Life Insurance - Frequenty Asked Questions
How much do you need to know in order to make smart decisions about life insurance?
Certainly, there's a lot to consider and, before you make any decisions, you'll need to go over all the details with your family and your insurance representative. To help you get started, here's some general information about two basic forms of life insurance: cash value and term life insurance.
People often contact us with questions about insurance. Below is a list of the inquiries we receive most frequently. Since the industry lingo can get complicated and confusing, the answers are in plain English, so they're easy to understand.
We hope this information is helpful. Please contact us if you have any other questions you'd like us to address.
A cash value life policy covers you for your lifetime. "Cash value" means that premiums generally stay level during the premium payment period. The policy not only provides insurance benefits when you die, but it also builds up a dollar value from your premium payments and investment returns. You can borrow against this value with a policy loan or redeem it for cash at any time before the policy matures. Whole life, universal life and extra value life are some of the more popular forms of cash value life policies.
Term insurance is a basic type of insurance coverage that you can buy, as the name implies, for a specified period of time. Term insurance is strictly insurance, and has no cash value. It also offers the lowest premiums. When a term life insurance policy expires, you must renew it to continue the coverage, and premiums increase in proportion to your age.
If you have long-term needs - for example, if you require life-long protection for premature death, retirement income or cash to settle your estate - then you should consider cash value insurance. Likewise, if you need protection for a specified period of time, perhaps to pay off a loan or mortgage in the event of your death, term insurance may be the right choice for you. Apply now to get a free quote on term life insurance at affordable rates.
The appropriate amount of life insurance varies from person to person, depending upon your individual needs and your family's lifestyle. To determine how much coverage you need, multiply your annual income by five or tally the assets that will pass to your heirs, such as Social Security, savings, real estate, and other benefits. The best way to establish a precise and adequate amount for life insurance coverage is to consult with your insurance representative.
It depends on the type of policy you purchase. Many policies have fixed premiums that cannot be increased, while other policies limit premium increases.
Usually, you can increase your coverage with a new policy or by adding a rider to your existing policy. However, a universal life policy can be increased without a rider or new policy. All coverage increases require you to provide evidence of insurability to your insurer.
" Convertible" and "renewable" are provisions in a term insurance policy. With a convertible policy, the policyowner has the option to exchange the policy for another insurance plan without evidence of insurability. However, term policies can only be converted to cash value policies. With a renewable policy, the policyowner can renew (or extend) the policy at the end of its term without evidence of insurability. When a policy includes both provisions, they continue until specified ages and then stop. Premium rates increase at each renewal, based on the insured's age.
Term insurance offers the lowest premium rates. However, each time a term policy is renewed, premiums increase and continue to do so rapidly over the years. Also, term insurance does not continue over the insured's entire lifetime. Whole life, universal life and extra value life can be less costly over the long term and also provide the advantage of cash value.
Do life insurance policies pay dividends?
Some companies issue participating policies that pay dividends. Here's how it works: Premiums include a safety factor to cover unexpected occurrences during the year. At year end, insurers analyze actual costs and earnings, and return any surplus to policyowners in the form of dividends.
No. You can receive dividends as cash and use them to reduce your premiums, or you can let them accumulate interest. Unless your policy is a term insurance plan, you can also use dividends to purchase additional paid-up life insurance.
It is wise to use dividends to reduce your premiums, which will minimize your cash outlay. If you purchased a policy for investment purposes, then the dividends can be left to accumulate interest. The "Paid-up Additions" option enables you to get the best of both worlds: it provides for the purchase of additional life insurance on a paid-up basis and also generates additional cash value.
You can change your dividend option at any time.
If you pay the premium within the grace period following the due date, you will not be subject to a penalty or loss of coverage.
When can my policy lapse and what can I do if this happens?
Your policy can lapse or terminate when a premium is not paid by the end of the grace period, if the policy has no cash value. If the policy has adequate cash value, you can borrow against it to pay the premium and maintain your insurance. You could also use one of the policy's non-forteiture options which allow you to: (1) surrender your policy and collect its cash value; (2) purchase a reduced amount of paid-up cash value life insurance; or (3) purchase the same amount of term insurance that you purchased originally and extend your coverage for a specified time period.
Yes. If you provide the insurer with evidence or insurability and pay all back-premiums plus interest. This is called "reinstatement" and can occur anytime within five years from the date your policy lapses. The advantages of reinstating a lapsed policy are: (1) you pay the original premium rate; (2) the cash value of the original policy will be greater than that of a newly issued policy; and (3) you may be charged a lower interest rate on loans against your policy.
Cash value life insurance policies can be used to obtain a loan. The loan amount and time at which you can borrow depend on the amount and type of insurance you have, as well as your age. Guaranteed loan values are outlined in the policy contract.
Why must I pay interest when I borrow on my own policy?
Your policy's cash value does not belong to you until you surrender the policy and relinquish its protection. Until then, the cash value is part of the insurer's investment portfolio, which enables the insurer to fulfill obligations to policyowners. These assets are invested and earnings keep premiums low and increase dividends. Therefore, all loans including policyowner loans, must earn interest.
No. You can repay a policy loan as you wish and, as long as you make regular premium payments, your policy will remain in effect. If you don't repay your loan, the amount you owe will be deducted from any insurance proceeds. It is a good idea to pay your loan regularly so that the amount you owe does not exceed the policy's cash value, which would cause your policy to lapse.
What additional benefits can be added to my life insurance policy?
Disability Waiver of Premium provides for payment of premiums by the insurer in the event that the insured becomes disabled. The Accidental Death Benefit provides for payment of an additional benefit if the insured dies in an accident. Guaranteed Insurability provides for purchase of additional life insurance at regular rates and at specified ages, regardless of occupation or state of health. Term Agreements can provide additional protection for specified periods of time.
When life insurance proceeds are paid to a living policyowner or to beneficiaries, they are paid under a settlement option. These options are:(1) a lump-sum cash payment; (2) monthly payments continuing until all proceeds and interest are paid; (3) lifetime income payments; or (4) payments of interest on proceeds remaining with the insurer under the interest option.
How is a settlement option chosen?
When life insurance proceeds are paid as a death benefit, the beneficiary may select or change a settlement option unless the policyowner has specified otherwise. When proceeds are paid during the lifetime of the insured, the policyowner may choose a settlement option.
Unless you designated your beneficiaries as "irrevocable," you always have the option to change your beneficiaries. Changes of irrevocable beneficiaries require the beneficiaries' consent. Review your beneficiary designation periodically to remain secure about the distribution of you policy's proceeds.
No. You can designate unrelated individuals, your estate, trusts or charitable organizations as beneficiaries.
What tax advantages are offered by life insurance?
Under current tax law, the yearly increase of cash value in a life insurance policy is not subject to Federal Income Tax. Taxes are paid only when the policyowner withdraws money from a policy's cash value, which exceeds total premiums paid. Generally, beneficiaries do not pay a Federal Income Tax on death benefits. When life insurance proceeds are received as monthly income under a settlement option, a portion of each monthly payment is received free of Federal Income Tax, until the cumulative non-taxable portions received equal premiums paid. Then, the entire payment is taxable.
Yes. A cash value life insurance policy is one way to accumulate funds for retirement or other purposes. Life insurance provides coverage in the event of untimely death, while offering a systematic means of building funds. Unlike a savings account in which you make deposits whenever you wish, a cash value insurance policy requires regular premium payments on specified dates, increasing your cash value.
Why invest in a cash value policy when a savings account may pay a higher interest rate?
A savings account may pay a higher interest rate, but it does not offer the insurance coverage or death benefits a life insurance policy guarantees. Life insurance can serve as both an investment vehicle and a source of income in the event of death.
Inflation typically raises interest rates and, consequently, your rates of return. Like other investments, funds placed in cash value, dividend-paying insurance policies should reflect increased earning rates.
An annuity is a contract that provides guaranteed lifetime income to an annuitant (the person receiving the income), usually after retirement. An individual purchases an annuity either through a lump-sum payment or through regular installments. At a certain age, the annuitant receives regular payments for life.
What is an IRA?
An individual retirement account (IRA) is a retirement savings plan you set up for yourself. You contribute a portion of your earnings to the plan to be set aside for your retirement. If your income is within certain limits, you may take a tax deduction for all or part of this contribution. One type of IRA is the Individual Retirement Annuity. Annuity funds build up on a tax-deferred basis until they are paid out at a specified age, later in life, when you may be in a lower tax bracket.
Since group life is issued as a single master policy to an employer or association, as a plan participant, you have no control over the price or amount of coverage. If you leave the group, your coverage usually terminates. In some states, an individual cash value policy may be purchased to replace group coverage. However, the new policy's premium rate is based on your age at the time your group coverage terminates. This "conversion" does not require evidence of insurability, and you may have a period of time to make the conversion while your group coverage remains in force.
As a stay-at-home mom, do I need life insurance?
Yes. If you were to die, your spouse would have pay for childcare and housekeeping services with household income. Life insurance is a wise option that lessens the financial strain on your family.
Do my children need life insurance?
It may be wise for children to have cash-value policies in their names since they can secure relatively low premium rates, which will not increase as they age. Also, a Guaranteed Insurability benefit can be added to the policy so the child can purchase insurance in the future. The need to accumulate funds, family medical history and financial circumstances are important considerations that help to determine whether life insurance makes sense for your children.
Will whole life help me during retirement ?
Yes. Whole life insurance along with the protection builds up a cash value. This can be used as a supplement to retirement funds or for your child's education. Also this policy's death benefits provides a ready-made estate for your heirs, allowing you to use other financial resources more freely during your retirement years.