Frequently Asked Questions
It is expected that during the life insurance buying process, you will have many questions. You should feel free to ask your agent for answers to any of your questions.
1. How much life insurance do I need?
2. What's the difference between term, convertible term, and whole life insurance?
3. What are the three types of permanent insurance?
4. How do variable and fixed annuities work?
5. How do accelerated death benefits work?
6. By using medical tests are insurers trying to eliminate any applicant likely to develop a serious health condition?
7. What should I consider in naming life insurance beneficiaries?
8. Does it make sense to replace a policy?
9. As a single person, do I need insurance?
10. I have the option of retiring early. How can I make sure to make the right decision?
11. What happens if I fail to make the required premium payments?
12. What if I become disabled and can't pay the premiums?
13. Are other riders available?
14. When will the policy be in effect?
15. Is a buyer's guide available?
The following are answers to many common questions that you may have:
1. How much life insurance do I need?
If you are providing financial support for people who are depending on you, you may need life insurance. To determine how much you may need to replace your lost income, deduct the total income that would be lost upon your death from the sum required for your family's ongoing financial stability. Beyond that, it depends on your particular circumstances (e.g., whether you have considerable net worth or few backup resources) and whether you want insurance for other purposes, such as educational funds. The solution to your particular needs may entail a combination of several policies, and the combination may be changed as your situation evolves.
2. What's the difference between term, convertible term, and whole life insurance?
Whole life insurance, the most traditional form of "permanent" insurance, can be kept in force for as long as you live. The face amount and the premium (the amount you pay for protection each year) are fixed at the time you buy your policy and stay the same even as you age. The policy's cash value grows at a fixed rate of return specified in the policy and can be used as collateral to borrow against your policy. While permanent insurance is usually recommended as the core of an insurance strategy, term insurance is good for people who need coverage for short periods of time -- younger families, say, who need large amounts of protection for one year, five years, or more. Lower premiums at younger ages increase as policyholders age and renew their policies. Benefits are paid only if death occurs during the period covered. If you stop paying premiums, the insurance stops. "Convertible" term policies can be exchanged for permanent insurance without a medical examination, but with a higher premium. Term policies generally have no cash value and no residual rights if the policy is canceled.
3. What are the three types of permanent insurance?
Whole life (discussed above), universal, and variable life are all permanent insurance and can provide lifetime protection and accumulate cash value. Unlike whole life, the cash value in universal life is linked to interest rates, and the cash value of variable life is linked to invested options. With universal life insurance you can reduce or increase the amount of the death benefit and vary the amount or timing of premium payments, subject to certain limitations. Variable life allows you to allocate your premiums among a variety of investment options offering varying degrees of risk. The cash value of universal and variable policies is not guaranteed, although some policies set a minimum death benefit.
4. How do variable and fixed annuities work?
Annuities are long-term vehicles used to provide retirement income to individuals without pensions, to supplement a pensioner's income, or to build assets over a more limited period. With variable annuities, the value varies according to the worth of the insured's investment options chosen. Payments can be fixed or variable. Under a fixed annuity (also called a fixed-dollar annuity), money is invested in assets with fixed rates of return. Because annuities are designed to be held for many years, the interest in an annuity builds up on a tax-deferred basis, and purchasers are generally not taxed until regular payments begin after retirement. Early withdrawals, however, result in substantial penalties in addition to income taxes.
5. How do accelerated death benefits work?
More than 200 insurers now offer this "living benefits" option to ease the financial burdens of the seriously ill or incapacitated. It allows policyholders to receive all or part of the policy's proceeds prior to death under certain circumstances. Because payments may affect tax status and Medicare eligibility, and will be deducted from the overall benefits paid later to beneficiaries, policyholders should thoroughly investigate using this benefit in advance.
6. By using medical tests are insurers trying to eliminate any applicant likely to develop a serious health condition?
Medical tests provide accurate and current information about an applicant's health, thus enabling insurers to charge premiums that reflect the level of risk an applicant represents. Because some health conditions are easily managed through proper medication, therapy or lifestyle changes, medical information makes it possible for insurers to cover applicants with certain health conditions. More serious or incurable conditions present an enormous risk that an insurer simply cannot assume.
7. What should I consider in naming life insurance beneficiaries?
(a) Always name a "contingent," or secondary, beneficiary, just in case you outlive your first beneficiary.
(b) Select a specific beneficiary, rather than having the proceeds of your life insurance paid to your estate. One of the great advantages of life insurance is that it can be paid to your family immediately. If it is payable to your estate, however, it will have to go through probate with the rest of your assets.
(c) Be very specific in wording beneficiary designations. Saying "wife of the insured" could result in an ex-spouse getting the proceeds. Naming specific children may exclude those born later. If your child dies before you, do you want the proceeds to go to that child's children? Changing the beneficiary designation is easy, but you have to remember to do it. Due to the various issues involved, an agent can be an excellent source of information to help you properly set up your beneficiary designation.
8. Does it make sense to replace a policy?
Think twice before you do, because in many situations it may not be to your advantage. Before dropping any in-force policy, consider:
(a) If your health status has changed over the years, you may no longer be insurable at standard rates.
(b) Your present policy may have a lower premium rate than is required on a new policy of the same type (if, for no other reason, that you have grown older).
(c) If you replace one cash-value policy with another, the cash value of the new policy may be relatively small for several years and may never be as large as that of the original one.
(d) You will be subject to a new contestability period.
You should ask insurance agents for a detailed listing of cost breakdowns of both policies, including premiums, cash surrender value, and death benefits. Compare these as well as the features offered by both policies.
If you decide to surrender or reduce the value of the policy you now own and replace it with other insurance, be sure that:
(a) the agent making the proposal puts it in writing;
(b) you pass any required medical examination; and
(c) your new policy is in force before you cancel the old one.
9. As a single person, do I need insurance?
The answer almost definitely is yes. You may want to consider these options:
(a) Disability income insurance -- especially important for self-supporting singles without sizable assets, this can replace a good part of the income you would lose if you were unable to work because of accident or illness. If you don't have long-term disability coverage at work, ask your life insurance agent about an individual policy designed to replace at least 60 percent of your income.
(b) Health insurance -- if you don't have on-the-job coverage, an individual policy is your first line of defense against ever-escalating medical and hospital costs. You can keep premium costs down by electing a large deductible, thereby "self-insuring" as much as you can afford.
(c) Life insurance -- even if you have no dependents now, you may later. If you buy now when you are younger and healthier, you can "lock in" term coverage at a reasonable rate, including conversion features.
10. I have the option of retiring early. How can I make sure to make the right decision?
Work out a detailed budget: mortgage payments, daily living expenses, loan repayments, college tuition, etc. Will you need a new car in the next few years? Determine your exact income from all sources. Some estimate you'll need 75 to 85 percent of your income to live comfortably in your retirement. How much can you expect from your company pension? Remember currently, Social Security doesn't start until age 62, and even then, at a lower rate than it would for normal retirement at 65. Ask if your employer will offset that loss until age 65. Will it offer you an additional bonus for taking early retirement? Also, look at your health insurance. Health-care costs can eat up a major portion of a retiree's budget. Will your company continue your health insurance into retirement? If so, will it continue to fund premiums as costs go up? You may not be able to afford to be uninsured in the years before you become eligible for Medicare. Even then, Medicare covers only about half of health-care costs, so you may want supplemental insurance.
11. 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, an insurer 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.
12. What if I become disabled and can't pay the premiums?
Provisions or riders that provide additional benefits can be added to a policy. One such rider is a waiver of premium for disability. With this rider, if you become totally disabled for a specified period of time, you don't have to pay premiums for the duration of the disability.
13. Are other riders available?
Yes. An accidental death benefit, for example, pays an additional benefit in case of death resulting from an accident. Some insurance 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.
14. 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.
15. 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. Contact a Protective representative to obtain a copy.
Information provided by Life and Health Insurance Foundation for Education (LIFE)
