LIFE INSURANCE: THE FOUNDATION OF FINANCIAL SECURITY
Buying:
Buying
life insurance is not like any other purchase you will make. When
you pay your premiums, you're buying the future financial security for your
family that only life insurance can provide. Among its many uses helps ensure that, when you die, your dependents will have the financial
resources needed to protect their home and the income needed to run a household.
Choosing a life insurance product is an important decision, but it often
can be complicated. As with any major purchase, it is important that you
understand your needs and the options available to you.
That's where this booklet comes in; read it thoroughly. It takes you through
the basics, step-by- step, as you prepare for this significant purchase.
Most important, it will help you know what questions to ask when you're buying
life insurance.
Life insurance also can be used to help with other financial goals, such
as funding retirement or education expenses. However, it is important to
remember that the main purpose is financial protection.
If your primary goals are something other than protection, you should consider
what other financial products are available to meet those goals.
The information in this brochure has been compiled by the American Council
of Life Insurance, a trade association of more than 600 companies.
Collectively, these companies provide about 90 percent
in force in the United States.
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LEARNING THE BASICS
The best way to make an informed decision about buying it is
to become familiar with the basics.
Why do I need it?
Life insurance is an essential part of financial planning. One reason most
people buy insurance is to replace income that would be lost with the
death of a wage earner. The cash provided by it also can help ensure
that your dependents are not burdened with significant debt when you
die. Life insurance proceeds could mean your dependents won't have to
sell assets to pay outstanding bills or taxes. An important feature
is that no income tax is payable on proceeds paid to beneficiaries.
How much insurance do I need?
Before buying, you should assemble personal financial information
and review your family's needs. There are a number of factors to consider
when determining how much protection you should have.
These include: any immediate needs at the time of death, such as final illness
expenses, burial costs and estate taxes; funds for a readjustment period,
to finance a move or to provide time for family members to find a job; and
ongoing financial needs, such as monthly bills and expenses, day-care costs,
college tuition or retirement. Although there is no substitute for a careful
evaluation of the amount of coverage needed to meet your needs, one rule
of thumb is to buy life insurance that is equal to five to seven times your
annual gross income.
What is term insurance?
Term provides protection for a specific period of time. It pays
a benefit only if you die during the term. Some term insurance policies can
be renewed when you reach the end of a specific period which can be from
one to 20 years. The premium rates increase at each renewal date. Many policies
require that evidence of insurability be furnished at renewal for you to
qualify for the lowest available rates.
What is permanent insurance?
Permanent provides lifelong protection and is known by a variety
of names, described later. As long as you pay the necessary premiums, the
death benefit always will be there. These policies are designed and priced
for you to keep over a long period of time. If you don't intend to keep the
policy for the long term, it could be the wrong type of insurance for you.
Most permanent policies including whole, ordinary, universal, adjustable
and variable life have a feature known as "cash value" or "cash surrender
value". This feature, which is not found in most term insurance policies,
provides you with some options:
You can cancel or "surrender" the policy "in total or in part"
and receive the cash value as a lump sum of money. If you surrender your
policy in the early years, there may be little or no cash value. If you need
to stop paying premiums, you can use the cash value to continue your current
insurance protection for a specific period of time or to provide a lesser
amount of protection to cover you for as long as you live. Usually, you may
borrow from the insurance company, using the cash value in your life insurance
as collateral. Unlike loans from most financial institutions, the loan is
not dependent on credit checks or other restrictions. You ultimately must
repay any loan with interest or your beneficiaries will receive a reduced
death benefit.
The cash values of many
life insurance policies may be affected by your company's
future experience, including mortality rates, expenses and investment earnings.
Keep in mind that with all types of permanent policies, the cash value of
a policy is different from the policy face amount. Cash value is the amount
available when you surrender a policy before its maturity or your death.
The face amount is the money that will be paid at death or at policy maturity.
What are the types of permanent insurance?
There are many different types. The major ones are
described below:
Whole Life or Ordinary Life
This is the most common type of permanent insurance. The premiums for a whole
life policy must be paid periodically in the amount indicated in the policy.
These premium amounts generally remain constant over the life of the policy.
Universal or Adjustable
This variation of permanent insurance allows you, after your initial payment,
to pay premiums at any time, in virtually any amount, subject to certain
minimums and maximums. You also can reduce or increase the amount of the
death benefit more easily than under a traditional whole
life policy. (To
increase your death benefit, you usually will be required to furnish the company with satisfactory evidence of your continued good health.)
Variable Life
This type of permanent policy provides death benefits and cash values that
vary with the performance of an underlying portfolio of investments. You
can choose to allocate your premiums among a variety of investments which
offer varying degrees of risk and reward stocks, bonds, combinations of both,
or accounts that provide for guarantees of interest and principal. You will
receive a prospectus in conjunction with the sale of a variable product.
The cash value of a variable
life policy is not guaranteed, and the policyholder
bears that risk. However, by choosing among the available fund options, the
policyholder can create an asset allocation that meets his or her objectives
and risk tolerance. Good investment performance will lead to higher cash
values and death benefits. On the other hand, poor investment performance
will lead to reduced cash values and death benefits.
Some policies guarantee that death benefits cannot fall below a minimum level.
There are both universal life and whole life versions of variable life.
What are the advantages and disadvantages of term and permanent
insurance?
Term
Advantages
Initially, premiums are generally lower than those for permanent,
allowing you to buy higher levels of coverage at a younger age when the need
for protection often is greatest. It's good for covering specific needs that
will disappear in time, such as mortgages or car loans.
Disadvantages
Premiums increase as you grow older. Coverage may terminate at the end of
the term or may become too expensive to continue. Generally, the policy doesn't
offer cash value or paid-up insurance.
Permanent
Advantages
As long as the necessary premiums are paid, protection is guaranteed for
your entire life. l Premium costs can be fixed or flexible to meet personal
financial needs. l Policy accumulates a cash value that you can borrow against.
(Loans must be paid back with interest or your beneficiaries will receive
a reduced death benefit.) You can borrow against the policy's cash value
to pay premiums or use the cash value to provide paid-up insurance. The policy's
cash value can be surrendered' in total or in part ' for cash or converted
into an annuity.. (An annuity is an insurance product that provides an income
for a person's life-time or for a specific period of time.) l A provision
or "rider" can be added to a policy that gives you the option to purchase
additional insurance without taking a medical exam or having to furnish evidence
of insurability.
Disadvantages
Required premium levels may make it hard to buy enough protection. It may
be more costly than term insurance if you don't keep it long enough.
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