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Life Insurance Basics
Life insurance is a contract between you and your insurance company
designed to solve financial problems that occur as a result of death.
The size of the financial problem is what determines the size of
death benefit or face amount that you would purchase. The Insurance
company agrees to pay the amount of the death benefit you purchase
to the beneficiary of your choice in return for your payment of
a premium.
Coverage Considerations
Consider the following as you contemplate your life insurance options:
• Do I need Life Insurance? 
• Are there different types of policies?
• What are the advantages/disadvantages of term and permanent
insurance?
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Do I need life insurance?
You need life insurance if anyone depends on your income. In such
cases, life insurance solves many personal and business financial
problems.
Personal needs
If you are a young parent, you may need life insurance on your own
life to enable a surviving spouse to raise the children. When you
are older, you may need life insurance if you are financially responsible
for an aging parent or want to provide funds to take care of final
expenses, debts or taxes.
A general rule suggests buying protection equivalent to FIVE TO
EIGHT TIMES YOUR ANNUAL INCOME. Your needs may vary according to
your financial assets and liabilities.
Life insurance can solve your heirs' immediate and long-term needs.
• Immediate needs include: funeral expenses, unpaid medical
bills, debt and taxes. Having money to pay immediate expenses may
give your heirs time to readjust their lives, free from money pressures.
• Long-term need for the care of dependents, college expenses
and, in general, providing financial resources.
Business needs
Life insurance is often the solution to:
• Replace a key person and provide the funds to cover the
costs of locating and training a replacement.
• Continuation of the business when a proprietor, partner or
co-owner dies.
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Are there different types of policies?
Yes! There are two basic types of life Insurance - term and permanent.
Term Insurance
It provides protection for a specified period of time, typically
from one to 30 years. It pays a death benefit only if you die during
this term. Some policies can be automatically renewed at the end
of the coverage period, and some can be converted to permanent insurance
without need for a medical exam.
There are several different types of term insurance you can consider:
1. Renewable Term Insurance.
These policies have a provision allowing you to renew coverage at
the end of the term without having to show evidence of insurability.
The company has to renew your policy even if your medical condition
has deteriorated. However, the premium rate will rise with each
renewal.
2. Convertible Term Insurance.
These policies allow you to convert your term coverage into a permanent
policy without providing evidence of insurability. Premiums for
convertible policies are usually higher than for nonconvertible
policies. Once converted, the premiums for the permanent coverage
will be higher than those of the term policy with the same death
benefit. However, the permanent policy premiums will remain the
same while the term premiums will rise.
3. Level Term Insurance.
These policies provide a fixed premium for a certain number of years,
usually 10 or 20 years, while the death benefit remains unchanged.
The death benefit is the amount the life insurance company will
pay, as stated in the policy, when the insured person dies. The
advantage is that you lock in a certain rate for the period of the
policy. The disadvantage is that the premiums will tend to cost
more than the earlier years of the renewable policy, and when the
level policy expires, premium rates will jump considerably if you
want to renew with another level policy.
4. Decreasing Term Insurance.
The death benefit in this type of policy decreases over its term.
For example, you might start with $100,000 of coverage and the amount
of coverage decreases by $10,000 each year for 10 years. The premium
usually remains the same over the term of the policy. This type
of insurance allows you to pay the same premium for less insurance
over time, rather than have your premium increase for the same amount
of insurance.
5. Increasing Term Insurance.
This kind of policy starts at one level of death benefit which gradually
increases over the life of the policy. You may start with a $100,000
policy and increase the death benefit $10,000 each year for 10 years.
The premium will increase each year. This kind of policy may be
appropriate if you see your insurance needs growing in coming years
because, for example, you expect to have more children.
Permanent (cash value) Insurance
It provides life-long protection as long as you continue to pay
premiums. The premiums are based on your age at the time of purchase,
and generally remain level. They do not increase as you age. Therefore,
the younger you are when you buy the policy, the lower the premium
you will pay for the life of the policy.
Because premiums remain level, permanent insurance is more expensive
than term insurance. But permanent insurance accumulates cash value,
which may be refundable upon surrender of the policy. While the
policy is in force, cash values can be borrowed against or used
to pay premiums.
The proceeds of many permanent life insurance policies can be used
to ease the financial burden of catastrophic illness, terminal illness
or long-term care. These accelerated benefits may be offered as
part of the basic policy or as a rider to an existing policy.
With a permanent life insurance policy, you may borrow up to the
cash value at an interest rate (fixed or adjustable) stated in the
policy. Any unpaid interest is added to the loan. Any unpaid loan,
including interest, will be deducted from the death benefit. The
cash value can be used to pay premiums for a period of time, keeping
the stated death benefit, or it can be used to purchase paid-up
insurance in a lesser amount with no further premiums due.
There are four basic types of permanent insurance:
1. Whole Life.
Sometimes also called life or ordinary life, this policy has a fixed
guaranteed rate and develops guaranteed cash values.
There are two variations on traditional whole life:
Joint Whole Life:
The policy insures two lives instead of one. Also called first-to-die
coverage, the policy pays the death benefit to the surviving insured
person when the first one dies. This is often purchased by a husband
and wife.
Survivorship Life:
The policy insures two people and pays a death benefit only when
the second person has died. It is designed for married couples who
want to provide funds to pay estate taxes that may be due after
their deaths. Also called second-to-die coverage.
2. Universal Life
This policy has more flexibility. Within certain limits, you can
change the death benefit, the amount of premium and payment frequency.
Unlike whole life, this is an "interest driven" policy,
which normally pays a minimum guaranteed interest of 4% to 4.5%.
If the interest rates are continuously low, additional premiums
may have to be paid to avoid a lapse of coverage.
3. Variable Life
This policy has death benefits and cash values that vary with the
performance of an underlying portfolio of investments that you select.
The death benefit and cash value are not guaranteed. They can go
down as well as up, although there may be a guaranteed minimum death
benefit.
4. Variable Universal
This policy combines the premium and death benefit flexibility of
universal life with the investment flexibility and risk of variable
life.
On all of the above policies, riders are available at an additional
cost for the following coverages:
1. Disability waiver of premium
A feature added to some life insurance policies providing for the
waiver of premium, and sometimes payment of monthly income if the
policyholder becomes totally and permanently disabled.
2. Accidental death
A provision in a life insurance policy for payment of an additional
benefit if death is caused by an accident. This is sometimes called
double indemnity.
Key life insurance terms
It is important to understand some of the key terms in life insurance
policies, before you purchase one:1. Accelerated death benefit.
Some insurers offer you the ability to collect life insurance benefits
while you are still alive to cover the costs of catastrophic illness.
Accelerated death benefits, also known as living benefits policies,
are generally offered as part of the policy or as a rider to an
existing insurance contract. They will pay you either a percentage
or all of your death benefit under certain specific circumstances,
including terminal illness where you have a life expectancy of less
than 12 months, contraction of a disease or need for long-term care.
2. Cash value
The savings portion of your premium in a permanent insurance policy.
The cash value is invested in stocks, bonds, real estate and other
investments by the insurance company and your returns grow tax-deferred.
If you surrender the policy by stopping premium payments, you will
be paid whatever remaining cash value is in the policy.
3. Endowment
An endowment plan provides a particular death benefit whether or
not the insured person survives to the end of a specified term.
If the person dies before the maturity date, the policyís
death benefit is paid to the beneficiary. If the insured person
is still alive on that date, the benefit is paid to the policyholder.
Changes in tax law means that most of these plans no longer qualify
for advantageous tax benefits because these plans are not considered
to be life insurance for tax purposes.
4. Medical Information Bureau (MIB).
A clearinghouse used by the life insurance industry to screen insurance
applicantsí medical histories. This ensures that applicants
do not withhold medical information from one company that they have
given to another when applying for life insurance. The medical history
is only given to an insurance company if you have applied for insurance
with that company. No company is permitted to base its decision
on approving or rejecting an application solely on the MIB report,
but it can be a key determinant of the insurance companyís
decision. You have the right to know what is listed on your MIB
report. You can contact the MIB and get a copy of your report for
a small fee at P.O. Box 105, Essex Station, Boston, Massachusetts
02112, 617-426-3660, or at http://www.mib.com
5. Policy loan.
Loans against the accumulated cash value in a policy. The interest
rate on the loan may be fixed or adjustable. You can repay the policy
loan at any time without penalty. If you donít pay the interest
due, it is added to the loan amount. If the unpaid interest and
loan amount exceed the cash value in the policy, the policy will
be terminated without any cash value payout. If you die with an
outstanding policy loan, the amount of the loan plus interest will
be deducted from the death benefit
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What are the advantages/disadvantages of term and permanent insurance?
There are pros and cons to buying both term or permanent (cash
value) insurance. Each has advantages and disadvantages. One or
the other or both may be appropriate to meet your insurance needs.
Term Insurance
The advantages of term policies include:
1. Term premiums are lower than those for permanent insurance so
you get more insurance coverage for less money. This allows you
to buy more coverage when you need it the most, such as when you
have young children.
2. Because term provides insurance for a specific period of time,
it is ideal for covering specific financial needs such as covering
your life until your children are through college, until they are
self-supporting, or covering your life until you pay off your mortgage.
The disadvantages of term policies include:
1. Premiums increase every time a policy is renewed, so the cost
of term insurance can become prohibitive as you near your late 50s
and 60s.
2. Term life doesn't provide a savings feature known as cash value.
Term policies only pay benefits if you die while the policy is in
force.
3. If your insurance company wants you to take a medical exam when
you want to renew your policy, you may be turned down if your health
condition has deteriorated.
4. You could outlive your coverage, because term insurance is generally
not renewable after age 70 or 75, depending on your stateís
insurance regulations.
Permanent (Cash Value) Insurance
The advantages of permanent insurance are:
1. You lock in a premium rate at whatever age you start the policy
and the benefits are guaranteed for as long as you live.
2. Your policy accumulates cash value that grows tax-deferred. Your
premiums are invested by the insurance company in stocks, bonds,
real estate, venture capital and other funds, and you receive a
return on your money in the form of annual dividends, which increase
your cash value.
3. You can tap that cash value while you are alive with low-cost
loans. Any outstanding loans will reduce your policyís cash
value by the amount of the loan. Or you can withdraw the cash value,
though you will have to pay income taxes on those withdrawals. You
can also convert your cash value into an annuity that will provide
fixed-income throughout your retirement years.
4. If you surrender your policy by discontinuing to pay premiums,
you will receive any accumulated cash value.
5. Dividends can be used to pay your premium in whole or in part.
6. Once you have passed the medical tests and have been issued a
policy, your policy cannot be cancelled for medical or any other
reasons if you continue to pay the premium.
The disadvantages of permanent insurance are:
1. It is far more expensive than term insurance. This means that
you can usually afford far less permanent coverage than you can
afford term. If you start a permanent policy and then must drop
it because you cannot afford the premiums, you will have lost a
great deal of money.
2. Insurance companies invest your cash value quite conservatively
so it is possible that you could earn higher returns on your own
if you are a skillful and knowledgable investor.
3. The return you earn on your cash value is determined by current
interest rates in money markets. So if interest rates are high,
your cash value will grow much more quickly than if interest rates
are low. Periodically, the insurance company deducts its expenses
and a mortality charge from your cash balance. The mortality charge
is the amount of money, based on a premium rate per thousands of
dollars of death benefits, required to provide you with life insurance.
The company will guarantee a minimum interest rate and a maximum
mortality charge. Some will also guarantee a maximum expense charge.
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Keeping costs down
Before you decide to buy life insurance be sure to keep your priorities
in mind and consider the following:
• Make sure you have at least a basic understanding of the
different types of life insurance available and then purchase the
type or types of insurance that you feel most comfortable with.
• Determine the minimum and the maximum amount of life insurance
you need.
• Know specifically what financial problems the life insurance
is supposed to solve.
If the problem you are trying to solve is one that will certainly
go away after a specific period of time then you should strongly
consider term insurance.
If the problem you are trying to solve is one that will continue
for a long and unspecified period of time then you should strongly
consider permanent insurance.
• Do not agree to spend more money on your life insurance than
you are comfortable with, especially if you are buying permanent
insurance.
If you cancel a permanent policy after a few short months or even
years of purchasing it, it will have been the most expensive type
of insurance you could have purchased because you will likely get
nothing or very little back.
• Be aware that your best option might not be one type of insurance
or the other, but rather a mix of different types of life insurance.
For instance, you might want some permanent insurance to cover things
like burial costs, estate taxes, or the funds needed to care for
someone that is permanently dependent on you.
You may want an additional amount of term insurance to cover the
costs associated with raising your children for the next 10 years
or for paying off the balance of your 30-year mortgage.
• There are many considerations when purchasing life insurance,
but probably the most important thing you can do is get good competent
advice from a licensed agent.
Health tips
The following healthy living tips are compliments of Regence Blue
Shield of Idaho:
If you want to avoid a second heart attack – get moving!
A study of 406 people who had a survived a first heart attack found
those who remained at least moderately active had a 60 percent lower
risk of a fatal or nonfatal heart attack. Those who remained very
active had a 78 percent lower risk. The findings indicate that patients
can’t give up exercise and activity at the end of their cardiac
rehab programs, which typically last from 12 to 23 weeks. They should
work with their therapists to design a home exercise program that
picks up where rehab leaves off. An even better idea: Have the therapist
write out a prescription for exercise. While the study makes no
suggestions for specific types of exercise, the study said patients
generally engaged in activities like gardening and jogging.
Live longer – Stop smoking
Every cigarette a man smokes reduces his life by 11 minutes. An
article in the British Medical Journal says that each carton of
cigarettes represents a day and a half of lost life. Researchers
came to their conclusions by comparing the life expectancy of smokers
and nonsmokers. Although the authors admit the calculation
is very rough, "it shows the high cost of smoking in a way
that everyone can understand."
Love your parents
Loving ties with middle-aged children does more to lengthen the
life of elderly parents than any functional support. Research has
found the elderly tend to live longer if they have practical aid
– people who drive them to the doctor’s or help at home.
There’s some evidence that feeling loved can stimulate hormones
that strengthen the immune system. Depression also is known as a
threat to cardiovascular health, so avoiding it may promote parent’s
survival.
Infants and fluffy stuff don’t mix
Never put an infant on top of fluffy bedding, pillows, or comforters.
According to the Consumer Product Safety Commission, up to 30% of
the 6,000 annual cases of sudden infant death syndrome may be caused
by sleeping atop soft bedding, which may cover an infant’s
mouth and nose.
Frequently asked questions
• What is a beneficiary?
This is the person or financial institution (a trust fund, for
instance) named in an insurance policy as the recipient of the funds
in the policy, in the event the policyholder dies.
In addition to naming a specific beneficiary to receive the proceeds
of your life insurance policy (permanent or term), you should name
a secondary or "contingent" beneficiary, just in case
you outlive the first beneficiary.
If there is no living beneficiary, the proceeds will be paid to
your estate and have to go through probate proceedings, resulting
in a possible delay before your family receives the money. If the
proceeds go into the estate, these proceeds may be subject to estate
taxes.
• Can I replace my old policy?
Yes! But, if you already own a life insurance policy, think carefully
before you replace it with another. Do not give up your old policy,
until you can determine if you are:
1. Still insurable.
If your health has deteriorated, you may be refused coverage after
a medical exam by the new insurance company.
2. Going to save money.
You are now older than when you bought the existing policy and your
premiums will be higher based on your age alone.
3. Not giving up valuable benefits.
Your older policy may have protections, dividend rates or other
provisions that the newer policy may not offer.
4. Not leaving behind cash value.
Ask your agent what will happen to any cash value that has accumulated
in your old policy if you replace it with a new one.
It is possible that a new policy will offer superior features, lower
premiums and more coverage that would make a switch worthwhile.
Just make sure before you proceed with the replacement.
• How can I locate a lost life insurance policy?
If you suspect that someone who has died may have had a life insurance
policy and named you beneficiary, there are several steps you can
take to track down the missing policy:
1. Call your state's department of unclaimed property to see if
the insurance company put the policyholderís name on their
list.
2. Check the deceased's safety deposit box at the bank, their file
cabinets and personal computer records to see if you can find the
policy.
3. Look for old checks written to insurance companies in the past
to trace old policies.
4. Ask older relatives if the deceased ever mentioned that they
had a life insurance policy and which company they had it with.
5. Call the insurance company that provided auto and home insurance
to the deceased, because they might have used the same company for
life insurance.
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• Where can I get additional information on life insurance?
The experts at Hartley Insurance can provide you with a wealth of
information, but if you would like an outside source of generic
information you can contact:
American Council of Life Insurers
1001 Pennsylvania Avenue
N.W., Washington, D.C. 20004-2599
202-624-2000
http://www.acli.com
Life and Health Insurance Foundation for Education
http://www.life-line.org
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