Life insurance is used to replace in whole or part the economic value of human life for either family purposes or business purposes. In exchange for premium payments, the life insurance company agrees to pay a death benefit upon the death of the insured to the beneficiary named in the application for the policy. Life insurance policies may provide other uses and benefits as well.
- Do I need life insurance? You need life insurance if you want to provide financial protection for your dependents (or to your creditors) in the event of your death. A business may want to use life insurance to fund its employee benefit plans, protect against the premature death of a keyperson or to provide for business continuation.The following are typical examples of family and business purposes to consider when assessing the need for life insurance:
- Dependent children.
- Dependent spouse, parent or grandparent.
- Credit enhancement.
- Key person indemnification.
- Business continuation.
- Employee benefit plans.
Should one or more of these examples apply to you, the purchase of life insurance may be suitable for your needs.
- How much life insurance do I need? The amount of life insurance a person needs will depend on their own particular circumstances and the reasons for purchasing the policy. One approach to determine how much life insurance you should purchase is to analyze the various needs of your family in the event of the death of a family member. Life insurance may satisfy a number of these needs by providing a fund that can be used to:
- Pay off an individual’s last debts such as medical bills and funeral expenses;
- Meet estate taxes and other expenses in settling an estate;
- Provide life income for the spouse;
- Pay off a mortgage;
- Pay for the children’s education;
- Provide funds for retirement;
- Provide an income for the policyholder’s spouse to give the family time to readjust to a new standard of living;
- Draw interest to provide funds for some special purpose; or
- Provide a monthly income until the children are grown and out of school.
Thus, the current and future financial needs particular to your family can be a significant consideration in determining the amount of life insurance that is right for you. Another factor that may be taken into consideration in determining how much life insurance you need is the amount of your annual salary.
- What are the main types of life insurance products available for purchase? While there are many types and variations of life insurance products available in today’s marketplace, there are basically two types of life insurance: term insurance and permanent insurance. Term life insurance provides death benefit protection for a certain period of time such as one or ten years. Death benefits are paid to the beneficiary only if the insured dies during that term period. Generally, term policies do not build up any cash values. Permanent life insurance can provide death benefit protection for your lifetime and the policy will provide for the build up of a cash value. The cash value may be used in several different ways e.g. you may borrow against the cash value by taking a loan. Permanent insurance includes several different types of policies such as whole life, universal life and variable universal life.
- What factors should I consider when selecting a life insurance company? There are two types of life insurance companies i.e. stock companies and mutual companies. Stock insurers are corporations owned by the shareholders of the corporation. Mutual insurers are owned by their policyowners who may receive a yearly dividend if one is declared by the company’s board of directors. Both stock insurers and mutual insurers offer suitable policies for purchase. Some factors you may want to consider when selecting a company include the following:
- The types of life insurance policies the company sells.
- The company’s reputation for treating policyholders fairly (especially with respect to discretionary items such as the crediting of additional interest or dividends)
- Financial safety
- The company’s history and experience in the life insurance industry.
- Insurance companies must be licensed by the New York State Insurance Department to operate in New York State; however, the Insurance Department does not rate the financial condition of insurance companies. There are private rating services that conduct financial analyses and grade insurance companies.
- How is life insurance sold? Individual life insurance can be sold directly from an insurance company through an agent or broker, through the mail, over the internet, over the telephone as well as from banks or other financial institutions. You may also be able to purchase insurance from a fraternal benefit organization if you are a member. Group insurance may be available through your job or from associations or other organizations in which you participate.
- What is underwriting? Underwriting is the process an insurance company uses when it selects applicants it is willing to insure and determines the cost of providing coverage. There are common factors that insurance companies may use to decide how much to charge you for the kind and amount of coverage you want to buy, such as:
- your age,
- your gender,
- your health and health habits (smoking for example),
- your family health history,
- whether you are engaged in a hazardous occupation, or
- dangerous hobbies (auto racing or sky diving for example).
The insurance company receives this information from your application, and may ask you to fill out a health questionnaire or have a health examination or certain medical tests. In addition, the company may request that you consent to the preparation of an investigative consumer report or a Medical Information Bureau (MIB) report.
It should be noted that there are varying levels of underwriting including full underwriting, simplified underwriting and guaranteed issue. Each type of underwriting impacts the premium rates to be charged. Ask your agent or the company which type of underwriting is applicable to the policy you are interested in purchasing and what type of medical information, if any, needs to be provided.
Often group life insurance is subject to different types of underwriting. In some cases, employees actively at work do not need to provide any medical information if they enroll within a specified period of time.
- How do I compare cost? To compare the costs of purchasing a life insurance policy, it is recommended that consumers obtain quotes for similar policies from different companies. Comparing costs only makes sense if you are comparing similar policies. Comparison of costs can become increasingly complicated when products include such non-guaranteed features as dividends or additional amounts. There is no guarantee that a company’s past practices with respect to non-guaranteed features will continue. Quotes for various products can be readily obtained from many sources, including local agents and brokers, telephone quote services and the internet. Make sure that you can afford the amount of coverage you intend to purchase. Premiums for some products can change over time and your circumstances i.e. your ability to pay the premiums over an extended period of time may change as well. When comparing the costs of policies be sure to ask if the premiums, death benefit, or cash values can change over time.
- Do I need a sales illustration? A sales illustration is a detailed projection of future policy values based upon the variables selected by you and your agent in conjunction with the purchase you are considering. The illustration can help to show you how the policy is expected to work. The illustration will show you what costs and benefits are guaranteed and what costs and benefits are not guaranteed. It is recommended that consumers request a sales illustration if available, prior to purchase.
- Can I change my mind after I purchase a policy? You will have a period that can be anywhere between 10 and 30 days, depending on the terms of the policy, after you receive the insurance policy to return the policy if you are not satisfied and receive a refund of premium. This period of time is called the “free-look” period, and a “free-look” notice is required to be displayed on the cover page of the policy. Use the free look period to read your policy carefully. If there is something in the policy you do not understand call your agent or contact the company for an explanation.
- Should I replace my existing life insurance policy? Replacing an existing life insurance policy can be costly and may not be in your best interest. When you apply for a life insurance policy you will be provided with a “Definition of Replacement” form which will explain what constitutes a replacement. If you intend to replace your policy, than no later than when you sign an application for a policy to replace your current policy with a new policy, you will receive a copy of a “Important Notice Regarding Replacement or Change of Life Insurance Policies or Annuity Contracts,” and a “Disclosure Statement.” These documents give you information to think about before replacing your life insurance policy or annuity contract. Some factors you should take into consideration if you are thinking of replacing your policy:
- Contact your present life insurance company to discuss the proposed replacement of your current policy. Your company may be able to help you make a change to your current policy that is more favorable than replacing your existing coverage.
- Since you are older than you were when you purchased your original policy it is likely the premium for the new policy will be higher due to your age.
- If your health status has changed for the worse the premiums for the new policy will be higher.
- The contestable and the suicide provisions will begin again in the new policy.
- If your policy has a cash value you should know that the initial costs for such policies are charged against the cash value in the earlier years. The replacement of such a policy by a new cash value policy results in you sustaining these costs again.
- Your present policy may also include surrender charges which you will incur if you surrender your policy during the surrender charge period. Alternatively, there may be a surrender charge period which has already ended on your present policy. You will want to find out if you will be subject to a surrender charge period in your new policy.