Life Events
Financial Guides
Table of Contents
- How do insurance companies classify individuals for rate purposes?
- What questions should I ask my life insurance agent?
- What should I watch out for when buying life insurance?
- How do I compare the cost of several insurance policies?
- Do I really need life insurance?
- How much life insurance should I buy?
- What type of life insurance should I buy?
- Should children have life insurance?
- How do I balance life insurance with my other investments?
Yet the hard fact is that life insurance is an essential part of your family's financial well-being. The more you know about it before you go to your agent, the better your coverage will be. If you don't plan for your life insurance needs, the result could be a waste of thousands of dollars on inappropriate or ineffective life insurance or, worse, financial hardship due to not having enough insurance.
Your Right
How do insurance companies classify
individuals for rate purposes?
Premiums vary among insurance companies so it's a good idea to comparison shop in order to get the best premium. It's also helpful to understand how premiums are calculated by insurers. Here's a quick look at how this works.
Insurance companies place individuals into four risk groups: preferred, standard, substandard, or uninsurable. A terminal illness at the time you apply for insurance will render you uninsurable. Having some type of chronic illness will place you in the substandard category. People with conditions such as diabetes or heart disease can be insured, but will pay higher premiums. If you have a high-risk job or hobby, you will be considered substandard, a high risk.
The premiums charged will be commensurate with the category you are placed in. Thus, a standard risk will pay an average premium for similarly situated insurers.
One company's category for you may not be the same as another company's category, so it still pays to shop for insurance with other companies even though one may have labeled you "substandard."
Once an insurance company approves you for coverage, you cannot be dropped unless you stop paying your premium.
What questions should I ask
my life insurance agent?
Here are some questions to ask about policies:
- How do cash values accumulate? An early, rapid build-up is generally preferable.
- How has the policy's cash value performed in the past? You can get this information from a publication called Best's Review, Life-Health Insurance Edition. Determine how the policy performed in comparison with the company's projection and with other insurers.
- Are any special features merely bells and whistles, or do they add value for you?
- What is the company's rating with A.M. Best, Standard & Poor's, and Moody's? You can find these publications in public libraries or online. The rankings should be in the top three to ensure that a company has financial stability.
- How has the policy's cash value performed in the past? You can get this information from a publication called Best's Review, Life-Health Insurance Edition. Determine how the policy performed in comparison with the company's projection and with other insurers.
Financial Guides
What should I watch out for when
buying life insurance?
Policy provisions that are hard to understand and compare. Many insurance company products contain investment features as well as insurance elements. Because these insurance products are very complex and have many variations, most clients cannot understand them. As a result, rates cannot easily be compared.
Pushing inappropriate policies. Make sure your agent carefully identifies your needs and explains why the policy is suitable for you. You may want to have your accountant or financial planner review any recommended policies before you make any purchases.
High commissions. Make sure you review the costs of any recommended policy carefully. As much as 80 percent of your first-year premium might go into the pocket of the insurance agent.
Due to administrative costs and commissions paid to agents the expected rate of return on insurance policies is generally low. If you want both insurance and investment returns, unbundle your needs. Get your life insurance from the insurance company (at the lower premium for pure, term insurance) and put the premium savings (the investment element) into a more profitable investment vehicle, where your return at age 65 will be substantially higher than through the insurance company's annuity.
Safety of investment. Check an insurer's rating before purchasing a policy. Even venerable companies such as Lloyd's of London can be wiped out by unexpectedly high claims and the insured's investment (as well as life insurance proceeds) can be lost.
Financial Guides
How do I compare the cost of
several insurance policies?
In most states, there are rules, set by a group of state insurance regulators, requiring the agent to calculate two types of cost indexes that can help you to shop for a policy. You can use these indexes to compare policy costs.
One type of index, the net payment index, gauges the cost of carrying your policy for the next ten or twenty years. The lower the number is, the less expensive the policy will be. This index is useful if you are most interested in the death benefit aspect of a policy, as opposed to the investment aspect.
The other type of index, surrender cost index, is useful to those who have a high level of concern about the cash value. This index may be a negative number. The lower the number is the less expensive the policy will be.
These two indexes apply to term and whole life policies; however, with universal life policies, you'll need to focus on the cash value growth and the cash surrender value to make comparisons. "Cash surrender value" is the amount you receive if you cancel the policy. It is not the same as "cash accumulation value."
If you are shown two universal life policies, and they have the same premium, death benefit, and interest rate, then in most cases, the one with the higher cash surrender value is generally the better policy.
Financial Guides
How To Prepare Financially For A Divorce
If you are considering divorce, it is vital to plan for the dissolution of the financial partnership in your marriage. Such dissolution involves dividing financial assets accumulated during the marriage. Further, if children are involved, future financial support for the custodial parent must be planned for. While it may not be at the top of your to-do list, taking time to prepare financially during divorce pays off in the long run.
Families or single parents with young children or other dependents.
Families or single parents with young children or other dependents.
Families or single parents with young children or other dependents. The younger your children, the more insurance you need. If both spouses earn income, then both spouses should be insured, with insurance amounts proportionate to salary amounts.
Adults with no children or other dependents
Adults with no children or other dependents
Families or single parents with young children or other dependents. The younger your children, the more insurance you need. If both spouses earn income, then both spouses should be insured, with insurance amounts proportionate to salary amounts.
Single adults with no dependents.
Single adults with no dependents.
Families or single parents with young children or other dependents. The younger your children, the more insurance you need. If both spouses earn income, then both spouses should be insured, with insurance amounts proportionate to salary amounts.
Children
Children
Families or single parents with young children or other dependents. The younger your children, the more insurance you need. If both spouses earn income, then both spouses should be insured, with insurance amounts proportionate to salary amounts.
Retirees
Retirees
Families or single parents with young children or other dependents. The younger your children, the more insurance you need. If both spouses earn income, then both spouses should be insured, with insurance amounts proportionate to salary amounts.
Financial Guides
How much life insurance
should I buy?
Determining how much insurance to buy requires you to calculate your current annual household expenses, followed by your assets, debts, and other sources of income. Your financial advisor can assist you in this computation.
The ideal amount of coverage is the amount that would allow your dependents to invest it after your death and maintain their desired standard of living without touching the principal. Although the old rule of thumb to buy five, six or seven times your annual salary may serve as a starting point, it is no substitute for making the calculations to find out how much you really need.
It's important to be as accurate as possible in estimating your family's needs since an underestimation could lead to your being underinsured, and an overestimation will lead to money wasted on unnecessary coverage.
To accurately estimate your family's annual income needs, it's helpful to have the following documents with you: Online bank statements or checkbook register for one year, a year's worth of credit card statements, and last year's tax return.
Insurance
What type of life insurance should I buy?
Once you have an idea of how much coverage you need, you can decide which type of insurance product would be best to fill those needs. Although the array of insurance products may seem confusing, there are really just two types of insurance: term and cash value, which is more commonly referred to as whole life, universal life, or permanent life insurance.
With term insurance, you pay for coverage for a specified amount of time, and if you die during that time the insurer pays your survivors the death benefit specified. Cash value on the other hand provides you with some other redeemable value in addition to paying a death benefit. For individuals age 40 or less, a term policy will almost always be less costly than a whole life policy. Although term policies do not build cash values, many are convertible to whole life policies without a physical exam. Thus, a term convertible policy may be a good option for someone who is under 40.
Term Insurance
There are various types of term insurance including:
Renewable. A renewable term policy is the most common type of life insurance where the policy renews automatically on a renewable term, e.g. every year, every 5 years, every 10 years, or every 20 years, which is the most popular renewal term. You do not need to take a physical or verify the fact that you are employed. The premium goes up at the beginning of each new term to reflect the fact that you are older. Most renewable term policies can be renewable until you reach age 70 or so.
Re-entry. With this type of policy, you must undergo a physical exam after a certain period, or pay an extra premium.
Level. With level term policies, the premium is guaranteed to stay the same over a certain period. This period may be shorter than the term of the policy. Nearly all life insurance bought today is level term insurance.
Decreasing. With a decreasing term policy, a good option for insuring mortgage payments the face amount of the policy decreases over time while the premium payments remain the same.
Return of Premium. Some insurers offer term life with "return of premium." Typically, premiums are significantly higher and they require keeping the policy in force to its term.
Cash Value Life Insurance
There are various types of term insurance including:
Renewable. A renewable term policy is the most common type of life insurance where the policy renews automatically on a renewable term, e.g. every year, every 5 years, every 10 years, or every 20 years, which is the most popular renewal term. You do not need to take a physical or verify the fact that you are employed. The premium goes up at the beginning of each new term to reflect the fact that you are older. Most renewable term policies can be renewable until you reach age 70 or so.
Re-entry. With this type of policy, you must undergo a physical exam after a certain period, or pay an extra premium.
Level. With level term policies, the premium is guaranteed to stay the same over a certain period. This period may be shorter than the term of the policy. Nearly all life insurance bought today is level term insurance.
Decreasing. With a decreasing term policy, a good option for insuring mortgage payments the face amount of the policy decreases over time while the premium payments remain the same.
Return of Premium. Some insurers offer term life with "return of premium." Typically, premiums are significantly higher and they require keeping the policy in force to its term.
Should children have life insurance?
Since the purpose of life insurance is to provide for dependent survivors, children generally need only enough life insurance to pay burial expenses and medical debts. Yet, 25 percent of cash-value life insurance policies sold covers the life of a child under 18. Cash value life insurance; either whole life or universal life combines a death benefit with a savings or investment element.
Alternatives to covering the costs of a child's death include (1) using funds already set aside for college and (2) taking out a rider on a parent's policy (if available).
Debt Relief with Dignity
How do I balance life insurance
with my other investments?
Get term life insurance if you haven't bought a policy yet. Then invest as much as you can in tax-deferred IRAs and 401(k) plans. If your money is in stock funds, you are more likely to experience bigger gains than you are with a cash-value policy.
If you already have a cash-value policy, don't sell it. Just realize that it is a conservative, long-term investment. The cash value eventually may be substantial because it is a tax-deferred investment. It may take 15 years or more, however, to produce a respectable return, similar to high-quality corporate bonds or long-term CDs. Balance your policy with investments such as stock funds, with a higher, long-term return.
This Content is for informational purposes only. Nothing contained herein constitutes accounting, tax, financial, investment, legal or other professional advice, and, accordingly, the author and the distributor assume no liability whatsoever in connection with its use. This Content is not an exhaustive explanation of any topic, practice or process. You should seek the advice of a licensed professional before making any accounting, tax, financial, investment or legal decision.
