FAQs about Life Insurance

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Question: What is the original design and purpose for carrying life insurance?

Answer: Life insurance in its historical design was created to protect young people with families and children if the breadwinner died

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Question: What else can life insurance accomplish for me today?

Answer: It can work as a financial planning tool for wealth accumulation, help for tax shelter and tax planning purposes, serve as added indirect protection for dependents such as aging parents or grandchildren, cover you in the event of accidental loss of vision or limbs, or crippling, and provide an instant estate in the event of tragedy.

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Question: Those benefits are very convincing. Isn’t one major benefit giving me and my dependents less worry about an uncertain future too?

Answer: Absolutely. Life insurance delivers peace of mind for you and loved ones. The emotional and psychological benefits are enormous. Their intangible value can be greater than money itself. Such benefits should be considered thoughtfully in a purchase decision.

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Question: Are there any other benefits that I might take into account also?

Answer: An important benefit comes at the very time when disaster strikes - at the time of death - when there is little else that is good news. Then you, the policy holder, are remembered for your wisdom, your forethought, and your advance planning. This time is a most important time, where peace and comfort come into an otherwise tragic situation of death.

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Question: From a monetary protection point of view, how much life insurance do I need?

Answer: Create a list of all your family and dependent expenses (every one whom you help financially). Sum it up to find the total. Then see how much things would change in your loss. If your survivors would not have enough, to take care of themselves to your level of satisfaction, then you definitely can benefit from life insurance.

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Question: So how do I get a dollar figure for my total Life Insurance need?

Answer: Review your expenses monthly that are needed to support others dependent on you. Add up your fixed expenses, such as mortgage. Then add up variable expenses in your absence. How big would the grocery bill be? Would about child care expenses? What about children’s future education? How about other living expenses, such as automobile, running the house or apartment, etc? Next review what income would be available to support those who would suffer your loss. Is there enough? The shortfall tells you how much life insurance you need.

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Question: Are there other factors important for total life insurance need?

Answer: A sudden death has unexpected effects. It affects different people depending on their need for security and peace of mind. Knowing that there is sufficient income and enough money to get by for only 2 years is frightening. Knowing that it will last for 12 to 15 years is far more reassuring. So such issues must be discussed by those affected, to discover their true needs, both financially and emotionally for their security and peace of mind.

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Question: My insurance agent says that analysis is self-defeating, and confusing to most people, so all I have to do is to replace my salary for 10 to 12 years. Is this a good approach?

Answer: There is always a tradeoff between security and affordability, balanced with your perception of how much protection your dependents require. There is no one formula that fits everyone. The traditional expert advice is to purchase 6 to 8 times as much total life insurance as your annual salary. This is an affordable level for most people, and provides a healthy degree of coverage that will fit your pocket book and still give dependents protection and peace of mind.

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Question: What is a good financial rule of thumb for guiding me in fitting my life insurance needs?

Answer: Figure on $100,000 life insurance for every $500 of monthly income needed. Let’s say your household needs $2,500 a month to cover all expenses. 500 divided into 2,500 goes 5 times, marking your total insurance need at $500,000.

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Question: What is the explanation for why you purchase $100,000 life insurance for each $500 of monthly income required?

Answer: The theory behind this rule of thumb is that the $100,000 can be put into a conservative investment, like a money-market account, and the interest on it will be enough to generate the $500 income required, while leaving the original $100,000 principal untouched. At an annual interest rate of 6 percent, the yearly interest is $6,000, which divided by 12 months in a year generates $500 per month.

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Question: If I die, I know my wife would need extra support. But she works and makes almost as much money as I do. In event of my death, she would continue to work, so how do I figure my life insurance needs?

Answer: How much would household expenses be if you were to suddenly disappear? Would they be the same, or would they decrease? How much? Take the difference between what her expenses would be and what her income would be, and see how much more income is required. Let’s say she would need an extra $1,500 a month to survive. Talk it over with her and see if she agrees, and would feel comfortable. If so, then divide 500 into 1,500, to get 3, meaning you would need $300,000 life insurance.

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Question: My insurance agent says that I should buy extra, since my wife will not continue working forever, and the extra amount gives her added peace of mind with more options and choices. Is buying extra a good plan?

Answer: Buying an additional 25% to 50% extra as a “cushion” or emergency reserve is always a good plan, if it fits within your budget and gives you the comfort of knowing that you have provided extra for emergency. This is true, providing you feel this way, and your wife agrees with you that it is what she wants.

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Question: Suppose I buy double the amount that the rule of thumb tells me. Does that make sense as a good idea?

Answer: There are several reasons why this could be a good plan, based on your situation and perception of need. For example, if you know that the insurance need you calculated is computed based on an unstable and unsustainable current situation. Then income you counted on for dependents could disappear, meaning they would need more.

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Question: How does inflation figure into the picture for my insurance needs?

Answer: Inflation lessens the purchasing power of your money. Within 10 years, the $500 monthly income from $100,000 in the bank might only buy $250 worth of food. This is why an extra 25 percent more life insurance is almost always a justifiable investment.

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Question: After I talked with my wife and other dependents, I came up with a reasonable amount of monthly income that they would need each month. My insurance agent disagrees. What should I do?

Answer: You are the person who decides. If you have consulted those whom you are protecting, and you are happy too, then you have done your duty by them and by your conscience.

Get a free insurance quote.

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Question: When I die, I am worried about the ability of my dependents to handle the proceeds of the policy, fearing that they might spend the principal quickly, and it would soon all be gone and wasted. What should I do?

Answer: We all make judgments about the ability of others to make wise decisions that are in their best long-term interests. However, if you believe this is the case, you have options. Consult with a financial planner, possibly even your life insurance agent. Arrangements for the handling of the proceeds of the policy should be made in advance, so that the money is protected from incompetence and abuse.

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Question: Are there additional factors to consider for the rule of thumb ($100,000 life insurance for each $500 of monthly income needed)?

Answer: Your ability to pay the life insurance premium must be considered also. Does the premium fit into your budget?

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Question: The bottom line is that I can not afford to pay the monthly insurance premium. Any suggestions about what I should do?

Answer: Your insurance agent receives a commission, and the insurance company makes a profit based on the commissions paid and underwriting people evaluated based on correct assessment of their mortality risk factors. To get the same amount of life insurance at a lower cost, you can shop around looking for a lower quote on the same dollar amount of life insurance. The differences between insurance companies can be substantial. However, make certain that you are dealing with reputable companies.

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Question: I like my insurance agent, don’t want to shop around for a lower cost policy, since he already offers just about the lowest available anywhere. What else can I do, if I can’t afford the monthly insurance premium?

Answer: You can consider the type of policy that you are purchasing. Does it build up cash value for example, or protect you for your whole life? Does the amount of protection stay level with time, or does it decrease? The type of policy you purchase can raise or lower your premium substantially.

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Question: I think that I do want to shop around for a lower cost premium. Are there insurance quotation services that could give me a good quote?

Answer: This question has many answers. There are thousands of agents eager for your business. The Internet has thousands of websites advertising their products from A to Z. And the variety of life insurance policies offered today is the largest ever. If you have a computer, or can get access to a computer from a friend or at the public library, go to the Google website (www.google.com), type in life insurance quote, and you will find many good places to investigate. You can view their websites, see their cost tables, check their rankings, and obtain phone numbers to call.

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Question: Will my need for carrying life insurance ever disappear?

Answer: The purpose for life insurance is to protect others who would suffer when you can no longer support them. If your death would harm them, then there is always a bonafide need for life insurance.

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Question: Others would be affected by my loss, but they could still survive without the proceeds of a life insurance policy. Does this mean I don’t need insurance?

Answer: The emotional comfort that life insurance provides in the event of an untimely or tragic death can be enormous. For that one reason alone, always carrying some amount of insurance, even if it is small, can make good sense.

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Question: One of my dependents just died in a car accident, so my need for life insurance has decreased. Should I think of canceling the policy that I have that was covering that person’s needs in the event of my early death?

Answer: It may be tempting to cancel your policy immediately. However, think of this. If you have an undiagnosed medical condition that you are unaware of, such as an aggressive cancer, then you would never want to suffer the loss of BOTH your life and your insurance policy making your life valuable. So the rule is to never cancel any life insurance policy until you obtain a medical checkup from your doctor and having a thorough physical. You might just want to keep that life insurance policy after all. And you would certainly suffer later, to think that you had cancelled it, but wished you could get it back again.

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Question: There are many different types of life insurance policies. What is the best type for me?

Answer: Are you looking the largest policy face value for the least dollar premium? Then you buy term life insurance.

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Question: What is term life insurance?

Answer: Term life insurance covers the value of the policy should you die within a certain window (term) of time. If you don’t die, then the net value after the term has expired is zero. If you are a young person, your chances of dying are very small. So the cost of a term life insurance policy for a younger person can be very low.

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Question: I am 25 years old, I am single, and I have no dependents. Do I need life insurance?

Answer: From the financial point of view of protecting dependents, you have no need for insurance. From the point of view of making your life valuable should you meet an untimely early death, you might consider a term life insurance policy, since it is so inexpensive for a large amount for a young person. It is much easier to accept the tragic early death of a loved one knowing that provision was made to lessen the grief by planning ahead with an insurance policy for such a contingency.

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Question: Why is a whole life policy called a cash value policy?

Answer: For a whole life or cash value policy, you pay premiums for a certain period of time, after which time, you have a policy that insures your life forever until your death. Your beneficiaries are going to eventually be paid the face value of the policy -- unless you failed to pay your monthly premium and you let the policy lapse. You are going to die sooner or later, and regardless of when, the policy face value will be paid to your beneficiaries after your death. Because the likelihood of your death increases with time as you get older, the policy will be paid off sooner. Thus a whole life policy or cash value policy becomes more valuable with time. Should you decide that you want to quit paying premiums, and instead receive the value of the policy as it has increased with time, you can redeem the policy for its cash value at that time.

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Question: When a new insurance policy is sold, how is the insurance agent paid for giving me his service?

Answer: How agents are paid varies considerably from company to company. Some are paid much of their sales reward up front, and others receive a trailing commission that appears year after year, as long as the policy sold stays in force, providing the insurance salesman remains with the life insurance company.

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Question: Is an insurance policy a safe haven for savings, an effective means for building up the value of a personal estate, and a universal financial planning tool?

Answer: Insurance is often sold as an investment, to make it more attractive, and to please customers who are seeking additional advantages beyond protection of income in event of untimely death. However, the general consensus of most independent financial planners is that there are other competitive products in the market, and many of those competitors have a higher rate of return, giving you a superior place to invest your savings. Some insurance plans do guarantee an annual rate of return, can be safer investments, and have mutual reciprocal reinsurance arrangements to make their promises very secure.

Life Insurance FAQ part 2

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A Search Engineer network Friday, May 12, 2006 18:57