums for these additional services. Check any life insurance policy you buy to make sure that it does not contain riders you do not want. If you don't want a certain rider on your policy, ask the insurer to remove it and deduct the cost from your premium.

Q. There's a "premium waiver" amendment on my policy—what does it mean?

This feature allows you to skip premiums but keep coverage while you are disabled and can't work in your regular occupation. In most cases, you must be disabled for six months before you are eligible. A disability insurance policy, which will help you pay your life insurance premiums if you become disabled, may cost less than the price of a premium waiver on your life insurance policy.

Q. Where should I keep my policy?

Keep your policy in a secure place—such as a bank safe deposit box. Give copies and instructions on where to find the policy to your beneficiaries and/or your lawyer. Keep a copy of your policy at home, along with important communications from your life insurance company and receipts or copies of your premium payments.

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