To help you make the right insurance decisions for you and your family, read through these 10 important questions and answers. They’ll help you make an informed decision when it comes time to make a life insurance purchase.
- How much life insurance do I need?
- What type of policy should I buy, term or permanent?
- What are the various kinds of permanent insurance?
- What are accelerated death benefits and how do they work?
- By using medical tests are insurers trying to eliminate any applicant likely to develop a serious health condition?
- What should I consider in naming life insurance beneficiaries?
- Does it make sense to replace a policy?
- What happens if I fail to make the required premium payments?
- Should I just buy basic life insurance coverage or is it worth considering the “bells and whistles” that some policies offer?
- How do I go about finding a good insurance agent?
How much life insurance do I need?Determining how much life insurance you need requires a careful examination of your current and future financial obligations (i.e., a combination of (a) what would it cost to help your surviving family members meet immediate and ongoing needs like funeral costs, taxes, food, clothing, utilities, mortgage payments, etc. and (b) future obligations like college and retirement funding) and the resources that your surviving family members could draw upon to meet those obligations (i.e., your spouse’s income, savings and investments, other income producing assets, and any life insurance you might already own).
The difference between the two (your financial obligations minus the resources your family has to meet those obligations) is the approximate amount of additional life insurance you need. If this sounds confusing, don’t worry. You’re not alone. That’s why most people turn to a qualified insurance professional when they want to figure out how much insurance they need. But if you don’t feel you’re ready to speak with an agent or want a preliminary sense of your needs before meeting with an agent, visit our Life Insurance Needs calculator. It’ll walk you through the various questions you need to ask yourself and provide you with a rough estimate of how much insurance you need to protect your family.
What type of policy should I buy, term or permanent?It’s impossible to say which is better because the kind of coverage that’s right for you depends on your unique circumstances and financial goals. But generally speaking, term offers the greatest coverage for the lowest initial premium and is a great solution for people with temporary needs or a limited budget. Permanent insurance may make more sense if you anticipate a need for lifelong protection and like the option of accumulating tax-deferred cash values. Also, it doesn’t have to be either one or the other. Oftentimes, a combination of term and permanent insurance is the right answer. You can also try using our interactive product selector to help decide what’s best for you.
What are the various kinds of permanent insurance?There are four main types. Whole life insurance is the most traditional form of “permanent” insurance. With it, the face amount (the death benefit) and the premium (the amount you pay for protection each year) are fixed at the time you buy your policy and stay the same even as you age. You also get a guaranteed rate of return on your cash values. Of course, any guarantee relies on the claims paying ability of the issuing insurance company. By contrast, the cash value in universal life is linked to interest rates, and the cash value of variable life and variable universal life is linked the performance of the underlying investment options you choose to invest in and fluctuate with market conditions. These two types of insurance products are offered via a prospectus, as such, you should always request a copy of a current prospectus, as it contains information you need such as the investment objectives, risks, and charges and expenses of the investment. The cash value of universal and variable policies is not guaranteed, although some policies set a minimum death benefit. With universal policies (universal life and variable universal life) you can reduce or increase the amount of the death benefit and vary the amount or timing of premium payments, subject to certain limitations. If you’re having a hard time understanding the differences between these policies, don’t despair. You can learn more about permanent life insurance by clicking here. Or better yet, contact an insurance professional in your community who can take the time to walk you through your various options.
What are accelerated death benefits and how do they work?Many policies contain a provision that allows a terminally ill person to collect a significant portion of his or her policy’s death benefit while that person is still alive. The money can be used to get one’s family finances in order, pay for uncovered medical expenses, or simply do certain things for your family or friends while you still can. It’s important to note that the amount you take out while still living will be subtracted from the death benefit payments to your beneficiaries along with an interest charge to account for early payment of benefits.
By using medical tests are insurers trying to eliminate any applicant likely to develop a serious health condition?Medical tests provide accurate and current information about an applicant’s health, thus enabling insurers to charge premiums that reflect the level of risk an applicant represents. Because some health conditions are easily managed through proper medication, therapy or lifestyle changes, medical information makes it possible for insurers to cover applicants with certain health conditions. More serious or incurable conditions present a very significant risk that some insurers simply may not want to assume.
What should I consider in naming life insurance beneficiaries?
- Always name a “contingent,” or secondary, beneficiary, just in case you outlive your first beneficiary.
- Select a specific beneficiary, rather than having the proceeds of your life insurance paid to your estate. One of the great advantages of life insurance is that it can be paid to your family immediately. If it is payable to your estate, however, it will have to go through probate with the rest of your assets.
- Be very specific in wording beneficiary designations. Saying “wife of the insured” could result in an ex-spouse getting the proceeds. Naming specific children may exclude those born later. If your child dies before you, do you want the proceeds to go to that child’s children? Changing the beneficiary designation is easy, but you have to remember to do it. Due to the various issues involved, an agent can be an excellent source of information to help you properly set up your beneficiary designation.
Does it make sense to replace a policy?Think twice before you do, because in many situations it may not be to your advantage. Before dropping any in-force policy, consider:
- If your health status has changed over the years, you may no longer be insurable at standard rates.
- Your present policy may have a lower premium rate than is required on a new policy of the same type (if, for no other reason, that you have grown older).
- If you replace one cash-value policy with another, the cash value of the new policy may be relatively small for several years and may never be as large as that of the original one.
- You will be subject to a new contestability period.
- the agent making the proposal puts it in writing.
- you pass any required medical examination.
- your new policy is in force before you cancel the old one.