Life insurance can be an important part of your family’s long-term financial planning. However, shopping for the right coverage can be intimidating.
All life insurance policies have one thing in common – they’re designed to pay money to the “named beneficiaries” when you die. The beneficiaries can be one or more individuals or even an organization.
In most cases, policies are purchased by the person whose life is insured, but life insurance policies can be taken out by spouses or anyone who is able to prove they have an insurable interest in the person.
There are many different types of life insurance policies. However, they fall into two classes of life insurance products: term and cash value. Take the time to explore your options and potential needs with a trusted advisor before you make a commitment.
Term Life Insurance
Term life insurance – is a policy that is purchased for a period of time (a term). The policy pays money to the named beneficiaries if the insured dies during the term. Term life insurance is intended to provide lower-cost coverage for a specific period.
Term life policies may include a provision that allows coverage to continue (renew) at the end of the term, even if your health status has changed. However, those premiums may be higher than the original policy. Ask what the premiums will be before you renew. Also, ask if you lose the right to renew at a certain age. If the policy is non-renewable you will need to apply for coverage at the end of the term.
Cash Value Life Insurance
A cash value life insurance policy is different because you can keep it for as long as you need it. These policies also have savings or investment features, which make it possible for policy owners to get money from the policy while they’re still alive. Whole life, universal life and variable life are types of cash value policies.
Myths vs. Realities
Know the truth about life insurance.
MYTH: I’m a stay-at-home spouse, my family doesn’t need to insure me.
REALITY: Stay-at-home parents provide a lot of valuable services that are necessary to the success of a family. If your spouse works full time, and you manage the household, will they need someone to clean, cook, take care of and chauffeur the kids? Insurance can provide funds to allow the working spouse to take time off and pay for help with household tasks.
MYTH: My life Insurance through work is sufficient.
REALITY: Everyone’s needs are different. Your life insurance at work may be enough, but it’s worth taking time to make sure. In order to determine your needs, it helps to understand how much your family depends on you financially and consider the expenses involved with end of life medical bills and burial.
MYTH: You’ll get a better deal purchasing life insurance online.
REALITY: While the Internet provides good information, it is not necessarily cheaper. You will likely pay the same in premiums if you use an agent or purchase a policy online. An agent can help you figure out how much insurance you need and assist you with the application and help you understand the terms of the policy.
MYTH: I can only have one beneficiary.
REALITY: You can have many beneficiaries. You simply need to note what percentage of your death benefits go to each. Experts advise that you consider setting up a trust or estate for minor(s) since insurance companies will not pay minors.
MYTH: All cash value policies are the same.
REALITY: In some cash value policies, the values are low in the early years but build later. In other policies the values build up gradually. Ask your insurance advisor for an illustration showing future values and benefits. Most term policies do not have cash value.
Decided you need life insurance? Ask these questions before you buy.
- How much of the family income do I provide?
- Will these financial obligations change over time?
- Knowing that the risk of death increases each year, in how many years do you anticipate the need for death benefits?
Ask your agent
- Do I pay the premiums on a set schedule?
- Does the policy have a cash value?
- Do the policy values change from year to year?
- What part of the premium or policy value isn’t guaranteed?
- Are there guaranteed minimums on my policy?
Have questions? We’ve got you covered.
Who needs life insurance?
Your need for life insurance varies with your age and responsibilities. It is a very important part of financial planning. There are several reasons to purchase life insurance. You may need to replace income that would be lost with the death of a wage earner. You may want to make sure your dependents do not incur significant debt when you die. Life insurance may allow them to keep assets versus selling them to pay outstanding bills or taxes.
Consumers should consider the following factors when purchasing life insurance:
- Medical expenses previous to death, burial costs and estate taxes;
- Support while remaining family members try to secure employment;
- Continued monthly bills and expenses, day-care costs, college tuition and retirement.
What is the right kind of life insurance?
All policies are not the same. Some give coverage for your lifetime and other cover you for a specific number of years. 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. Some policies may offer other benefits while you are still living. There are two basic types of life insurance: term insurance and permanent insurance.
Term insurance generally has lower premiums in the early years, but does not build up cash values that you can use in the future. You may combine cash value life insurance with term insurance for the period of your greatest need for life insurance to replace income.
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 offers the largest insurance protection for your premium dollar. It generally does not build up cash value.
You can renew most term insurance policies for one or more terms, even if your health has changed. Each time you renew the policy for a new term, premiums may be higher. Ask what the premiums will be if you continue to renew the policy. Also ask if you will lose the right to renew the policy at a certain age. For a higher premium, some companies will give you the right to keep the policy in force for a guaranteed period at the same price each year. At the end of that time you may need to pass a physical examination to continue coverage, and premiums may increase. You may be able to trade many term insurance policies for a cash value policy during a conversion period 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.
Permanent insurance (such as universal life, variable universal life and whole life) provides long-term financial protection. These policies include both a death benefit and, in some cases, cash savings. Because of the savings element, premiums tend to be higher.
How much life insurance do I need?
Ask yourself the following questions:
- How much of the family income do I provide?
- If I were to die, how would my survivors, especially my children, get by?
- Does anyone else depend on me financially, such as a parent, grandparent, brother or sister?
- Do I have children for whom I would like to set aside money to finish their education in the event of my death?
- How will my family pay final expenses and repay debts after my death
- Do I have family members or organizations to whom I would like to leave money?
- Will there be estate taxes to pay after my death?
- How will inflation affect future needs?
Some insurance experts suggest that you purchase five to eight times your current income. However, it is better to go through the above questions to figure a more accurate amount.
Tips on Buying Life Insurance
- Make sure you feel confident in the insurance agent and company.
- Decide how much you need, for how long, and what you can afford to pay.
- Learn what kinds of policies will provide what you need and pick the one that is best for you.
- Do not sign an application until you review it carefully to be sure the answers are complete and accurate.
- Do not buy life insurance unless you intend to stick with your plan. It may be very costly if you quit during the early years of the policy.
- When you buy a policy, make the check payable to the company, not the agent.
Who can take out a policy on my life?
Only someone who has an "insurable interest" can purchase an insurance policy on your life. That means a stranger cannot buy a policy to insure your life. People with an insurable interest generally include members of your immediate family. In some circumstances your employer or business partner might also have an insurable interest.
Insurable interest may also be proper for institutions or people who become your major creditors.
Why is term life often called "temporary" insurance?
Insurance agents sometimes refer to term insurance as "temporary" because the term policy lasts only for a specific period. It is probably no more "temporary" than your auto or homeowner insurance. Just like term, those types of policies provide coverage for a specific period of time, and must be renewed when that period ends.
What do I get when I buy term insurance?
You have bought and received the company's guarantee that if you die during the term of the policy, it will pay a death benefit to your beneficiary.
What happens to the cash value after the policy is fully paid up?
The company plans to use the cash value to pay premiums until you die. If you take cash value out, there may not be enough to pay premiums. The company could require you to resume paying premiums, or reduce the amount of the death benefit to an amount that the remaining cash value will support.
What is a "participating" policy?
That is a policy that may pay you dividends. You have a chance to "participate" in the company's earnings. A life insurance dividend is actually a refund of part of your premium. When a company collects more money in premiums than it needs to pay death claims and maintain the insurance pool for future claims, the company may pay dividends at the end of that year.
An insurance agent has suggested that I buy term instead of whole life. Does it makesense to buy term and invest the difference?
"Buy term and invest the difference" has been a popular sales slogan for term life. The pitch compares term, the least expensive form of life insurance, with other kinds of life insurance.
- $100,000 death benefit at age 35
- Annual whole life premium: $1,800
- Annual renewable term premium: $250
- Difference: $1,550
What are your choices?
- Buy whole life. The "difference" is used to keep your premiums lower than the actual cost of insurance as you get older.
- Buy term. You keep the difference.
In addition, make sure you consider the following:
- As you get older your term premiums will increase to keep up with the cost of insurance;
- If you invested the difference, you could use your investment to pay the higher cost of insurance;
- If you spent the difference you will have to dip into other savings to pay higher premiums; and
- If your health deteriorates you may not be able to buy a new policy.
How much cash value is in my policy?
Read your policy. It has a table of cash values that should provide the answer. Call your agent if you are still not sure of the cash value amount.
What happens to the cash value in my policy when I die?
When you die, the insurance company will pay the death benefit. No matter how much cash value you may have had in the policy the moment before you died, your beneficiaries can collect no more than the stated death benefit. Any loans you have not repaid (plus interest) will be subtracted from the death benefit.
The result: your beneficiary could wind up with less than the face amount of the policy.
The exception: some whole life policies pay both the death benefit and the cash value when you die.
Tips & Tools
Be prepared before you buy.
Review Your Insurance Needs
Talk to an insurance agent. He or she can help you evaluate your needs and give you information about available policies.
Decide How Much Coverage You Need
How much of the family income do you provide? Does anyone else depend on you financially? How will your family pay final expenses and repay debts after your death? Based on the answers to these questions, decide how much coverage you need, for how long and what you can afford to pay. You want to make sure that you buy enough life insurance to cover the financial effects of an unexpected or untimely death.
Assess Your Current Life Insurance Policy
If you already have a life insurance policy, do not cancel it until you have received the new one. Keep in mind that you may not have to cancel your current policy. You may be able to change your policy to get the coverage or benefits you want now.
Compare the Different Kinds of Insurance Policies
There are two basic types of life insurance: term and cash value. Term generally has lower premiums in the early years but does not build up cash values that you can use in the future. Cash value may be one of several types: whole life, universal life and variable life. Your choice should be based on your needs now and in the future and what you can afford.
Be Sure You Can Afford the Premium Payments
Before purchasing a life insurance policy, be sure that you can afford the cost. Can you afford the initial premium? If the premium increases later, will you still be able to afford it?
Have an Insurance Agent Help You Evaluate the Future of Your Policy
How quickly does the cash value grow? Some policies have low cash values in the early years that build quickly later on. Other policies have a more level cash value build-up. Ask your agent for a year-to-year display of values and benefits.
Keep Your Current Policy
It is important that you do not drop one policy and buy another without a thorough study of the new policy and the one you have now. Replacing your insurance policy may be costly.
Understand Renewal Policies
You can renew most term insurance policies for one or more terms, even if your health has changed. Each time you renew the policy for a new term, premiums may be higher. Ask what the premiums will be if you continue to renew the policy. Also ask if you will lose the right to renew the policy at a certain age.
Read Your Policy Carefully
Do premiums or benefits vary from year to year? How much do the benefits build up in 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? These are all questions that you should be able to answer by reading your policy thoroughly. Your agent can help you understand your policy.
Review Your Life Insurance Program Every Few Years
How will inflation affect your future needs? Do you need more insurance when your family size increases? Review your policy with your agent every few years to keep up with changes in your income and needs.
Need help navigating life insurance?
Life Insurance Buyer’s Guide
NAIC’s Life Insurance Buyer’s Guide provides you information to make better informed decisions around purchasing life insurance. Download the Life Insurance Buyer’s Guide to get a better understanding of life insurance products.
Life Insurance Policy Locator
NAIC’s Life Insurance Policy Locator is a tool that helps beneficiaries find lost life insurance policies of the deceased and connect them with unclaimed death benefits. Use the Life Insurance Policy Locator to find a lost life insurance policy.