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Frequently Asked Questions (FAQ) about Insurance
What is life insurance?
Life insurance is a financial resource for your loved ones in the event of your death. You enter into a contract with an insurance company, which promises to provide your beneficiary(ies) with a certain amount of money upon your death. In return, you make periodic payments, known as premiums. The amount of the premiums generally depends on factors such as your age, gender, occupation, medical history and whether you intend to build up cash value in your policy. Some policies may require a medical exam.
Certain types of life insurance may also provide benefits for you and your family while you're still living. Such policies accumulate cash value on a tax-deferred basis that can be used for future needs such as supplementing your retirement income or helping provide for a child's education.
What is Term Life Insurance?
Term life insurance is the least expensive type of coverage, at least initially, and the simplest. These policies do not build up a cash value. Coverage is in effect for a fixed term or period of time - usually one to 20 years - and usually can be renewed. The policy pays your beneficiary a fixed amount of money if you die during the term of the policy. The premiums are lowest when you are young and increase upon renewal as you age. Be sure to check your policy for age or other renewal restrictions.
What is Whole Life Insurance?
Whole life insurance provides protection as well as a cash value. The premiums remain at a fixed level for the duration of the contract. Over time, the policy generally builds up cash value on a tax-deferred basis. Many companies pay policyholders a dividend. Dividends provide both flexibility and increased value to your life insurance policy. They can add more coverage to your overall insurance benefit and can build a sizable cash value.
You may prefer this type of coverage since the cash value can benefit you while you're still alive. You can use it to supplement retirement funds or help provide for a child's education - it's your money to use as you need. You should, however, keep in mind that life insurance should not be purchased solely for accumulation. Its primary purpose is protection. Also, withdrawals and/or loans will decrease the death benefit.
What is Universal Life Insurance?
Universal life insurance is a flexible life insurance plan. These policies are interest-sensitive and permit the owner to adjust the death benefit and/or premium payments, within limits, to fit the owner's situation. Your net premium payments are applied to the accumulation fund, which earns a guaranteed interest rate. The monthly cost of the death benefit and policy administration is deducted from the accumulation fund. As with whole life insurance, the cash value is yours — you may withdraw it or borrow against it at any time. Read your policy carefully to understand how withdrawals may affect the death benefits.
Since you decide how much premium to pay, within limits, some universal life policies even allow you to skip payments. If you skip a premium payment, the administrative and death benefit costs are deducted from your cash value. The policy stays in effect until your cash value can no longer cover these costs. Make sure you understand your annual statement so you know how much interest your policy is earning and how much cash value you have. Universal life insurance rates are subject to change, but the rate will never fall below the minimum rate guaranteed in the contract.
What is Variable Life Insurance?
Variable life insurance is for those who want to tie their life insurance policy to the performance of the financial markets. You decide how your net policy values are to be invested. Your cash value may have the opportunity to accumulate more rapidly than with other cash value policies, but you incur additional risk. If market performance is poor, your death benefit may decrease, and you may have to pay higher premiums to keep the policy in effect. As with whole and universal life policies, you may borrow against or withdraw the cash value at anytime. Keep in mind that loans and withdrawals may reduce cash values and the death benefit. Read your policy carefully for any possible charges associated with these transactions. These policies are sold by prospectus, a valuable disclosure document, that you should also read carefully.
Do I need life insurance?
The ability to earn an income can be considered your family's most valuable asset because your income allows you to obtain other assets, particularly the necessities of life and, of course, the creature comforts. However, as we know, the ability to earn an income is not guaranteed. Yet, the need for income may continue for those who were financially dependent upon you. Consequently, your need for life insurance and the amount will depend upon your personal and financial circumstances.
How much life insurance do I need?
Most financial planners recommend 6 to 8 times your annual earnings. However, there are other considerations when determining how much life insurance you need. For instance, what other income do you have beyond your current salary? What are your spouse's current or potential earnings? How many are financially dependent on you? Will you have death benefits from an employer-sponsored life insurance plan? Are there other large expenses such as a mortgage, college or wedding fund? Consult with your financial advisor.
Should I buy term insurance or cash value life insurance?
First answer this question - are you able to purchase enough life insurance coverage? The amount of life insurance you need may be so large that the only way you can afford it is to buy term insurance, which carries a lower premium than cash value policies. Most people are tragically under insured, so don't ever buy (more expensive) cash value insurance, if it means you can't buy the coverage you need. People with a need to reduce estate taxes often use cash value life insurance as a tool. If you have further questions, please ask your financial advisor.
Should I buy life insurance for my spouse or children?
You must first protect the earnings of the primary breadwinner before considering life insurance on your spouse or children. If your spouse works, then you should purchase insurance to protect the spouse's earnings as well. If you buy life insurance for your children, you should only do it with discretionary funds. Protect your earnings first.
Should I buy mortgage insurance?
With mortgage insurance, the face amount decreases over time in step with the projected decrease in the mortgage balance. Although the death benefit decreases, the premium is usually level in amount. While it seems like a convenient option, the dollar cost per $1,000 of coverage is usually higher than just straight term insurance. Do some comparison shopping to see.
Can I use an existing life insurance policy to cover the mortgage?
Yes A mortgage is just one of the many financial obligations you should consider when determining how much life insurance you need. The mortgage company usually won't require you to buy additional life insurance to cover the mortgage, as long as you have enough insurance to cover all of your financial obligations.
What if your insurance company goes bankrupt?
Guaranty Fund
Established by law in every state, these funds are typically maintained by a state's commissioner of insurance to protect policyholders in the event that an insurer becomes insolvent or otherwise unable to meet its financial obligations. The funds are usually financed by assessments against all property and casualty insurers regulated by state.
Check with your insurance agent for more details about the Guaranty Fund coverage in your state? Here is some more information...
State insurance departments monitor the financial health of insurance companies through regular in-depth financial analyses and periodic on-site examinations. The regulation of insurance company solvency is a function of the state. When a company is found to be in poor financial condition, regulators can take various actions to try to save it. Insolvencies do occur, however, despite the best efforts of regulators.
All states have procedures through which the property/casualty insurance industry covers claims against insolvent insurers. New York has a pre-assessment system, which requires insurers to contribute to a permanent insolvency fund, while the other states have established insurance guaranty associations (known as guaranty funds). Insurers are required to be members of guaranty associations as a condition of licensing. When there is an insolvency, they are assessed, based on business they do in that state.
More Information at National Conference of Insurance Guaranty Funds
Are life insurance benefits taxable?
Death benefits are usually not subject to federal income tax. There are exceptions, though, if the IRS deems your insurance policy to be an investment in disguise. Your insurance agent should be able to tell you if your policy benefits will be taxable.
Insurance for funeral and burial costs?
It depends on whether or not you have other life insurance set up, as well as prearranged burial. If you have no life insurance, I would strongly advise a burial policy, since the cost can range from 5 to 10 thousand without being extravagant. Another alternative is to prearrage all of the funeral elements with your local funeral homes. Even with prearranged burial, having some life insurance can be a good thing, as it will help differ medical expenses and estate tax.
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Important Disclaimer: Answers on Insurance advice are not a substitute for professional advice. For reliable information of any sort you must consult an officially qualified professional in your area.
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