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The main
purpose
of
life
insurance
is to provide cash to your family after you die. The money your
dependents will receive (the "death benefit") is an important
financial resource: It can help pay the mortgage, run the household,
end ensure that your dependents aren't burdened with debt. The
proceeds from a
life
insurance
policy could mean that they won't have to sell assets to pay
outstanding bills or taxes. What's more, there is no federal income
tax on life
insurance
benefits.
Where do I Begin?
Start by evaluating your family's needs. Gather all your personal
financial information and estimate what your family will need after
you're gone. Include ongoing expenses (such as day care, tuition or
retirement) and immediate expenses at the time
of
death (like medical bills, burial costs, and estate taxes). Your
family also may need funds to help them readjust... perhaps to finance
a move, or pay expenses while job hunting. Remember,
life
insurance
provides financial protection. If protection is not your primary goal,
you should consider other financial products
How much
life
insurance
will I need to purchase?
While there's no substitute for evaluating needs, one rule
of
thumb is to buy
life
insurance
equal to five to seven times your annual gross income.
What are the
different types
of
life
insurance?
There are many kinds
of
insurance,
but they generally fall into two categories: term
insurance
and permanent
insurance.
What is term
insurance?
Term insurance
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
the term -- which can be from one to 30 years. The premium rates
increase at each renewal date. Many policies require that you present
evidence of
insurability at renewal to qualify for the lower rates.
What is
permanent
insurance?
Permanent
insurance provides
lifelong protection. As long as you pay the premiums, the death
benefit will be paid. 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, this
may be the wrong type
of
insurance
for you.
Permanent
policies are known by a variety
of
names: whole, ordinary, universal, adjustable and variable
life.
Most have a feature known as "cash value" or "cash surrender value."
This feature, not found in most term
insurance
policies, provides you with some options.
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You can cancel or "surrender" the policy -- in total
or in part -- and receive the cash value as a lump sum. If you
surrender your policy in the early years, there may be little or no
cash value.
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If you need
to stop paying premiums, you can use the cash value to continue your
current
insurance
protection for a specified time or to provide a lesser amount
of
protection covering you for your lifetime.
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You can
usually 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 |
With
all types of
permanent policies, the cash value
of
a policy is different from the policy's face amount. The face amount
is the money that will be paid at death or policy maturity. Cash value
is the amount available if you surrender a policy before its maturity
or your death. Moreover, the cash value may be affected by your
insurance
company's financial results or "experience," which can be influenced
by mortality rates, expenses, and investment earnings.
What are the
types
of permanent
insurance?
Whole
Life
or ordinary
life
is the most common type of
permanent insurance.
The premiums generally remain constant over the
life
of
the policy and must be paid periodically in the amount indicated in
the policy.
Universal
life
or adjustable
life
allows you, after your initial payment, to pay premiums at any time,
in virtually any amount, subject to certain minimums or maximums. You
also can reduce or increase the death benefit more easily than under a
traditional whole life
policy. (To increase your death benefit, the
insurance
company usually requires you to furnish satisfactory evidence
of
your continued good health.
Variable
Life
provides death
benefits
and cash values that vary with the performance
of
a portfolio of
investments. You can allocate your premiums among a variety
of
investments offering different degrees
of
risk and reward -- stocks, bonds, combinations
of
both, or accounts that guarantee interest and principal. You will
receive a prospectus in conjunction with the sale
of
this product.
The cash value
of
a variable life
policy is not guaranteed and the policyholder bears the risk. However,
by choosing among the available fund options, you can allocate assets
to meet your objectives and risk tolerance. Good investment
performance will lead to higher cash values and death
benefits.
If the specified investments perform poorly, cash values and
benefits
will drop.
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?
The following points can help you determine which type
of
insurance
best suites your needs.
Term
Insurance
Advantages
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Initial
premiums generally are lower than those for permanent
insurance, allowing
you to buy higher levels
of
coverage at a younger age when the need for protection often is
greatest
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It's good for covering needs that will disappear in
time, such as mortgages or car loans.
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Disadvantages
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Premiums increase as you grow older.
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Coverage may
terminate at the end
of
the term or become too expensive to continue.
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The policy
generally doesn't offer cash value or paid-up
insurance.
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Permanent
Insurance
Advantages
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As long as
the premiums are paid, protection is guaranteed for
life.
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Premium costs can be fixed or flexible to meet
personal financial needs. |
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The policy
accumulates a cash value against which you can borrow. (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.
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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 lifetime or a specified
period.)
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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
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Disadvantages
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Required premium levels may make it hard to buy
enough protection.
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It may be
more costly than term
insurance
if you don't keep it long enough. |
How do I choose a company?
Before purchasing a policy, check the company's financial condition.
Ask an agent or request information from your state's
insurance
department. Contact the
insurance
department to be sure the company is licensed in your state. You can
also check the financial
health
of
a company by looking at its "rating." A number
of
services rate the financial strength
of
companies, and publications that list these ratings usually can be
found in large public or business libraries.
How do I choose an agent?
Collect the names
of
several agents through recommendations from friends, family and other
sources. Find out:
Is the agent licensed in your state?
All states require agents to be licensed to sell
life
insurance.
In addition, agents who sell variable products must be registered with
the National Association
of
Securities Dealers and have additional state licenses.
What company or companies does the agent represent?
Ask the agent which company he or she represents and what types
of
policies these companies sell.
What can I expect during the agent's visit?
The agent will meet with you to discuss your
life
insurance
needs. He or she will ask questions about family income and your net
worth. With the information you have already assembled about your
personal goals and financial situation, you'll be able to discuss your
insurance
options.
What can I expect the agent to do for me?
The agent should be willing and able to explain various policies and
other insurance-related matters. You should feel satisfied that the
agent is listening to you and looking for ways to find you the right
type and amount
of
insurance
at an affordable price. If you are not comfortable with the agent, or
you aren't convinced he or she is providing the service you want, find
another agent.
Will the agent
ask questions about my
health?
Be prepared at the initial meeting to answer questions about your
health.
For example, you can expect questions about your age, medical
condition, medical history, family history, and personal habits. When
you apply for
life
insurance,
you may also be asked to have a medical exam. Often, a licensed
medical professional will make a personal visit.
Always answer
questions about medical history and
health
carefully and truthfully; this information helps a company establish a
premium for your coverage based on your risk. For instance, you may
pay a lower premium if you don't smoke. On the other hand, if you have
a chronic illness, you may charged a higher premium.
Also, in the
event
of
a claim, accurate and truthful answers enable your beneficiary to
receive prompt payment. Inaccurate or untruthful answers, however, may
cause delay or even denial
of
a claim.
How do I know
if a
life
insurance
policy is right for me?
The agent will recommend a
life
insurance
policy that he or she thinks will meet your needs. Look at the
recommended policy with care to be sure it fits your personal goals.
Often, an agent will provide a "policy illustration" that shows how
the policy will work.
Carefully study
your agent's recommendation and ask for a point-by-point
explanation.
Make sure the agent explains items you don't understand. Because your
policy is a legal document, it is important that you know what it
provides.
If your agent recommends a term policy, ask:
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How long can
I keep this policy? If I want the option to renew the policy for a
specific number
of
years or until a certain age, what are the terms
of
renewal?
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When will my
premiums increase? Annually? Or after a longer period
of
time, such as five or 10 years? Can I convert to a permanent policy?
Will I need a medical exam when I convert?
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If your agent recommends a permanent policy, ask:
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Are the premiums within my budget?
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Can I commit to these premiums over the long term?
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How much will I receive if I surrender the policy?
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Keep in mind
that permanent
insurance
provides protection for your entire
life.
If you don't plan to keep the policy for many years, consider another
type. Cashing in a permanent policy after only a few years can be a
costly way to get short-term
insurance
protection.
What does my policy illustration show?
A policy illustration shows premiums, death
benefits,
cash values, and information about other factors that may affect your
costs.
Your policy may provide for
dividends to be paid to you as either cash or "paid-up"
insurance.
Or it could provide for interest credits that could increase your cash
value and death benefit or reduce your premium. Dividends and credits
are not guaranteed. Your costs or
benefits
could be higher or lower than those in the illustration, because they
depend on the future financial results
of
the insurance
company. With variable life,
your values will depend on the results
of
the underlying portfolio of
investments. However, when figures are guaranteed, the
insurance
company will honor them regardless
of
its financial success. Ask your agent which figures are guaranteed and
which are not.
If the illustration is for a
variable life
policy, be sure that the interest rate assumed is reasonable for the
underlying investment accounts to which you would allocate premiums.
For example, a higher interest rate may be warranted if you select a
stock account, while a lower rate should be assumed for more
conservative alternatives.
Is a policy illustration a legal document, like a
contract?
No, an illustration is not a legal document. Legal obligations are
spelled out in the policy itself.
What else should I look for in a policy illustration?
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Is it based on recent experience?
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Is the classification shown appropriate for me (i.e.,
smoker/nonsmoker, male/female)?
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When are premiums due -- annually, monthly or
otherwise?
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Which amounts are guaranteed and which are not?
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Will I be notified if the non-guaranteed amounts
change?
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Does the policy have a guaranteed death benefit, or
could the death benefit change depending on interest rates or other
factors?
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Does the policy pay dividends or provide for interest
credits? Are those figures incorporated into the illustration?
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Will my premiums always be the same?
Could the premium increase significantly if future interest rates
are lower than the
illustration assumes? |
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If the
illustration shows that I will not have to make premium payments
after a certain period
of
time, is there any chance I would have to resume payments in the
future?
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Is the
premium level sufficient to guarantee protection for my entire
life?
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What happens if I fail to make the required premium
payments?
If you miss a premium payment, you typically have a 30 - or 31-day
grace period during which you can pay the premium with no interest
charged. After that, the company -- with your authorization -- can
draw from a permanent policy's cash value to keep that policy in
force. In some flexible-premium policies, premiums may be reduced or
skipped as long as sufficient cash values remain in the policy.
However, this will result in lower cash values and a shortened
coverage period.
Are other riders available?
Yes. An "accidental death benefit," for example, pays an additional
benefit in case
of
death resulting from an accident.
Some companies
provide "accelerated
benefits,"
also known as "living
benefits."
This rider allows you, under certain circumstances, to receive the
proceeds of
your life
insurance
policy before you die. Such circumstances include terminal or
catastrophic illness, the need for long-term care, or confinement to a
nursing home. Ask your agent for information about these and other
policy riders.
When will the policy be in effect?
The date that
insurance goes into
effect could be different from the date the company issues the policy.
If you decide to purchase the policy, always check precisely when the
insurance
becomes effective.
Is a "buyer's guide" available?
Most states require companies to give consumers a buyer's guide to
help them understand
life
insurance
terms, benefits
and costs. Ask your agent for a copy
Here are a few
tips to keep in mind about your
life
insurance
purchase:
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Take your time. On one hand, don't put off an
important decision that would provide protection for your family.
Make sure you fully understand any policy you are considering and
that you are comfortable with the company, agent and product.
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When you
purchase a policy, make your check payable to the
insurance company,
not to the agent. Be sure to get a receipt.
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After you
have purchased an
insurance
policy, keep in mind that you may have a "free-look" period --
usually 10 days after you receive the policy -- during which you can
change your mind. During that period, read your policy carefully. If
you decide not to keep it, the company will cancel the policy and
give you an appropriate refund.
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Review the
copy
of
your application contained in your policy. Promptly notify your
agent or company
of
any errors or missing information.
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If an agent or company contacts you and wants you to
cancel your current policy to buy a new one, contact your original
agent or company before making a decision. Surrendering your policy
to buy another could be very costly.
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If you have a
complaint about your
insurance
agent or company, contact the customer service division
of
your
insurance company. If
you are still dissatisfied, contact your state
insurance
department. Most departments have a consumer affairs division that
can offer help, and some have a toll-free number to respond to
consumer requests.
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If you have a
complaint about your
insurance
agent or company, contact the customer service division
of
your
insurance company. If
you are still dissatisfied, contact your state
insurance
department. Most departments have a consumer affairs division that
can offer help, and some have a toll-free number to respond to
consumer requests.
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Review your policy periodically or when your
situation changes to be sure your coverage is adequate
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Where else can
I get information about
insurance?
Your personal
insurance agent and
company are good sources
of
general information about
insurance.
You might also:
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Contact the
National
Insurance
Consumer Helpline (NICH) at 1-800-942-4242. NICH is a toll-free
consumer information telephone service sponsored by
insurance
trade associations.
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Look in your
local library for magazines or books on
insurance or personal
finance.
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Contact the
consumer affairs division
of
your state insurance department: |
In North Carolina:
Commissioner
Department
of
Insurance
Dobbs Bldg., 430 North Salisbury St.
P.O. Box 26387
Raleigh,
NC 27611
919-733-7349
919-733-7343
Toll free: 1-800-546-5664
Toll free:1-800-662-7777
Fax: 919-733-6495
E-mail:
bstevens@ncdoi.net
Web site:
www.ncdoi.net
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