Question: What is the difference between term life insurance and whole life (cash value) life insurance.
Answer: Term life insurance expires after the term of coverange expires, hence its designmation as term life insurane. Whole life remains in force your entire life and never expires, as long as you maintain the policy requirements.
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Question: After the term of term life insurance expires, do I have to
go qualify for it again to gain additional coverage time?
Answer: Unless you renew it within a given limited time frame, you do need to qualify again for another term policy.
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Question: When I renew or obtain a new term life insurance policy, I
notice that the monthly premiums have increased, and I wonder why so
much?
Answer: The closer you approach the ages when people suffer a higher likelihood of dying, the more it costs to insure your life.
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Question: Is there a way to reduce the cost of my term insurance policy,
to gain coverage for a longer period of time, without having to pay the
higher cost penalty related to my increasing age and likelihood of death
as I age?
Answer: You can purchase a policy with a longer term of coverage, say 20-year term or 25-year term, instead of 15-year term. This might increase somewhat the amount you pay now, but at the benefit of costing you less later.
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Question: Are there other advantages of choosing a longer term of coverage
for a term life insurance policy.
Answer: Definitely there are. You have the peace of mind of being insured for a longer time. You don’t need to reconsider getting life insurance until further intothe future. You get a price break and discount from the insurance company, since you are getting a longer policy, during which time they don’t need to worry about selling you another policy.
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Question: For a longer term policy, the cost is a little more than I
can afford to pay. What can I do to make it more affordable for my
budget?
Answer: You can purchase a decreasing term policy rather than a level term policy. For a decreasing term policy, the amount of insurance coverage on your life decreases gradually toward the later years of the policy.
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Question: If I don’t pay my monthly term life insurance premium, will
I suffer loss of my coverage?
Answer: If you don’t pay premiums and let the policy lapse, you will lose your coverage. You will have to read your policy to see the specifics. You should be notified by the insurance company that you have defaulted, and what the steps are to resume coverage.
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Question: Is there a time even after I have failed to pay that I will
still retain my term life insurance coverage?
Answer: Normally, you are covered for a limited time period called the grace period, after failing to pay your monthly premium.
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Question: Will there be a penalty to resume my term life insurance coverage?
Answer: There may of may not be a penalty to continue your policy coverage, depending on whether the cause of premium default was your fault or not. If sufficient time has elapsed since your last payment, you will lose your policy completely, or else suffer a penalty to resume it, if the terms of your term life insurance policy do allow you to resume coverage.
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Question: My agent informs me that there is another third kind of term
life insurance coverage policy possible, and that this policy is different
from level term life and decreasing term life. What is this type of
policy?
Answer: Increasing term life insurance coverage has a death benefit that increases for the later years of the policy. For some people, this more expensive third type of term life insuarance coverage might make sense. Inflation causes money to be less valuable with time for example, and the increasing coverage with time helps to adjust for the loss of purchasing power of the dollar.
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Question: Are there other examples when an increasing term life insurance
policy might make sense?
Answer: Yes, you can get increasing term life insurance coverage if you know you are going to need more life insurance protection your dependents in future years. Examples of when increasing term might make sense are when future dependents are going to come into the family from family additions due to birth, adoption, or prearrangement. Another possibility is that you might be expecting an additional increasing financial burden through the coming years for your dependents.
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Question: Why is increasing term life insurance less common than either
level term or decreasing term?
Answer: An increasing term policy will be more expensive due to two factors that combine to increase its cost. You are getting older with a higher likelihood of dying and the value of your policy payoff amount is increasing. This means your insurance company is exposed to more risk over time, with an increasingly larger amount of money at risk over time. So an increasing term life insurance policy will cost more. This makes this kind of policy less common than either a level term policy or a decreasing term policy.
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Question: Are there different types of whole life insurance policies,
just like there are different types of term life insurance policies?
Answer: Yes, there are various possible types of whole life insurance policies (also called cash value life insurance) that are available. The four most common types are standard whole life, universal life, variable life, and variable-universal life.
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Question: What is standard whole life insurance?
Answer: Standard whole life insurance has two components, a mortality cost life insurance payoff component and an increasingly valuable savings component. In the early years of the policy, the savings component will be growing rapidly because there is little cost to insure your life when you are younger. The savings will normally pay a dividend, which increases with time as the total value increases. The dividend makes the policy more valuable as the policy earns compounded interest on your savings.
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Question: What is Universal life insurance?
Answer: Universal life insurance, like standard whole life insurance, has two components: (1) mortality insurance for your life and (2) a savings accumulation. The premiums you pay each month are flexible. As long as you pay enough to cover the insurance cost for your life, or have enough savings accumulation, you do not need to pay the entire scheduled cost of your premium payment, should you find yourself in tough times short of money.
Question: Can I skip premium payments completely with Universal life
insurance?
Answer: Yes, payments can be skipped entirely, so long as the savings accumulation of your Universal life insurance policy are sufficient to pay the mortality cost.
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Question: What is Variable life insurance?
Answer: Like both standard life insurance and universal life insurance, variable life insurance has both a mortality component to insure your life, and a savings component that increase with the passage of time. However, the savings you have are more like an investment where you can exert some freedom over choosing how and where the savings will be invested, giving you a variable rate of return depending on your selection.
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Question: What are some of the choices available for the savings component
of Variable life insurance?
Answer: Most variable life insurance companies offer three different kinds of choices (1) a reasonably steady or guaranteed rate of return in money market or government money funds (2) a more variable rate of return in bond fund portfolio choices, and (3) an even more variable rate of return in stock mutual fund types of portfolio choices.
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Question: If I am looking for a guarantee on the value of my life, why
would I choose a stock mutual fund type of portfolio for the savings
portion of my Variable life insurance policy?
Answer: Over longer periods of time, the duration of your life time, savings invested in stock portfolios have historically outperformed both money market fund portfolios and bond fund portfolios.
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Question: What is variable-universal life insurance.
There are two basic types of variable life insurance. One type demands
a fixed premium payment, which is named simply “variable life”. The
other type has a flexible premium like universal life, and is named
“variable-universal life”. Like universal life insurance, you are allowed
to make premium payments that are less than the scheduled monthly coupon
premium, providing that the savings portion of your policy is sufficient
to cover the mortality cost for that month. This allows added flexibility
in the payment of monthly premiums.
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Question: Does the death benefit of my cash value life insurance policy
(Eg, standard life, universal life, variable life, or variable universal
life) grow as the cash value (savings portion) of my policy grows?
Answer: In most cases, the death benefit is constant regardless of type of policy. So the answer is no, unless the specific policy language allows for an increasing death benefit.
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Question: My insurance agent claims that there is an increasing death
benefit for the whole life (cash value) policy that he sells. How can
this be?
Answer: Some insurance companies will add a benefit of increasing life insurance payout benefit like this, to encourage purchase and holding on to the policy, so customers are more likely to pay their premiums and less likely to allow their policies to lapse. It is also a good incentive to purchase the policy that the salesman can explain.
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Question: Does a cash value (whole life) insurance policy offer tax benefits?
Answer: Yes, the savings portion of your policy grows free of tax. For variable life and variable-universal life, the rate of return may be higher and comparable to regular taxed investments in stock portfolios, making the policy advantageous as a tax shelter.
Question: Can I borrow money against the cash value of my whole life insurance?
Answer: Most whole life insurance policies allow you to take out a policy loan, as long as the policy has sufficient cash value accrued. And you can often borrow the money at a very favorable interest rate. This is one of the design features built in to cash value life insurance, and advertised as a benefit to the policy holder.
Question: How soon do I need to pay back my policy loan?
Answer: As described in the contract for your life insurance policy, you don’t need to repay the loan back, as long as the remaining value of the policy earns enough income to pay the loan charges.
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Question: Does that mean I can take out a loan indefinitely on my cash
value life insurance policy, and then never pay it all back?
Answer: Essentially yes, so long as there is enough remaining value to pay the interest charges. However, the value of your death benefit is decreased by the amount of your unpaid loan plus interest chages.
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Question: Is it possible to convert a term life insurance policy upward
into a whole life insurance policy?
Answer: Yes, many term policies can be converted to whole life policies. This is the conversion benefit of term life insurance, where if you pay the difference between the premiums for the two policies, you can convert upward to whole life insurance.
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Question: Can I convert my whole life insurance policy downward to a
term life insurance policy.
Answer: Most whole life policies do not allow a downward conversion to what is considered a less desireable product, in the interests of protecting the customer.
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Question: If I decide to replace my whole life policy with a term policy
anyway, what is the correct way to perform this downward conversion?
Answer: You first want to contact the agent and the life insurance company behind your current policy. Notify them of your intent to make the changeover. They may be able to help you expedite your decision, offer you alternatives, and make certain that you don’t make a careless of foolish mistake that is avoidable.
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Question: What kind of mistakes could you make, if you are dropping a
policy, or if you are changing over to a different company with a different
kind of policy?
Answer: There are a number of things to consider in your decision. The worst thing that could happen is to drop a policy already in place, and then discover in a subsequent health examination that you are uninsurable. Or you could surrender a very good policy for an inferior one, and at the same time end up paying the insurance sales commission necessary for putting a new policy into place.
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Question: As advertused by some books, is it better to buy inexpensive
term life insurance, invest the difference of what I would pay for
a cash-value policy, say into a no-load mutual fund, and do better
financially in the long run.
Answer: In real life practice, few have the discipline and can take the extra money each month to invest in this theoretical approach. There is a very wide gap between what is possible on paper, and what people actually end up doing in practice. There is no gap at all, when a forced savings plan forces a disciplined approach each month.
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Question: Do I have to pay taxes on the proceeds of a whole life policy
that I cash in?
Answer: You only owe taxes if the proceeds of liquidating your whole life policy exceed the total premiums you have paid in. This is seldom the case, except for the unusual situation where the variable investment part of a varuable life insurance policy has done extremely well.
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Question: What is the double indemnity or triple indemnity feature of
life insurance?
Answer: Your policy pays double or triple the face value of the death benefit should your death occur due to an accident. For example, double indemnity on a $500,000 policy would pay $1,000,000. Sudden medical emergencies such as strokes and heart attacks are considered natural causes of death, rather than accidental causes.
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Question: Is suicide covered in life insurance contracts?
Answer: The contract language tells how suicide is covered. If there is a preliminary period of exclusion of death benefit from suicide, often the insurance company will rebate premiums paid, but can not pay the full death benefit. Some policies will pay the full face value when suicide occurs, providing the initial exclusion period has expired. A customary exclusion period is 2 years.
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Question: I just discovered that my recently deceased husband of 20 years
failed to change his beneficiary from his former wife to me. Does that
mean that his former alienated wife is awarded his death benefit rather
than me.
Answer: The answer is yes, unless his former wife is incompetent, or unless you can somehow contest the award in a court of law and win. For this reason, it is critically important to update life insurance beneficiary designations on all policies.
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Question: We have just had a new baby born in our house. Now we are wondering,
should we buy life insurance on our newborn?
Answer: The purpose of life insurance is to replace income that other people are dependent on. Your baby has no income, and your baby has no dependents. You might consider buying life insurance on yourself however, since now you have a new dependent, your baby, who is now dependent on your income. So you would insure your own life for those dependent on you.
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Question: When does it make sense to take out a life insurance policy
on another person?
Answer: Whenever you have an interest in another person that you are dependent on, it makes sense to purchase life insurance on that person. Even if that interest is not purely financial, still the death of that person can be mitigated considerably and compensated in part by the death benefit that accompanies the loss when a person dies.
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Question: Is a medical examination necessary in order to purchase a life
insurance policy.
Answer: A medical examination is not necessary for some types of life insurance. Examples of life insurance that require no examination are those companies that accept everyone who applies. The face value of these policies is usually quite small however. These companies can succeed and avoid medical examinations because they have high premiums, and they diversify their risk of death payout over a large enough pool of applicants. Such policies generally have contract language that excludes pre-existing conditions. Applicants should be forwarned to read the contract language carefully.
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Question: How can some employer life insurance programs automatically
insure every employee, without requiring any medical examinations?
Answer: The employer’s life insurance company requires no medical examination because the insurance company is averaging its risk of death benefit payout to an acceptable level -– a level less than the premiums it charges the employer -- by using the law of large numbers. This law of averages allows covering a large enough pool of people that fit into specific risk categories – healthy working employees -- without requiring medical examinations.
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Question: Can terminally ill people purchase life insurance?
Answer: If they are willing to pay a high enough premium, allow exclusions, and find the right insurance carrier, then there is almost always some company who will accept their premium payments. This may or may not be finanially worthwhile, based on the contract provisions and the premium costs. The happiness and emotional relief of holding an insurance policy in hand can be considerable.
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Question: What is a living death benefit?
Answer: Living death benefits are provisions (called riders) written into the life insurance contract that pay out a percentage fraction of your death benefit while you are still alive. Living death benefits are also called accelerated death benefits, since there is an early accelerated advance death benefit, usually less than the face amount of the policy, that is paid out prior to actual death.
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Question: At what time is the living death benefit paid?
Answer: The usual time a payment of living death benefit occurs is after a doctor certifies that a patient is terminally ill with less than a year to live. The purpose of the benefit is to provide funds for the medical care and comfort of the terminally ill.
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Question: Will the payment of a living death benefit decrease the total
payout made at actual time of death?
Answer: The language and provisions of your life insurance policy tell you whether your total death payout is affected by payment of a living death benefit. If you paid extra for this benefit, it may be possible that there is no decrease in your total death payout.
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Question: What is a viatical settlement of a life insurance policy?
Answer: A viatical company will pay you part of the cash value of your whole life insurance policy while you are still alive in exchange for ownership of your policy. They will also pay your life insurance premiums while you are still alive, so that they can collect your full death benefit when you die.
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Question: When does it make sense to have a viatical settlement of a
life insurance policy?
Answer: If you really need the cash, viatical settlement might make sense, with the understanding that by taking the cash up front now deprives the beneficiary of the death benefit later.
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Question: What is a survivorship life insurance policy?
Answer: A survivorship life insurance policy insures two people who are usually spouses. No death benefit is paid until both have died. This policy is also called a “second-to-die” policy, since death benefit occurs only after the second person dies.
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Question: When is a survivor life insurance policy most frequently used?
Answer: For very wealthy people, a survivorship policy can help pay the estate taxes due at time of death.
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Question: Can life insurance payouts go to family trusts and living trusts?
Answer: Trusts can receive your life insurance payout providing that the trust allows it, and providing that you have complied with the specific language required in the trust when you designate the trust as your beneficiary.
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Question: Can I reduce life insurance needs to cover my wife by the way
I choose my pension plan options?
Answer: By choosing a “joint and survivor” pension plan option when available, the wife receives a part of the husband’s monthly pension, should the husband die first. But you also are penalized by taking a reduced monthly pension while you are alive, so that your spouse can receive part of your pension after you die. This “joint and survivor” pension plan option reduces your need for life insurance, since income after your death is now provided for your spouse. But it does carry the penalty of a reduced monthly pension plan check for both of you during the entire time while you both are still alive. And should your wife die first, then you suffer the reduced monthly pension check for your entire lifetime.