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.
Additional Resources:
Life Insurance Advice.
Life Insurance Company Ratings.
Life Insurance Definitions.
Life Insurance Premiums. |
