State Insurance Department or Commission

Every state in the nation has an insurance commissioner. They normally report directly to the governor of the state just like the attorney general of each state reports to the governor of that state. The NAIC is an association of all the state insurance commissioners. The NAIC spends a lot of time drafting and holding hearings on new model laws and regulations for the insurance industry. This work of the NAIC has a gone a long way toward providing some degree of uniformity between the insurance laws and regulations of the various states. Their work has also acted as an impetus for the implementation of laws and regulations when a new area of significant need arises. Recently that area of need has been the sales methods of agents.
Insurance agents must obtain a license from each state (through the insurance commissioner’s office) in which they are soliciting business. If an agent is not a resident in a state in which he wishes to sell insurance products, the agent may ordinarily obtain a nonresident license from that state. You can check on the licensing (or disciplinary) status of your agent by simply contacting the insurance commissioner’s office of your state. Agents who sell variable life insurance products or other investment-related products must also obtain a license from the

Relationship between agent and insurance company

The law of agency, a separate and distinct area of the law, applies to the relationship between the insurance agent and the insurance company. A basic rule of agency law is that the principal is liable for the acts of its agents done within the scope of their agency authority. It is not to the life, health or disability income insurance company’s benefit to have agents who are acting inappropriately or illegally while they are representing the insurance company. Lawsuits against the agent invariably include the insurance company as a co-defendant for two reasons--because of the principal/agent relationship and also because the insurance company usually has deeper pockets than the agent.

Why is agency law important to policyholders? Because, unlike property and casualty insurance (homeowners and auto), the agent who sells life, health and disability income insurance is almost always regarded as the legal agent of the insurance company. Therefore, as a general rule, any wrongdoing by the agent, such as incorrectly completing your application for life, health or disability insurance, will legally be regarded as wrongdoing by the insurance company. In laymen’s terms, the insurance company of a life, health or disability income insurance agent is responsible for the acts of its agents while they are selling insurance to you. (Of course, if you are conspiring with the agent to cheat the company, that’s a different story.)

American Council of Life Insurers (ACLI)

The conduct of insurance agents has come under closer scrutiny in recent years as a result of the initiation of numerous class action law suits alleging inappropriate and inaccurate sales presentations by insurance agents. In response to this, organizations such as the American Council of Life Insurers (ACLI) and the National Association of Insurance Commissioners (NAIC) have proposed model regulations, market conduct principles and use of databases to improve agent practices.
The ACLI is an association of life insurance companies through which the industry is attempting to police itself.

Captive v. independent agent

If an agent is licensed with only one company, he is referred to as a “captive agent”. And he can only sell the insurance products of that company. If he is licensed with many companies, he is referred to as an “independent agent” because he is not restricted to selling the products of only one company.
But every agent can only sell the products of companies for which he is licensed to sell. This is important for you to know because an independent agent who can sell for many companies, if he is conscientious, has a better likelihood of selling you the best product to meet your insurance needs because he has more products from which to choose. In order to make the sale (and earn the commission), a captive agent may try to convince you that his company’s product is the best for you when in fact there are better products for your situation in the marketplace.

The Life, Disability and Health Insurance Agent

There are many ways to define the term, “insurance agent”. Fundamentally, an insurance agent is a licensed individual who solicits sales for an insurance company, or a number of insurance companies. The agent is subject to the state licensing laws of every state in which he sells life, health and disability insurance.

Dental Insurance - Advice on choosing a policy

Dental insurance opens up a number of new medical options, and will ensure protection for the teeth of you and your family in case of dental treatment being required. Currently 50% of Americans do not have a good dental health care insurance plan in place, something which can cause inconveniences when dental health care is required. It's said by some that the pain of toothache can be worse than childbirth, and without a good dental health plan in place, you may be tempted to attempt to live with the pain for far longer than you would have if you'd been assured that the price of your dental care was taken care of. Neglecting your teeth in this manner will only make the problem worse, and so having a good dental health care insurance plan is only good sense. Growing children requiring braces or other such orthodontic devices may also come as a surprise to you and to your pockets, and being assured of discounted dental health care thanks to your and your family's dental health care insurance plan should be a load off your mind.

Some people fear that individual dental health insurance or dental insurance plans will be expensive, and in many cases these fears are unfounded, with companies such as MetLife and delta offering affordable dental insurance plans.
Dental insurance plans come in two basic types; Preferred Provider Organization and Dental Health Maintenance Organization. Each dental insurance plan has its own benefits and each is considered managed care.

A preferred provider organized dental health plan aims to provide people who have a dental health plan that involves preferred provider organized health care with a substantial discount to their dental health care. The holder of such a dental health care policy can visit any participating dental health service provider and receive a discount on their dental health care. In theory, this is mutually beneficial to both the client and the dental health care service provider. While the holder of the dental health care insurance policy receives discounted dental health care treatment, the dental health care provider will see a rise in their number of customers. Lower costs to the insurer will also result in lower premiums, a saving which is then passed on to the dental health care policy holder. If the customer chooses to receive dental health care from a health care service provider who is not a part of the participating provider organization, their insurance policy will, usually, still refund the cost of part of the procedure, but it will be a much lower amount than if the patient had received treatment from a dental health care professional who was a part of the participating provider organization.
Preferred provider organizations differ from dental health maintenance organizations in that, if you receive dental health care from someone who is not a member of the organization while on a dental health maintenance organization policy, you will not normally get any kind of discount to your treatment, not even a small amount like you would receive if you were on a preferred provider organizations policy.
When buying any kind of insurance, it's important to shop around and find an insurance policy which is suitable for the needs of you and your family. Dental health insurance is often a lot cheaper than many people believe it will be, and shopping around ensures that you will find the best deal available. Finding cheap dental health plans will serve you well in future, and although

Whole life insurance - what do you need to do about it?

Whole life insurance is one of the most famous and one of the most sought after insurance policies in the market today. It is nothing but an insurance policy which will pay a lump sum of amount on the event of your death or during a critical illness. This is considered one of the best policies there due to a couple of reasons. First of all, it pays a lump sum of amount on the event of the policyholder's death. This can be greatly useful for the kith and kin of the policy holder. Second of all, it also pays you on the account of critical illness. This is considered a great benefit as usually you will have to pay through the nose in case of a critical illness. This lump sum of amount can be greatly helpful to you at that point of time. The premium insurance of this policy can be determined in many ways. You also have to think whether it is life insurance taxable or not. In fact, whole life insurance sometimes is linked with life insurance universal or universal life insurance, which is yet another important insurance policy available in the market. This policy is separated from other policies and it stays different and unique from other policies due to a couple of reasons. First of all, universal life insurance differs from whole life insurance or any other insurance for that matter to a great deal. While in most other insurance policies the premium amount is usually fixed for life time, in case of universal life insurance, the premium can vary according to the ups and downs in the market conditions. Now whole life insurance policy can be sometimes linked to universal life insurance and the policy can have the features of both these policies. The same analogy can be applied in the case of standard life insurance also.

One of the most important things you need to think about while choosing whole life insurance is whole life insurance quote. You can get whole life insurance quotes from insurance advisors who are in the best position to guide you through the process. Globe life insurance is one such company which has knowledgeable insurance advisors who can help you through the process. You can also opt for group life insurance, but you need to inquire your insurance advisor properly about the different terms and conditions of the policy which differ greatly from conventional policies. Life insurance annuity is a great help for people who want to go for insurance policies with the lowest risk possible and also get returns. The annuity can be received by the policyholder immediately or at a deferred date, depending upon the nature of the policy. Life insurance general is one of the most important generators of such policies. You can also check out life insurance jobs, which have a very positive growth rate. You can check out newspapers and websites which have adverts regarding life insurance jobs. If you have a knack for selling and understanding complex calculations, then these jobs will be suitable for you. You can also try your hands on life insurance medical which is one of the most used policies. Life insurance settlement is one issue which differs from policy to policy. In case of medical life insurance, different insurance providers have different set of rules for the payout for the policyholder. You need to check them out before choosing a policy.

Things you must know about term life insurance

Term life insurance is nothing but insurance assured for a particular period of time. You have to pay the premium as expected by the insurance company for a particular period of time mentioned in the term insurance policy you have taken up. During the period, if something were to happen to you or your property, the insurance amount will be given to you or your beneficiary on the event of your death. It is also considered long term care insurance because of the kind of protection it offers. In fact, the policy is so brutally honest that you will sometimes find it difficult to ignore this kind of policy. The insurance advisor should be able to tell you everything about the policy and because it is one of the most straight forward policies available in the market, you can find yourself easily relating to the terms and conditions provided and you can go ahead with the policy. The advisor should be also able to give you term life insurance quote. Term life insurance quotes are easily available from various other sources also. Some of the most popular and the most accessible sources apart from the insurance advisors are magazines, internet, and the concerned insurance companies' information centers.

As is the case with any other kind of insurance policy available in the market, you can also find cheap term life insurance. It is also one of the most popular ones available in the market as it is affordable for many lower middle class people. You can get to know about that from your insurance advisor and the internet. In fact, you can find a lot of information about term life insurance online. The internet has become an excellent source for insurance related queries and you can find a huge amount of resources available in the internet, which you can check out in a matter of minutes. One of the most important things you need to consider while taking a term life insurance policy is the term life insurance rate. The affordability factor comes into the play and you need to educate yourself with term life insurance rates. This is very important as this is the only way in which you can decide whether you would be able to afford the policy or not. While going for a policy, you should think whether it is an affordable term life insurance or not. Only an affordable term life insurance policy can be the best term life insurance policy for you. Also, you need to do some research on your part in order to find out the best term life insurance policy available in the market. You can also get into some deep research and come out with the best results. You can also see a lot of people going for instant term life insurance.

When you are planning to go for term life insurance, you should get in touch with a financial advisor or an insurance advisor. They should be able to give you an idea about the cost term life insurance. They should also be able to give you instant term life insurance quote in order to help you make a decision. You can check out various factors like the premium to be paid, life insurance term life, and other things. You can also go for low cost term life insurance if you are not sure whether you would be able to afford the high cost policy and the respective premium.

Tips on shopping for cheap life insurance quotes

Life insurance helps in the protection of economic value of assets. What this would mean to you in turn is that a life insurance quote that decides your policy will help you in being sure of your future. Life insurance is there to provide financial security. While most of us are aware of the need for life insurance, a lot of us are not aware of the factors that determine life insurance cost. The type of life insurance policy that you go in for decides the insurance rate. Other factors such as a person's age and his/her health too play an important part in the insurer determining the insurance risk that is involved with that particular person. This in turn would dictate the premium that one pays towards a life insurance policy.
You can find a lot of useful information on life insurance over online sources dedicated to the subject. From getting a free life insurance quote to information on the various aspects of life insurance you can find them online these days. Getting life insurance quotes online is a very simple process. In order to get life quotes insurance companies will request you to provide certain information. Once you key in the relevant information you can then get your life insurance quote in a matter of minutes. The actual cost insurance life low or high is dependant on several factors such as the age of the person and medical condition, to mention only two.
The first important decision that you need to make while going in for life insurance is to make a choice between permanent and term insurance. Term insurance is less expensive and provides coverage for a specific term as the name suggests. If something were to happen to the life assured then the death benefit is paid to the beneficiary in the case of term insurance. Permanent life insurance is designed in such a way to provide protection for the entire life of a person. Since there are several life insurance companies in the market you can always find some insurer who can offer you low cost life insurance. Contrary to what people think, cheap life insurance is not difficult to find. Since the competition is intense you can always find a company which can offer you lower rates. A simple search is all that you need to find out a low life insurance quote online.

You should also consider life insurance rate quotes based on some other 'riders' that are part of insurance policies. For instance you may want cover for health care costs for something extra along with your life insurance policy. All these factors will determine the premium that you need to pay for your life insurance. Even if you were to find an insurance company offering discount life insurance, you should make sure that you are dealing with a reputable insurer. Just because someone is offering you a life insurance price that is low does not mean that you should compromise on some aspect. These days with the advent of the internet getting a life insurance quote has become very convenient. You can easily get life insurance quotes online. You can also shop for some of the cheapest life insurance available online. Although this is the case it is always advisable to seek professional advice before you settle for the best option suited to your needs.

During your initial search phase for a life insurance policy try and get in touch with multiple life insurance companies. You should make it a point to find out every thing in detail from the customer service representatives of life insurance companies on all the aspects of a policy. Your insurance agent is another person who can help you in deciding the right life insurance policy which suits your circumstances best.

How Life Insurance Premiums are Determined

Many people have bought life insurance plans mainly for investments, tax benefits and the life cover that they offer. They have rarely tried to understand how their life insurance plan works for them or for that mater, how their premium is determined.

In this article, I will give you an overview of how premiums are determined and which life insurance plan proves to be a better option.

First and foremost , the primary purpose of life insurance is to insure the financial future of the nominees in case of an eventuality to the insured. It does so by paying a 'sum assured' to the nominees.

The sum assured is decided upon at the time that you buy the life insurance plan and the premium is paid accordingly. The premium consists of three important elements which you need to know in order to choose the right insurance plan.

1. Mortality charges
Mortality charges are incurred by the life insurance company to cover the risk of an eventuality to the policyholder. The mortality expenses vary based on the age of the individual and the sum assured. The higher the age and sum assured, the higher the mortality expenses.

2. Sales and administration expenses
These expenses are incurred by the insurance company for operational purposes and recovered from the premiums that the policyholder pays towards his or her policy. Agents' commissions, sales and marketing expenses and the general overhead costs incurred to run an insurance comapny every day are examples of sales and administrative expenses.

3. Savings component
This part of the life insurance premium is invested by the insurance company in various investments such as bonds, government securities, money market instruments and equities.

The savings component generates a portion of the returns that insurance companies pay to a policyholder by way of bonuses and the maturity amount.

Two Basic Types of Life Insurance

Now that you have a better understanding of the basic premium structure, I encourage you to evaluate their own needs and buy insurance coverage accordingly. To do this, you need to understand the two basic types of life insurance plans - term life insurance and endowment life insurance plans.

Term life insurance plans are pure risk cover plans. The premiums charged by term plans cover only the mortality charges and sales and administration expenses, not the savings component. With no savings element in the premium; there is also no maturity amount accrued. For this reason term life insurance plans are the cheapest form of life insurance coverage available.
Unlike with term plans , the premium towards an endowment type plan also includes a savings component. As already explained earlier, the savings component is what helps the insurance company in generating a corpus over the tenure of the policy.

But it is also for this reason that the premium paid for an endowment plan is a lot more than what you would have to pay for a comparable term plan.

A major portion of the premium difference between the term plan and endowment plan is the savings component, which is invested by the insurance company to generate returns for the policyholder.

What this also means is that the term plan premium works out approximately 87% cheaper than the endowment plan premium every year. Or in other words, the individual has to pay 7.5 times more premium for an endowment plan for the same amount of coverage!
In my view, you should ideally keep their life insurance needs and investment needs apart. Consider buying a term life insurance plan for the desired amount of life insurance coverage and devote the remaining 'investible surplus' to other investment avenues like mutual funds for instance.

You should therefore be certain that they have done you homework on understanding your life insurance needs. This will not only help you in making wiser decisions, it will also lead you to a better and more prosperous future.

Where can I get additional information on life insurance?

For more detail on life insurance, you can contact:

• American Council of Life Insurers 1001 Pennsylvania AvenueN.W., Washington, D.C. 20004-2599202-624-2000www.acli.com
• Life and Health Insurance Foundation for Education www.life-line.org

How can I locate a lost life insurance policy?

If a family member dies and you are unable to locate his or her life insurance policies, there is, unfortunately, no national or statewide database of all life insurance policies that you can consult. However, you can try to determine:

• which insurance company might have issued the policy
• which agent or broker might have sold or serviced the policy
• whether the deceased might have had insurance through an employer, union or trade association, or other group to which he/she belonged.

Here are some strategies that might turn up useful information:

1. Look for insurance-related documents. Search through files, bank safe deposit boxes, and other storage places to see if there are any insurance-related documents. Also, look through address books to see if the names of any insurance agents or companies are listed. An agent or company who sold the deceased their auto or home insurance may know about the existence of a life insurance policy.
2. Contact current and prior financial advisors. Contact current or prior attorneys, accountants, investment advisors, bankers, business insurance agents/brokers and others who might have known about the deceased’s life insurance.
3. Review life insurance applications. The application for each policy is attached to that policy. So if you can find any of the deceased’s life insurance policies, look at the applications for them. The application will have a list of all other life insurance policies owned at the time of the application.
4. Contact previous employers. Former employers may have a record of a past group policy or policies.
5. Check bank books and canceled checks. See if any checks have been made out to life insurance companies over the years.
6. Check the mail for a year following the death of the policyholder. Look for premium notices or dividend notices. If a policy has been paid up, there will no notice of premium payments due. However, the company may still send an annual notice regarding the status of the policy or it may pay or send notice of a dividend.
7. Review the deceased’s income tax returns for the past two years. Look for interest income from and interest expenses paid to life insurance companies. Life insurance companies pay interest on accumulations on permanent policies and charge interest on policy loans.
8. Contact all relevant state insurance departments. The National Association of Insurance Commissioners has a “Life Insurance Company Location System” to help you find state insurance department personnel who might help identify companies that might have written life insurance on the deceased. To access that service, click here.
9. Check with the state's unclaimed property office. If a life insurance company knows that an insured client has died but can’t find the beneficiary, it must turn the death benefit over to the state in which the policy was bought as “unclaimed property.” If you know (or can guess) where the policy was bought, you can contact the state comptroller’s department to see if it has any unclaimed money from life insurance policies belonging to the deceased.
10. Contact a private service that will search for “lost life insurance.” Several private companies will, for a fee, contact insurance companies for you to find out if the deceased was insured. This service is often provided through their Web sites.
11. Do you think the life insurance might have been bought in Canada? If so, you might contact the Canadian Life and Health Insurance Association (phone: 1-800-268-8099; Web site: www.clhia.ca).
12. Try the MIB database. There is a database of all applications for individual life insurance that were processed during the last 12 years. There is a $75 charge per search. Many searches are not successful: a random sample of searches found only 1 match in every 4 tries. For information, click here.

How do I file a life insurance claim?

To begin the claims process:

• Get several copies of the death certificate.
• Call your insurance agent. He or she can help you fill out the necessary forms and act as an intermediary with the insurance company. (Don’t keep life insurance policies in your safe deposit box. In most states, safe deposit boxes are sealed temporarily upon the death of the owner, which can delay the settlement. ) If you don’t have an insurance agent, or don’t know who the deceased's agent was, contact the company directly.
• Submit a certified copy of the death certificate from the funeral director with the policy claim. Once the claim is submitted, a settlement should be issued to you shortly. Once a life insurance claim is submitted, you must determine how the proceeds will be distributed. These are some of the options available:

1. Lump sum -- You receive the entire death benefit in a single
   amount.
2. Specific income provision -- The company pays you both principal and
   interest on a predetermined schedule.
3. Life income option -- You receive a
   guaranteed income for life. The amount of income depends on the death benefit,
   your gender and your age at the time of the insured's death.
4. Interest income option -- The company holds the proceeds and pays you interest on them. The death benefit remains intact and goes to a secondary beneficiary upon your death.

If I can’t pay my premium, what should I do?

If unexpected expenses come up and you can’t pay your life insurance premium, you should know the possible consequences. The effect depends on the type of policy and coverage you have and the policy terms and conditions.

Term: If you stop paying premiums, your coverage lapses.
Permanent: If you have this type of policy, you will have the following choices:

• Cash out the policy. This means that you can stop paying the premium and collect the available cash savings. You will no longer be covered by life insurance, but you will at least save some of the proceeds of the policy. You may, however, have to pay taxes on some of the cash value if the sum exceeds what you have paid in premiums.
• Non-forfeiture options There may be a “reduced paid-up” option. This means that you can stop paying premiums completely in return for a reduced death benefit and no cash saving. You may also be able to convert the permanent policy to an extended term policy for a time period based on the accumulated cash savings in the policy.
• Policy will lapse If this happens, see if the policy can be reinstated. Some insurers may allow this if you do it within five years of lapsing. You will most likely have to pass a physical examination for the reinstated policy and pay back the premiums you would have paid plus interest. Annual premiums for the reinstated policy may be lower than those for a new, comparable policy.

HELP!

• If I can’t pay my premium, what should I do?
• How do I file a life insurance claim?
• How can I locate a lost life insurance policy?
• Where can I get additional information on life insurance?
  

How often should I review my policy?

You should review all of your insurance needs at least once a year. If you have a major life change, you should contact your insurance agent or company representative. The change in your life may have a significant impact on your insurance needs. Life changes may include:

• Marriage or divorce
• A child or grandchild who is born or adopted
• Significant changes in your health or that of your spouse/domestic partner
• Taking on the financial responsibility of an aging parent
• Purchasing a new home
• A loved one who requires long-term care
• Refinancing your home
• Coming into an inheritance

KEEPING YOUR LIFE INSURANCE CURRENT

• How should I organize and store my life insurance records?
• How often should I review my policy?

How should I organize and store my life insurance records?

The last thing you want to happen after you die is for your beneficiaries to be unable to locate and submit a claim on your life insurance. To prevent this, you should have copies of your life insurance records in at least two places. This is to make it less likely that you’ll lose them (to fire, flood, accidental discarding, etc.) and more likely that, after your death, your beneficiaries will find them.

What information should I keep?

For each individual life insurance policy on your life, you should record the following information:

• The full name of the life insurance company that issued the policy
• The city and state of the home office of the company that issued the policy
• The name and U.S. headquarters of the group, if the issuing company belongs to a group of companies
• The policy number
• The date the policy was issued
• The amount of the death benefit
• The name and address of the agent/broker who sold you the policy
• The type of policy (e.g., term, whole life, etc.)
• The location of the original life insurance policy

You might have life insurance automatically from your employer. Your employer also might offer you the chance to buy additional life insurance under a group policy. And you might be eligible to buy life insurance under a group policy from your union or trade association or other group you belong to (such as a college alumni association or an automobile club). For each of these life insurance benefits, you should record the following information:

• The name of the employer or group that sponsors the insurance
• The office or person to contact when it’s time to file a claim
• The certificate number (comparable to the policy number under an individual policy)
• The date the insurance was started
• The amount of the death benefit

Sometimes financial programs that are mainly designed for income or other purposes have death benefits as additional features. This might include pensions, annuities, workers compensation programs, disability insurance, travel accident insurance, etc. For each such program, you should record the following information:

• The type of policy that has a death benefit as part of its features
• The full name of the life insurance company that issued the policy
• The city and state of the home office of the company that issued the policy
• The policy number
• The date the policy was issued
• The amount of the death benefit
• The name and address of the agent/broker who sold you the policy
• The location of the original insurance policy

Credit cards and lending institutions may offer life insurance to pay off your outstanding loans in the event of your death. For each life insurance benefit on your life dedicated to paying off a loan, you should record

• The full name of the lending institution through which you obtained the life insurance
• The loan number and issue date of the loan
• The name of the person or office to contact when it’s time to file a claim
• The policy number of the life insurance policy that pays off the loan

Where should I keep the information?

Keep one set of these records in your home, in a place where others who need this information are likely to find it (and after you put the information there, tell the people who’ll need it where it is). This might be with your other financial records (such as income tax, checking account, investment records), with your other legal papers (such as a copy of your will, living will, health care proxy, etc.), or anywhere your survivors are likely to look for them.

Keep another set of these records “off site”—that is, outside of your home, perhaps in a safe deposit box, or with a professional or a relative who can be counted on to produce them when they’re needed.On each page, record the date on which the information was last updated. That way, if the copy in your home differs from the one in the safe deposit box, it’s easy to tell which is the more current.

Do "empty nesters" need life insurance?

Quite possibly. Here are 10 reasons to own life insurance after your kids have left home:

To meet goals
If your children are in college and/or not completely financially independent, life insurance can help “finish the job.” Although you may have saved enough for tuition, the kids’ living expenses (e.g., room and board, laundry, entertainment/activity costs, etc.) continue, but not Social Security benefit payments for the surviving spouse and children—they stop when the kids leave high school.

To support other dependents
If you have parents, disabled adult children, or others who depend on you for financial support, life insurance would continue this support if you die before they do.


To cover the Social Security “blackout period”
A recent study showed that 5 percent of married women ages 51-64 were poor, but 20 percent of widows that age were poor. This happens because many people don’t plan for life insurance to pay income to the surviving spouse after their kids are grown. As noted above, Social Security pays nothing from when the youngest child leaves high school until the surviving spouse applies for benefits based on the deceased spouse’s record (minimum age for eligibility is 60). This interval is called the “blackout period.”

To offset reduced Social Security survivor’s benefits
If a survivor begins receiving Social Security survivor benefits earlier than the full-benefit age (66-67, depending on when the survivor was born), the Social Security benefit amount is permanently reduced. Moreover, because of the deceased’s early death, he or she didn’t get salary increases that might have boosted Social Security benefits further. A life insurance policy can help offset the effect of these “lost” raises.

To offset other “lost” retirement savings
Also, because of the deceased’s early death, he or she didn’t get salary increases that might have boosted employer pension benefits and/or IRA contributions. A life insurance policy can help offset the effect of these reduced retirement savings.

To meet commitments based on two incomes
Most two-earner couples make financial commitments (e.g., home mortgage, loans, leases, etc.) based on their combined income. Life insurance on each earner enables the survivor to continue to meet those commitments.

To pay unplanned expenses caused by an early death
Young people don’t generally plan to have savings available to pay for funeral and burial costs, final medical expenses, estate administration and transfer costs, and federal and state income and estate taxes. Life insurance can cover these costs, which can easily reach tens of thousands of dollars.

To create a financial “safety net”
Conventional wisdom says each household should have an “emergency fund” equal to about half a year’s income, to meet surprise unavoidable outlays. If the household does not already have an emergency fund, the post-death family will be even more financially vulnerable without one. Furthermore, it might also be somewhat more difficult for the survivors to obtain credit. Life insurance can solve this problem.

To offset lost income if a spouse dies after beginning Social Security retirement benefits
When a couple retires and begins receiving Social Security retirement benefits, each one receives an income. The earner with the larger pre-retirement income gets a benefit based on that income, and the person with the smaller (or no) pre-retirement income gets either a benefit based on his or her own earnings record or half of the spouse’s Social Security benefit, whichever is greater. When one spouse dies, the larger retirement benefit continues but the second benefit stops—in effect, a 33 percent income reduction. Life insurance can offset this income drop.

To provide bequests to heirs and charities
If you want to be sure that your heirs and/or favorite charities get money after your death, you can designate some or all of your life insurance benefits to go to them. This is particularly useful if, without the life insurance, your executor would have to liquidate other assets to meet this objective.

Should I buy life insurance on my child’s life?

The main reason for buying life insurance on anyone’s life is to replace income “lost” or pay for expenses caused by the death of the insured person. If your child dies, there’s no lost income, but there will be funeral, burial and related expenses that could run to thousands of dollars, which might cause a financial hardship to the parents of the deceased child.

Another reason for buying life insurance on a child’s life is to guard against the possibility that, when the child is older, he or she might not be able to buy life insurance because of intervening illness or other circumstance.

Still another reason for buying life insurance on a child’s life is part of a program to teach the child financial responsibility. Typically the insurance is whole life insurance, ownership of which is transferred to the child when he or she turns 21.

Most insurance advisors recommend that families spend their insurance budget to buy life and disability income insurance on the parents first, before considering insurance on children’s lives. Death of a parent, particularly an income-earner, could have financial consequences that are devastating compared to the financial effects from a child’s death.

SPECIAL BUYING SITUATIONS

• What is “burial insurance”?
• Should I buy life insurance on my child’s life?
• Do "empty nesters" need life insurance?

What is “burial insurance”?

“Burial insurance” usually refers to a whole life insurance policy with a death benefit of from $5,000 to $25,000. As its nickname implies, people buy this type of policy to provide money for funeral and burial costs for themselves and/or family members. It is possible to buy a policy after answering a few health-related questions on the application and with no medical exam.

Premiums are payable weekly or monthly. The premium is usually collected at the policyowner’s home or workplace, and the premium is usually a small round number, such as $2 or $3 per week; the death benefit is whatever that premium will buy given the insured’s current age. For example, a $3 per week premium might buy a $6,000 death benefit for a 36-year-old man or an $18,000 death benefit for a 9-year-old boy.

Burial policies may be designed to cover one person or everyone in a family.

Under some state laws, funeral homes may be licensed to sell burial insurance, but it is mainly sold through brokers and agents of insurance companies licensed to sell life insurance.

An approach that is similar to burial life insurance (and sometimes called burial or “pre-need” insurance) is pre-payment of your funeral arrangements. Under this program, you may select the funeral home, type of service, casket (or cremation), flowers, headstone, burial plot, the cost of digging and filling the grave, and other items, and lock in the prices for them by paying in advance.

How can I save money on life insurance?

There are ways to save money when buying life insurance, but they don’t always entail paying a lower premium immediately. As your top priority, look for a policy that meets your needs. Buying the wrong benefits for a low premium is a waste, not a saving. Beyond that, here are some ways to maximize your life insurance dollars.

Before you buy

Once you’ve determined what type of life insurance product to buy:

1. Focus on financially sound companies. Dozens of companies sell life insurance. Limit yourself to companies with high ratings from two or more independent rating agencies. A low premium from a shaky company isn’t a good buy. See How do I choose a life insurance company? for more details.
2. Shop around to get a sense of the premium you’re likely to pay. Quote services on the Internet may serve this purpose, or you can ask an agent or broker to get you a premium estimate.As part of this research, determine which rate class you’ll fit into. Most companies that sell individual life insurance have several different price classes—usually called “preferred (non-tobacco),” “standard (non-tobacco),” “preferred (tobacco),” and “standard (tobacco).” A small percentage of people have health conditions or histories that disqualify them for even “standard” rates. Many in this group will be offered insurance at “impaired risk” or “nonstandard” rates.
3. Look into group insurance. Consider participating in your employer-sponsored life insurance program, even if you have to contribute to it financially. Employers often subsidize their group insurance costs, so it can be less expensive than individual life insurance. You might obtain coverage up to a certain level without providing evidence of good health, an advantage for some people. You’ll probably pay premiums through payroll deduction, which can be a nice convenience. However, make sure to compare group and individual rates, as depending on your age and health status, group insurance may or may not provide a savings. In comparing group to individual life insurance, remember that if you have over $50,000 of group life insurance, IRS tables determine how much it costs to provide the amount over $50,000 and charges you taxable income for that cost.
4. Take care of yourself. Find out into which rate class you’ll be grouped and, if necessary, consider making some lifestyle changes—don’t smoke, maintain a healthy weight and exercise regularly—to qualify for a more favorable rate class.

When you're ready to buy

1. Shop around to get a good rate. Life insurance is a very competitive business, and you’ll find differences of hundreds of dollars (for annual premiums) even among financially strong companies for essentially the same policy.
2. Consider the net cost index. How can you compare two policies, one with premiums that start lower than the other but later are higher than the other? Or one with low premiums and a low cash value, the other with higher premiums and a higher cash value? Use a net cost index—a standard method for collapsing these variables into one number. The lower the number, the better, but ignore small differences (since the indexes are approximations based on assumptions, small differences might not signal true differences in values). The agent or broker with whom you’re dealing, or the company from which you’re considering buying a policy, will provide these index numbers.
3. Be aware of premium discounts for particular amounts of insurance. Most companies offer rate discounts for specified insurance amounts. For example, you might actually pay a smaller premium for $250,000 of life insurance than for $200,000, or for $500,000 of life insurance than for $450,000, because a discount “kicks in” at the higher insurance amount.
4. Beware of “fractional premiums”. Typically, you can pay your life insurance premium once a year, once every half-year, once a quarter, or once a month. Although paying quarterly or monthly might seem to be easier to fit into your budget, some companies levy high charges for paying premiums frequently. Others levy quite small charges to do this. If a company levies high charges for paying more frequently, try budgeting so that you can pay your premium only once or twice a year.
5. If you’re buying a term policy, look for renewal guarantees.A renewal guarantee gives you the right to start a new term after the current one ends, paying a higher premium based on your current age, but without requiring you to undergo a new health exam or submit any other “evidence of insurability.” Without the guarantee, you’d have to shop for life insurance all over again, and if your health has deteriorated, you might have to pay much more or not get it at all.

How should I choose a life insurance agent?

When you’re considering buying life insurance, it’s important to choose an agent or broker who can help you. Buying life insurance can be complicated or confusing. The key to buying the right amount and the right type of policy at a good rate is a good agent or broker. You should choose one who:

• Understands your financial situation, including your attitudes about risk, your income and estate tax “brackets,” and your other financial assets and obligations, as well as your personal situation (that is, your age, marital status, dependents, etc.)


• Explains, in terms you can easily understand, issues, options and planned use of life insurance in your financial program


• Provides you with a personalized written document that -records the facts of your current financial and personal situation and-describes the features of the life insurance and how it fits into your situation


• Doesn’t pressure you into a decision, but works with you until you’re ready and convinced that you are doing what is best for you


• Is prepared to review with you periodically—perhaps every three years or so—whether the product continues to be suitable for your needs and circumstances


• Is licensed by your state insurance department.

If you don’t have an agent or broker who fits this description, ask your lawyer, accountant, friends, relatives and business associates for the names of insurance agents or brokers with an excellent reputation. You can also use this link: http://www.life-line.org/find_agent.html to connect with the nearly 70,000 members of the National Association of Insurance and Financial Advisors (NAIFA), who subscribe to the organization’s Code of Ethics ( http://www.naifa.org/about/ethics.cfm ).

An agent or broker who has one or more professional financial services designations has demonstrated a commitment to specialized education in the field. Designations you might see include the following:

The Compensation Issue

Like everyone else, agents and brokers get paid for their services, which are enriched by their education and experience. Most agents and brokers are paid by commission, but some work on a fee basis. Typically, the largest part of the compensation is paid at the time you purchase the annuity, since most of the agent’s or broker’s work occurs at that time or just before it. As with any professional service, you should understand how your agent or broker will be compensated and how that might affect the purchase recommendation.

The bottom line? The best way to protect yourself is to make sure you understand what you’re buying and the nature of the product’s limitations, penalties or fees if you want to drop the policy.

How can I assess the financial strength of an insurance company?

Five independent agencies—A.M. Best, Fitch, Moody’s, Standard & Poor’s, and Weiss—rate the financial strength of insurance companies. Each has its own rating scale, its own rating standards, its own population of rated companies, and its own distribution of companies across its scale. Each agency uses numbers or plusses and minuses to indicate minor variations in rating from another rating class.

The agencies disagree often enough so that you should consider a company’s rating from two or more agencies before judging whether to buy or keep a policy from that company. Moreover, agencies will announce changes of ratings on any day. It’s probably prudent to check annually on the ratings of any company you’re interested in.

Some points for using the ratings:

• Don’t rely only on what the insurance companies say about their ratings from these agencies. Companies are likely to highlight a higher rating from one agency and ignore a lower one from another agency, or to select the most favorable comments from a rating agency’s report.
  
• To use the ratings from more than one independent agency, you need to understand that each agency’s rating code is different from the others. For example, an A+ from A.M. Best is the next-to-top rating of its 15 categories, but an A+ from Fitch or S&P is their 5th-highest rating (out of 24 categories for Fitch, and out of 19 categories for S&P). Moreover, Moody’s doesn’t have an A+ rating.
  

Ratings Agency Contact Information

All of the ratings agencies can be found on the Web, or reached by phone.

How do I pick a life insurance company?

Roughly 1,000 life insurance companies sell life insurance in the U.S., but many are members of groups of companies and so aren’t really competitors with each other. Having separate companies enables a group to offer its products through separate distribution channels, to more efficiently meet the regulatory requirements of particular states, or to achieve other organizational goals. There are an estimated three hundred company groups.

Moreover, not every group has a company licensed to operate in each state. As a general rule, you should buy from a company licensed in your state, because then can you rely on your state insurance department to help if there’s a problem. And if the insurance company becomes insolvent, your state’s life insurance guaranty fund will help only policyholders of companies it has licensed. To find out which companies are licensed in any state, contact that state’s state insurance department.

There are several other points to keep in mind when selecting a life insurance company:

• Product – most, but not all, companies offer a broad range of policies and features, so choose a company that offers the product and features that meet your needs.
• Identity – life insurance company names can be confusing, and different companies can have similar names. Life insurance company names often use words that suggest financial strength (such as Guaranty, Reserve, or Security), financial sophistication (such as Bankers, Financial, or Investors), maturity (such as First, Pioneer, or Old), dependability (such as Assurance, Reliable, Trust), fairness (such as Beneficial, Equitable, or Peoples), breadth of operations (such as Continental, National, or International), government (such as American, Capital, or Republic), or well-known and respected Americans (such as Jefferson, Franklin, or Lincoln). Be sure you know the full name, home office location, and affiliation (if any) of any company you are considering (for an example, click here).
• Financial Solidity – life insurance is a long-term arrangement. There is no guarantee for life insurance policyholders similar to that provided for bank accounts by the Federal Deposit Insurance Corporation (FDIC). Select a company that is likely to be financially sound for many years, by using ratings from independent rating agencies.
• Market ethics – some life insurance companies subscribe to the principles and codes of conduct of the Insurance Marketplace Standards Association, a nonprofit organization that promotes ethical conduct in life insurance marketing.
• Advice and service – for many people, life insurance is a strange, complex product, so that it helps to deal with a representative with whom you can communicate and who is attentive to your needs. This might be connected to the selection of a life insurance company because some agents represent only one or a very few life insurance companies. See How do I select a life insurance agent?
• Claims – you may want to check a national claims database to see what complaint information it has on a company. Also, your state insurance department will be able to tell you if the insurance company you are considering doing business with had many consumer complaints about its service relative to the number of policies it sold.
• Premium and cost – The premium is the amount you pay the company for the life insurance contract with all of its benefits. Even for a given death benefit and type of insurance (e.g., term life), the premium can vary widely among companies, either because some companies’ policies have features that others don’t, or because some charge more than others for the same coverage. So the first step in comparing policies is to make sure you compare similar insurance plans, based on

-Your age

-The type of policy and policy features

-The amount of insurance you are purchasing

The premium for the policy isn’t the same as the cost of the protection portion of the policy. One policy might have a higher premium but also offer more benefits (for example, it might pay policy dividends) than another. Or both might promise dividends, but in different amounts at different points in time. In each case, the higher-premium policy might have a lower cost of protection. How can you tell what a policy’s cost is? Companies should tell you a policy’s Net Payment Cost Index and its Surrender Cost Index. Use the Surrender Cost Index if you’re thinking of keeping the insurance only for a specific period of time; use the Net Payment Cost Index if you expect to keep the policy indefinitely. Generally, the lower the cost index, the better.

BUYING AND SAVING MONEY

• How should I choose what type of life insurance to buy?
• How do I pick a life insurance company?
• How can I assess the financial strength of an insurance company?
• How should I choose a life insurance agent?
• How can I save money on life insurance?

How should I choose what type of life insurance to buy?

You should consider term life insurance if:

• You need life insurance for a specific period of time. Term life insurance enables you to match the length of the term policy to the length of the need. For example, if you have young children and want to ensure that there will be funds to pay for their college education, you might buy 20-year term life insurance. Or if you want the insurance to repay a debt that will be paid off in a specified time period, buy a term policy for that period.
• You need a large amount of life insurance, but have a limited budget. In general, this type of insurance pays only if you die during the term of the policy, so the rate per thousand of death benefit is lower than for permanent forms of life insurance. If you are still alive at the end of the term, coverage stops unless the policy is renewed. Unlike permanent insurance, you will not build equity in the form of cash savings.

If you think your financial needs may change, you may also want to look into “convertible” term policies. These allow you to convert to permanent insurance without a medical examination in exchange for higher premiums.

Keep in mind that premiums are lowest when you are young and increase upon renewal as you age. Some term insurance policies can be renewed when the policy ends, but the premium will generally increase. Some policies require a medical examination at renewal to qualify for the lowest rates.

You should consider permanent life insurance if:

• You need life insurance for as long as you live. A permanent policy pays a death benefit whether you die tomorrow or live to be 100.
• You want to accumulate a savings element that will grow on a tax-deferred basis and could be a source of borrowed funds for a variety of purposes. The savings element can be used to pay premiums to keep the life insurance in force if you can’t pay them otherwise, or it can be used for any other purpose you choose. You can borrow these funds even if your credit is shaky. The death benefit is collateral for the loan, and if you die before it’s repaid, the insurance company collects what is due the company before determining what’s goes to your beneficiary.

Keep in mind that premiums for permanent policies are generally higher than for term insurance. However, the premium in a permanent policy remains the same no matter how old you are, while term can go up substantially every time you renew it.

There are a number of different types of permanent insurance policies, such as whole (ordinary) life, universal life, variable life, and variable/universal life.

Why should I purchase permanent insurance?

A permanent life policy provides lifelong insurance protection. The policy pays a death benefit if you die tomorrow or if you live to be a hundred. There is also a savings element that will grow on a tax-deferred basis and may become substantial over time. Because of the savings element, premiums are generally higher for permanent than for term insurance. However, the premium in a permanent policy remains the same, while term can go up substantially every time you renew it.

There are a number of different types of permanent insurance policies, such as whole (ordinary) life, universal life, variable life, and variable/universal life. In a permanent policy, the cash value is different from its face value amount. The face amount is the money that will be paid at death. Cash value is the amount of money available to you. There are a number of ways that you can use this cash savings. For instance, you can take a loan against it or you can surrender the policy before you die to collect the accumulated savings.

There are unique features to a permanent policy such as:

• You can lock in premiums when you purchase the policy. By purchasing a permanent policy, the premium will not increase as you age or if your health status changes.
• The policy will accumulate cash savings.Depending on the policy, you may be able to withdraw some of the money. You also may have these options:

1. Use the cash value to pay premiums. If unexpected expenses occur, you can stop or reduce your premiums. The cash value in the policy can be used toward the premium payment to continue your current insurance protection – providing there is enough money accumulated.
2. Borrow from the insurance company using the cash value in your life insurance as collateral. Like all loans, you will ultimately need to repay the insurer with interest. Otherwise, the policy may lapse or your beneficiaries will receive a reduced death benefit. However, unlike loans from most financial institutions, the loan is not dependent on credit checks or other restrictions.

What are the different types of permanent policies?

Whole or ordinary life
This is the most common type of permanent insurance policy. It offers a death benefit along with a savings account. If you pick this type of life insurance policy, you are agreeing to pay a certain amount in premiums on a regular basis for a specific death benefit. The savings element would grow based on dividends the company pays to you.

Universal or adjustable life
This type of policy offers you more flexibility than whole life insurance. You may be able to increase the death benefit, if you pass a medical examination. The savings vehicle (called a cash value account) generally earns a money market rate of interest. After money has accumulated in your account, you will also have the option of altering your premium payments – providing there is enough money in your account to cover the costs. This can be a useful feature if your economic situation has suddenly changed. However, you would need to keep in mind that if you stop or reduce your premiums and the saving accumulation gets used up, the policy might lapse and your life insurance coverage will end. You should check with your agent before deciding not to make premium payments for extended periods because you might not have enough cash value to pay the monthly charges to prevent a policy lapse.

Variable life
This policy combines death protection with a savings account that you can invest in stocks, bonds and money market mutual funds. The value of your policy may grow more quickly, but you also have more risk. If your investments do not perform well, your cash value and death benefit may decrease. Some policies, however, guarantee that your death benefit will not fall below a minimum level.

Variable-universal life
If you purchase this type of policy, you get the features of variable and universal life policies. You have the investment risks and rewards characteristic of variable life insurance, coupled with the ability to adjust your premiums and death benefit that is characteristic of universal life insurance.

TYPES OF LIFE INSURANCE

• What are the types of term insurance policies?
• What are the different types of permanent policies?
• Why should I purchase permanent insurance?

What are the types of term insurance policies?

Term insurance comes in two basic varieties—level term and decreasing term. These days, almost everyone buys level term insurance. The terms “level” and “decreasing” refer to the death benefit amount during the term of the policy. A level term policy pays the same benefit amount if death occurs at any point during the term.

Common types of level term are:

• yearly- (or annually-) renewable term
• 5-year renewable term
• 10-year term
• 15-year term
• 20-year term
• 25-year term
• 30-year term
• term to a specified age (usually 65)

Yearly renewable term, once popular, is no longer a top seller. The most popular type is now 20-year term. Most companies will not sell term insurance to an applicant for a term that ends past his or her 80th birthday.

If a policy is “renewable,” that means it continues in force for an additional term or terms, up to a specified age, even if the health of the insured (or other factors) would cause him or her to be rejected if he or she applied for a new life insurance policy.

Generally, the premium for the policy is based on the insured person’s age and health at the policy’s start, and the premium remains the same (level) for the length of the term. So, premiums for 5-year renewable term can be level for 5 years, then to a new rate reflecting the new age of the insured, and so on every five years. Some longer term policies will guarantee that the premium will not increase during the term; others don’t make that guarantee, enabling the insurance company to raise the rate during the policy’s term.

Some term policies are convertible. This means that the policy’s owner has the right to change it into a permanent type of life insurance without additional evidence of insurability.

“Return of Premium”

In most types of term insurance, including homeowners and auto insurance, if you haven’t had a claim under the policy by the time it expires, you get no refund of the premium. Your premium bought the protection that you had but didn’t need, and you’ve received fair value. Some term life insurance consumers have been unhappy at this outcome, so some insurers have created term life with a “return of premium” feature. The premiums for the insurance with this feature are often significantly higher than for policies without it, and they generally require that you keep the policy in force to its term or else you forfeit the return of premium benefit. Some policies will return the base premium but not the extra premium (for the return benefit), and others will return both.

What is a beneficiary?

A beneficiary is the person or entity you name in a life insurance policy to receive the death benefit. You can name:

• One person
• Two or more people
• The trustee of a trust you’ve set up
• A charity
• Your estate

If you don’t name a beneficiary, the death benefit will be paid to your estate.

Two “levels” of beneficiaries

Your life insurance policy should have both “primary” and “contingent” beneficiaries. The primary beneficiary gets the death benefits if he or she can be found after your death. Contingent beneficiaries get the death benefits if the primary beneficiary can’t be found. If no primary or contingent beneficiaries can be found, the death benefit will be paid to your estate.

As part of naming beneficiaries, you should identify them as clearly as possible and include their social security numbers. This will make it easier for the life insurance company to find them, and it will make it less likely that disputes will arise regarding the death benefits. For example, if you write "wife [or husband] of the insured" without using a specific name, an ex-spouse could claim the death benefit. On the other hand, if you have named specific children, any later-born or adopted children will not receive the death benefit—unless you change the beneficiary designation to include them.

Besides naming beneficiaries, you should specify how the benefits are to be handled if one or more beneficiaries can’t be found. For example, suppose you have two children and you name each one to receive half of the death benefit. If one of the children dies before you do, do you want the other child to get the entire death benefit, or the deceased child’s heirs to get his or her share?

If the death benefit goes to your estate, probate proceedings could delay distributing the money, and the cost of probate could diminish the amount available to your heirs.

Choosing beneficiaries, and keeping those choices up-to-date, is an important part of owning life insurance. The birth or adoption of a child, marriage or divorce can affect your initial choice. Review your beneficiary designation as new situations arise in order to make sure your choice is still appropriate.

How is life insurance sold?

You can buy life insurance either as an “individual” or as part of a “group” plan.

Individual Policy

When you buy an individual policy, you choose the company, the plan, and the benefits and features that are right for you and your family. You might be able to buy the policy from the same agent or company representative who sells you property and liability insurance for your home, auto or business. And although you won’t qualify for any discounts by buying your life insurance and other insurance from the same representative, working with a single advisor for all your insurance needs can make your financial life simpler.Individual policies are typically sold through insurance agents or brokers. If you buy a policy through an agent or broker, you will pay a commission, also called a “load,” that is built into the premium rate. The commission compensates the agent or broker for the time spent advising you on how much and what type of life insurance to buy, for facilitating the application process, and for any further service that’s needed in future years to keep the policy up-to-date (such as changing beneficiary designations, arranging policy loans or coordinating your financial plans with your lawyer and accountant).

There are two other ways to buy individual life insurance. In Connecticut, Massachusetts and New York, you can buy it from a savings bank. Or you can buy a policy directly from an insurance company or from a fee-only financial advisor—what’s known as a “no load” or “low load” policy. Although there is no sales commission on these policies, the company will still have charges built into the premium to cover its marketing expenses, application processing expenses and subsequent services. Finding an insurance company that will sell you a no-load policy isn’t easy; typing in “no load life insurance” on Internet search engines will in many cases lead you to an agent or broker.

Group Policy

You might have life insurance automatically from your employer; many large companies do this. Your employer also might offer you the chance to buy additional life insurance under a group policy. And you might be eligible to buy life insurance under a group policy from a union or trade association or other group you belong to (such as a college alumni association or an automobile club).Compared to buying an individual life insurance policy, there are several advantages to buying life insurance under a group policy:

• Group purchase can sometimes offer you a lower rate for a given death benefit either because the employer or other group sponsor subsidizes the premium or because the rates are averages weighted by people younger than you.
• There are virtually no health qualifications for getting the group coverage.
• Premium payment is usually by payroll deduction (for employer-based group coverage) or linked with other payments (e.g., credit card bills), lowering the chance of missing a payment.

Most employer group plans are term insurance, but if you leave that employer your state may require that you be allowed to convert the policy to a form of whole life insurance with the same insurance company that provides the group life insurance. You would then pay premiums directly to the company and keep the insurance in force. This can be an advantage if you are older, or have experienced deteriorating health, as it gives you the opportunity to qualify for whole life insurance without having a medical exam.

Credit Life Insurance

Credit cards and lending institutions may offer life insurance to pay off your outstanding loans in the event of your death. This is generally made available in two ways

• As part of the loan at no extra charge. In this case the cost of the life insurance is borne by the lender and is included in its interest rate or other finance charges. If you have this type of credit life insurance, you don’t need separate life insurance to pay off that loan if you die.
• As an option at an extra charge. In this case, you should usually reject the optional coverage, provided that you have some other life insurance (group or individual) that can be designated to pay off the loan if you die. If you’re under age 50 and you don’t have other insurance that could pay off this loan, consider buying individual life insurance for this purpose as the rates will probably be better. At 50 or over (or younger with health issues), if you have no other life insurance for this purpose, the optional credit life insurance is likely to be cheaper than individual life insurance.

What are the principal types of life insurance?

There are two major types of life insurance—term and whole life. Whole life is sometimes called permanent life insurance, and it encompasses several subcategories, including traditional whole life, universal life, variable life and variable universal life. In 2003, about 6.4 million individual life insurance policies bought were term and about 7.1 million were whole life.Life insurance products for groups are different from life insurance sold to individuals. The information below focuses on life insurance sold to individuals

Term

Term Insurance is the simplest form of life insurance. It pays only if death occurs during the term of the policy, which is usually from one to 30 years. Most term policies have no other benefit provisions.There are two basic types of term life insurance policies—level term and decreasing term.
Level term means that the death benefit stays the same throughout the duration of the policy.
Decreasing term means that the death benefit drops, usually in one-year increments, over the course of the policy’s term.In 2003, virtually all (97 percent) of the term life insurance bought was level term.

Whole Life/Permanent

Whole life or permanent insurance pays a death benefit whenever you die—even if you live to 100! There are three major types of whole life or permanent life insurance—traditional whole life, universal life, and variable universal life, and there are variations within each type.In the case of traditional whole life, both the death benefit and the premium are designed to stay the same (level) throughout the life of the policy. The cost per $1,000 of benefit increases as the insured person ages, and it obviously gets very high when the insured lives to 80 and beyond. The insurance company could charge a premium that increases each year, but that would make it very hard for most people to afford life insurance at advanced ages. So the comapny keeps the premium level by charging a premium that, in the early years, is higher than what’s needed to pay claims, investing that money, and then using it to supplement the level premium to help pay the cost of life insurance for older people.By law, when these “overpayments” reach a certain amount, they must be available to the policyowner as a cash value if he or she decides not to continue with the original plan. The cash value is an alternative, not an additional, benefit under the policy. In the 1970s and 1980s, life insurance companies introduced two variations on the traditional whole life product—universal life insurance and variable universal life insurance.

How much life insurance do I need?

In most cases, if you have no dependents and have enough money to pay your final expenses, you don’t need any life insurance.If you want to create an inheritance or make a charitable contribution, buy enough life insurance to achieve those goals.If you have dependents, buy enough life insurance so that, when combined with other sources of income, it will replace the income you now generate for them, plus enough to offset any additional expenses they will incur to replace services you provide (for a simple example, if you do your own taxes, the survivors might have to hire a professional tax preparer). Also, your family might need extra money to make some changes after you die. For example, they may want to relocate, or your spouse may need to go back to school to be in a better position to help support the family.You should also plan to replace “hidden income” that would be lost at death. Hidden income is income that you receive through your employment but that isn’t part of your gross wages. It includes things like your employer’s subsidy of your health insurance premium, the matching contribution to your 401(k) plan, and many other “perks,” large and small. This is an often-overlooked insurance need: the cost of replacing just your health insurance and retirement contributions could be the equivalent of $2,000 per month or more.Of course, you should also plan for expenses that arise at death. These include the funeral costs, taxes and administrative costs associated with “winding up” an estate and passing property to heirs. At a minimum, plan for $15,000.

Other sources of income

Most families have some sources of post-death income besides life insurance. The most common source is Social Security survivors’ benefits. Social Security survivors’ benefits can be substantial. For example, for a 35-year-old person who was earning a $36,000 salary at death, maximum Social Security survivors’ monthly income benefits for a spouse and two children under age 18 could be about $2,400 per month, and this amount would increase each year to match inflation. (It drops slightly when the survivors are a spouse and one child under 18, and stops completely when there are no children under 18. Also, the surviving spouse’s benefit would be reduced if he or she earns income over a certain limit.)Many also have life insurance through an employer plan, and some from another affiliation, such as through an association they belong to or a credit card. If you have a vested pension benefit, it might have a death component. Although these sources might provide a lot of income, they rarely provide enough. And it probably isn’t wise to count on death benefits that are connected with a particular job, since you might die after switching to a different job, or while you are unemployed.

A multiple of salary?

Many pundits recommend buying life insurance equal to a multiple of your salary. For example, one financial advice columnist recommends buying insurance equal to 20 times your salary before taxes. She chose 20 because, if the benefit is invested in bonds that pay 5 percent interest, it would produce an amount equal to your salary at death, so the survivors could live off the interest and wouldn’t have to “invade” the principal.However, this simplistic formula implicitly assumes no inflation and assumes that one could assemble a bond portfolio that, after expenses, would provide a 5 percent interest stream every year. But assuming inflation is 3 percent per year, the purchasing power of a gross income of $50,000 would drop to about $38,300 in the 10th year. To avoid this income drop-off, the survivors would have to “invade” the principal each year. And if they did, they would run out of money in the 16th year.The “multiple of salary” approach also ignores other sources of income, such as those mentioned previously.

A simple example

Suppose a surviving spouse didn’t work and had two children, ages 4 and 1, in her care. Suppose her deceased husband earned $36,000 at death and was covered by Social Security but had no other death benefits or life insurance. Assume the surviving spouse is 36.Assume that the deceased spent $6,000 from income on his own living expenses and the cost of working. Assume, for simplicity, that the deceased performed services for the family (such as property maintenance, income tax and other financial management, and occasional child care) for which the survivors will need to pay $6,000 per year. Assume that the survivors will have to buy health insurance to replace the coverage the deceased had at work, and that this will cost $12,000 per year.Taken together, the survivors will need to replace the equivalent of $48,000 of income, adjusted each year for an assumed 4 percent inflation.Thanks to Social Security, the survivors would need life insurance to replace only about $1,700 per month of lost wage income (adjusted for inflation) for 14 years until the older child reaches 18; Social Security would provide the rest. The survivors would need life insurance to replace about $2,100 per month (adjusted for inflation) for three more years when the non-working surviving spouse has only one child under 18 in her care.The life insurance amount needed today to provide the $1,700 and $2,100 monthly amounts is roughly $360,000. Adding $15,000 for funeral and other final expenses brings the minimum life insurance needed for the example to $375,000.

What’s left out?

• The surviving spouse will have no income from Social Security from age 53 until 60 unless the deceased buys additional life insurance to cover this period. It could be assumed that the surviving spouse will obtain a job at or before this time, but she could also become disabled or otherwise unable to work. If life insurance were bought for this period, the additional amount of insurance needed would be about $335,000.
• Some people like to plan to use life insurance to pay off the home mortgage at the primary income earner’s death, so that the survivors are less likely to face the threat of losing their home. If life insurance were bought for this goal, the additional amount of insurance needed is the amount of the unpaid balance on the mortgage.
• Some people like to provide money to pay to send their children to college out of their life insurance. We may assume that each child will attend a public college for four years and will need $15,000 per year. However, college costs have been rising faster than inflation for many decades, and this trend is unlikely to slow down. If life insurance were bought for this goal, the additional amount of insurance needed would be about $200,000.
• In the example, no money is planned for the surviving spouse’s retirement, except for what the spouse would be entitled to receive from Social Security (about $1,200 per month). It could be assumed that the surviving spouse will obtain a job and will either participate in an employer’s retirement plan or save with an IRA, but she could also become disabled or otherwise unable to work. If life insurance were bought to provide the equivalent of $4000 per month starting at age 60 until 65 and $3,000 per month from 65 on (because at 65 Medicare will make carrying private health insurance unnecessary), the additional amount of insurance needed would be about $465,000.

Why should I buy life insurance?

Many financial experts consider life insurance to be the cornerstone of sound financial planning. It can be an important tool in the following situations:

1. Replace income for dependents If people depend on your income, life insurance can replace that income for them if you die. The most commonly recognized case of this is parents with young children. However, it can also apply to couples in which the survivor would be financially stricken by the income lost through the death of a partner, and to dependent adults, such as parents, siblings or adult children who continue to rely on you financially. Insurance to replace your income can be especially useful if the government- or employer-sponsored benefits of your surviving spouse or domestic partner will be reduced after your death.
2. Pay final expenses Life insurance can pay your funeral and burial costs, probate and other estate administration costs, debts and medical expenses not covered by health insurance.
3. Create an inheritance for your heirs Even if you have no other assets to pass to your heirs, you can create an inheritance by buying a life insurance policy and naming them as beneficiaries.
4. Pay federal “death” taxes and state “death” taxes Life insurance benefits can pay estate taxes so that your heirs will not have to liquidate other assets or take a smaller inheritance. Changes in the federal “death” tax rules between now and January 1, 2011 will likely lessen the impact of this tax on some people, but some states are offsetting those federal decreases with increases in their state-level “death” taxes.
5. Make significant charitable contributions By making a charity the beneficiary of your life insurance, you can make a much larger contribution than if you donated the cash equivalent of the policy’s premiums.
6. Create a source of savings Some types of life insurance create a cash value that, if not paid out as a death benefit, can be borrowed or withdrawn on the owner’s request. Since most people make paying their life insurance policy premiums a high priority, buying a cash-value type policy can create a kind of “forced” savings plan. Furthermore, the interest credited is tax deferred (and tax exempt if the money is paid as a death claim).

LIFE INSURANCE BASICS

• Why should I buy life insurance?
• How much life insurance do I need?
• What are the principal types of life insurance?
• How is life insurance sold?
• What is a beneficiary?

Specialty Life Insurance

Some life insurance companies have started to offer specilty products, such as no-exam life insurance, which is issued without a medical exam. Some polices are issued online.

Choosing an Agent

Almost all life insurance companies sell their products through agents, rather than directly to the public. Some companies use "captive" agents, who can only represent one company. Most of the competitive term life insurance providers (such as those featured at this site) use independent agents, who are free to represent several companies. These agents can help you select from a variety of products and companies to tailor a plan.

You should first obtain an online life insurance quote, and then select an independent agent.

Term Life Insurance or Whole?

Term life insurance, also called temporary insurance, covers a person against death for a limited time, the term. For example, the term might be until children are grown, or until college is paid for, or until retirement. You pay for the policy period and at the end of the term, the contract or policy expires. If no claims are made against the policy during the term, you don't receive any benefits after the policy expires, just like auto or homeowners insurance.

Whole life insurance, also called permanent insurance, is permanent and does not expire (assuming you continue to pay the premiums). It provides coverage similar to term life insurance, but it also provides an investment vehicle. A portion of the premium goes for life insurance, while the rest goes into an investment account. This account can be either an interest bearing account or a variable (stocks and bonds) investment account.

Which is better (our opinion)? Young families with large financial obligations are usually better off with term life insurance policies. The substantially lower premiums enable them to purchase sufficient coverage to protect against loss of income. Any discretionary investment funds can be placed in other vehicles (mutual funds, money market accounts, etc.) that are likely to generate returns similar to or better than life insurance policies. Whole life insurance is often purchased by people for tax and estate planning purposes. You should consult with your financial advisor.

About Life Insurance

Paying for life insurance hurts! But few can do without it. The key is to buy life insurance only for losses that you can not replace, such as your income. Avoid narrowly defined life insurance policies that only cover specific loss of life, such as accidents, plane crashes or cancer. You're better off with insurance for any loss of life for a small increase in premium.

Don't skimp on life insurance. But remember that people with no dependents may not need life insurance policies at all. To estimate the amount of a life insurance policy, use our life insurance calculator. Most life insurance consultants estimate five to ten times your annual income. Smoker life insurance costs two to three times as much as non-smoker.

Jane Bryant Quinn provides tips on how to find the best term life insurance quotes in Insurance: When You Bet Your Life. Budget Life uses the Term4Sale database recommended by Ms.Quinn for term life insurance comparisons.

Do you know how long you are going to live? See our article on life expectancy, or this related article on life insurance settlements. We take a somewhat contrarian view on these topics, so let us know what you think!

About Budget Life

The following term life insurance companies head up the Budget Life Top 15: Ohio National Life Assurance Corporation, Western Reserve Life Insurance Company of OH, West Coast Life Insurance Company, Savings Bank Life Insurance Company of MA, Banner Life Insurance Company. We use a third party database of top term life insurance companies to rank in terms of lowest life insurance rates. We can also provide term life insurance quotes online.

Term life insurance rates have been dropping steadily in response to increased competition. Term life insurance is a commodity, and improved access to online life insurance quotes information, such as at this Web site, is making it even more so. Whether to use life insurance as an investment is a separate decision; but for just pure life insurance, which is term insurance, why pay more than you have to?

Budget Life also lets you obtain term life insurance quotes from independent agents. These life insurance agents use our database to ensure that they have the lowest life insurance rates; they don't quote for just one life insurance company. Term life insurance quotes are commodities, and they find the best term life insurance rate. Some specialize in survivors life insurance and impaired risk life insurance.