Life Insurance Buyer's Guide
Insurance Buyer's Guide - National Association of Insurance Commissioners
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
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?
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.
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.
figuring what you need, think of income for your 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.
is the Right Kind?
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.
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
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.
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.
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.
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.
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.
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
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.
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.
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.
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.
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
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.
premiums or benefits vary from year to year?
much cash value builds up under the policy?
part of the premiums or benefits is not guaranteed?
is the interest on money paid and received at different
times on the policy?
a Low Cost Life Insurance Policy
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.
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.
Indexes. There are two types of comparison index numbers. Both
assume you will live and pay premiums for the period of index.
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
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
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.
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.
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.
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
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.
keep in mind that index numbers cannot tell you the whole story.
You should consider:
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.
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).
special policy features that may be particularly suited to your
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.
- 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.
look only at the initial premiums, butlook at later
premium increase too.
- Don't buy life insurance unless you intend to stick with it.
- Read your policy carefully.
- Ask your agent or company about
anything that is not clear to you.
- Review your life insurance policy with your agent or company
every few years
- Keep up with changes in your income and your