What
do I need to know when I buy insurance?
When
you buy life insurance, you want coverage that fits your
needs and doesn't cost too much. First, decide how much
you need - and for how long - and what you can afford to
pay. Next, find out what kinds of policies are available
to meet your needs and pick the one that best suits you.
Then, find out what different companies charge for that
kind of policy for the amount of insurance you want. You
can find important cost differences between life insurance
policies by using cost comparison indexes as described in
this guide.
It makes good sense to ask a life insurance agent or company
to help you. An agent can be particularly useful in reviewing
your insurance needs and in giving you information about
the kinds of policies that are available. If one kind doesn't
seem to fit your needs, ask about others. This guide provides
only basic information. You can get more facts from a life
insurance agent or company or at your public library.
How
much do you need?
To
decide how much life insurance you need, figure out what
your dependents would have if you were to die now, and what
they would actually need. Your new policy should come as
close to making up the difference as you can afford.
In
figuring what you have, count your present insurance - including
any group insurance where you work, social security or veteran's
insurance. Add other assets you have - saving, investments,
real estate, and personal property.
In
figuring what you need, think of income for you dependents
- for family living expenses, educational costs and any
other future needs. Think also of cash needs - for the expenses
of a final illness and for paying taxes, mortgage or other
debts.
What
is the Right Kind?
All
life insurance policies agree to pay an amount of money
when you die. But all policies are not the same. Some provide
permanent coverage and others temporary coverage. Some build
up cash values and others do not. Some policies combine
different kinds of insurance, and others let you change
from one kind of insurance to another. Your choice should
be based on your needs and what you can afford. A wide variety
of plans is being offered today. Here is a brief description
of two basic kinds - term and whole life - and some combinations
and variations. You can get detailed information from a
life insurance agent or company.
Term insurance covers you for a term of one or more years.
It pays a death benefit only if you die in that term. Term
insurance generally provides the largest immediate death
protection for your premium dollar.
Most term insurance policies are renewable for one or more
additional terms even if your health has changed. Each time
you renew the policy for a new term, premiums will be higher.
Check the premiums at older ages and how long the policy
can be continued.
Many
term insurance are renewable for one ore more additional
terms even if your health has changed. Each time you renew
the policy for a new term, premiums will be higher. Check
the premiums at older ages and how long the policy can be
continued.
Many term insurance policies can be traded before the end
of a conversion period of a whole life policy-even if you
are not in good health. Premiums for the new policy will
be higher than you have been paying for the term insurance.
Whole Life Insurance covers you for as long as you live.
The common type is called straight life or ordinary life
insurance - you pay the same premiums for as long as you
live. These premiums can be several times higher than you
would pay at first for the same amount of term insurance.But
they are smaller than the premiums you would eventually
pay if you were to keep renewing a term policy until your
later years.
Some
whole life policies let you pay premiums for a shorter period
such as 20 years, or until age 65. Premiums for these policies
are higher than for ordinary life insurance since the premium
payments are squeezed into a shorter period.
Whole
life policies develop cash values. If you stop paying premiums,
you can take the cash - or you can use the cash value to
buy continuing insurance protection for a limited time or
a reduced amount. (Some term policies that provide coverage
for a long period also have cash values).
You may borrow against the cash values by taking a policy
loan. Any loan and interest on the loan that you do not
pay back will be deducted from the benefits if you die,
or from the cash value if you stop paying premiums.
Combinations
and Variations. You can combine different kinds of insurance.
For example, you can buy whole life insurance for lifetime
coverage and add term insurance for the period of your greatest
insurance need. Usually the term insurance is on your life
- but it can also be bought for your spouse or children.
Endowment
insurance policies pay a sum or income to you if you live
to a certain age. If you die before then, the death benefit
is paid to the person you named as beneficiary.
Other
policies may have special features which allow flexibility
as to premiums and coverage. Some let you choose the death
benefit you want and the premium amount you can pay. The
kind of insurance and coverage period are determined by
these choices.
One
kind of flexible premium policy, often called universal
life, lets you vary your premium payments every year, and
even skip a payment if you wish. The premiums you pay (less
expense charges) go into a policy account that earns interest
and charges for the insurance are deducted from the account.
Here, insurance continues as long as there is enough money
in the account to pay the insurance charges.
Variable
life is a special kind of insurance where the death benefits
and cash values depend upon investment performance of one
or more separate accounts. Be sure to get the prospectus
provided by the company when buying this kind of policy.
The method of cost comparison outlined in this Guide does
not apply to policies of this kind.
A
simple comparison of the premiums is often not enough. There
are other things to consider. For example:
- Do
premiums or benefits vary from year to year?
-
How much cash value builds up under the policy?
- What
part of the premiums or benefits is not guaranteed?
- What
is the effect of interest on money paid and received at
different times on the policy?
Finding
a Low Cost Policy
After
you have decided which kind of life insurance is best for
you, compare similar policies from different companies to
find which one is likely to give you the best value for
your money.
Comparison
Index numbers, which you get from your life insurance agents
or companies, take these sorts of items into account and
can point the way to better buys.
Comparison
Indexes. There are two types of comparison index numbers.
Both assume you will live and pay premiums for the period
of index.
Yield
Comparison Index. The Life Insurance Yield Comparison Index
is a measure of cash value growth over the Index period
which takes into account the interest credited, the estimated
value of the death protection provided, and the expenses
charged. A higher yield index number generally indicates
a better buy. Since this index reflects items other than
interest earnings, it may differ from the credited interest
rate advertised or guaranteed in your policy. For the same
reasons, the Yield Index may differ from the return on a
pure investment like a savings account. Keep this in mind
if you attempt to compare Yield Indexes with investment
returns.
The
Net Payment Cost Comparison Index helps you compare
costs over the Index period assuming you will continue to
pay premiums on your policy and do not take its cash value.
It is useful if your main concern is the benefits that are
to be paid at your death.
Guaranteed
an Illustrated Figures. Many policies provide benefits on
a more favorable basis than the minimum guaranteed basis
in the policy. They may do this by paying dividends, or
by charging less than the maximum premium specified. Or
they may do this in other ways, such as by providing higher
cash values or death benefits than the minimums guaranteed
in the policy. The "currently illustrated basis" reflects
the company's current scale of dividends, premiums or benefits.
These scales can be changed after the policy is issued,
so that the actual dividends, premiums or benefits over
the years can be higher of lower than those assumed in the
Indexes on the currently illustrated basis.
Some policies are sold only on a guaranteed or fixed cost
basis. These policies do not pay dividends; the premiums
and benefits are fixed at the time you buy the policy and
will not change.
Using
Comparison Indexes. The most important thing to remember
is that, when using the Net Payment Cost Comparison Index,
a policy with smaller index numbers is generally a better
buy than a similar policy with larger index numbers. When
using the Life Insurance Yield Comparison Index, the opposite
is true: a policy with larger Yield Comparison Index numbers
is generally a better buy than one with smaller Yield Comparison
Index numbers.
Compare
index numbers only for similar policies - those which provide
essentially the same benefits, with premiums payable for
the same length of time. Where possible the same amount
of planned premium should be used. Make sure they are for
your age, and for the kind of policy and amount you intend
to buy. Remember than no one company offers the lowest cost
at all ages for all kinds and amounts of insurance.
Small
differences in index number should be disregarded, particularly
where there are dividends or non guaranteed premiums or
benefits. Also, small differences could easily be offset
by other policy features, or differences in the quality
of service from the agent or company or differences in the
strength of companies. When you find small differences in
the indexes, your choice should be based on something other
than cost.
Finally
keep in mind that index numbers cannot tell you the whole
story. You should consider:
The
level and quality of service from the agent or company,
the strength and reputation of the company, the history
(track record) of how the company treats carious classes
of policyholders e. g. longtime policyholders versus current
purchasers.
The pattern of policy benefits. Some policies have low cash
values in the early years that build rapidly later on. Other
policies have a more level cash value buildup. A year-by-year
display of values and benefits can be very helpful. (The
agent or company will give you a Policy Summary that will
show benefits and premiums for selected years).
Any
special policy features that may be particularly suited
to your needs.
The methods by which non guaranteed values are calculated.
For example, interest rates are an important factor in determining
policy dividends. In some companies dividends reflect the
average interest earnings on all policies whenever issued.
In others, the dividends for policies issued in a recent
year, or a group of years, reflect the interest earnings
on those policies; in this case, dividends are likely to
change more rapidly when interest rates change.
Things
to Remember
- Review
your particular insurance needs and circumstances. Choose
the kind of policy with benefits that most closely fit
your needs. Ask an agent or company to help you.
- Be
sure that the premiums are within your ability to pay.
Don't look only at the initial premiums, but take account
of any later premium increase.
- Don't
buy life insurance unless you intend to stick with it.
It can be very costly if you quit during the early years
of the policy.
- Read
your policy carefully.Ask
your agent or company about anything that is not clear
to you.
- Review
your life insurance program with your agent or company
every few years to keep up with changes in your income
and your needs.
