Buying Life Insurance

100 Things You MUST Know About Life Insurance

Posted in: Buying Life Insurance, Life Insurance Basics

Life insurance can be a touchy subject: after all, no one likes to be reminded of their own mortality. However, purchasing life insurance is very important. If you have loved ones or other financial obligations that your existing assets would not be able to cover in the event of your death, you should begin looking [...]

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Know exactly how much coverage you’ll need. Calculate how much money it would take to cover your spouse’s living expenses until they are ready to retire, or how much money your children will need to pay for college.
Shop around. You can get quotes at many websites, including Accuquote.com, LifeInsure.com, and FindMyInsurance.com.
Be prepared. Do a lot of research on your own and talk to your friends who have bought life insurance before you are ready to buy life insurance or talk to an insurance agent or financial planner. You should feel confident that you are making the right choice when you finally do decide to buy life insurance.
Make sure your will/living trust is in order.
Make lifestyle changes. By losing weight or quitting smoking, you will be able to save money on the cost of your premium. Even small changes like taking a long walk three times a week or eating less red meat can help you lose weight and lower your cholesterol.
Decide what kind of life insurance best suits your needs. Get informed about the differences between term life insurance and permanent/cash value life insurance, and select what is best for you.
Remember that your needs will change as you get older. If you marry, divorce, or have a child, you may want to reassess your life insurance needs.
Buy from a company that you can trust. The insurance company should have at least an “A” rating as rated by an agency like Standard & Poor’s or A.M. Best. The company should be on solid financial ground.
Buy at the “break point”. Better premium rates are usually available at coverage levels of $100,000, $250,000, $500,000 and $1,000,000.
Keep it on the level. Make sure that whatever policy you choose, your premium is guaranteed not to increase over the course of your coverage.
Consider Group Coverage. Many employers offer group plans. Group plans generally do not require you to complete a medical exam, which may be great for you if you are in poor health.
Understand the concept of insurable interest. Talking about life insurance with your spouse can be a very sensitive subject. It is possible for you to buy a policy for someone other than yourself if you have an “insurable interest”. This means that you must have a substantial interest in the person, and be related by blood or a lawful marriage. Business partners can take out a policy on each other, and corporations may also be considered to have an insurable interest in certain essential employees.
Know your risk factors. When you are shopping for life insurance, you will generally be asked many questions about your life. Take some time to consider your lifestyle. Do you engage in any risky hobbies like sky-diving or flying a plane? Is your job dangerous? Do you smoke or drink to excess? If so, be prepared to pay higher premiums.
You can almost always convert your term life policy to a cash-value policy of the same amount without a medical exam.
You can modify your coverage with riders or endorsements. These can include modifications for accidental death, or riders to include your spouse and children.
Know your rights. You have a right to be paid promptly in the event of the death of the policyholder. Your claim must be acknowledged within 15 days, and paid within 45 days, unless they have a valid reason to delay your claim. Make sure your beneficiaries know this.
You can miss a payment and still maintain continuous coverage. Virtually all policies have a 30- or 31-day grace period after the due date. If the insured were to die during this grace period, the beneficiaries would still receive their benefits minus the amount of the unpaid premium.
Understand what will happen if your policy lapses. In order to reinstate your coverage if your policy has lapsed, you will be required to pay at least part of your overdue premium, often with interest. It should be relatively easy to reinstate a lapsed policy within 5 years. However, you may be asked health questions or be required to take another medical exam.
Details, details, details. NEVER let another person, not even your insurance agent, fill in your personal information on your application. Any mistakes made on your application can be cause for termination of your coverage. Do not let anyone sign on your behalf. Always fill out applications truthfully.
The “contestable period”. You must keep in mind that all life insurance policies have a 2-year contestable period. If the insured dies during the first two years of coverage, the insurance company has the right to investigate and verify all the information originally submitted. Additionally, almost all life insurance policies have a suicide clause, which stipulates that the insurance company will not pay the death benefit in the event that the insured commits suicide within the contestable period.
The “free-look” period. Some states have what is known as a “free-look” or “right to examine” period. During this 10 day period, you may review your coverage, and choose to cancel it for any reason and receive a full refund. If you state mandates this period, make sure to use it to your advantage. Take the time to consider if the policy is right for you.
Always ask for illustrations. Ask your agent for a history of the companies projections versus the actual growth of cash values. If the agent objects, that is a red flag.
Beware of unethical behavior. An insurance agent should never market a life insurance policy as a retirement tool, nor should they ever offer you any type of gift or money as an incentive to buy a policy from them. If you believe an agent has made an improper offer, you should contact their supervisor as well as a state governmental agency.
Watch out for insurance fraud. When in doubt, trust your gut. Always get a second opinion, and never let yourself be pressured into a policy you aren’t informed about.
Never pay in cash for your policy.
Never sign a blank application.
Never buy insurance over the phone, or on your first visit to an agency.
Never buy a policy from an agent who won’t allow you to bring a friend or spouse with you to the appointment.
Consider the financial implications of owning life insurance. For example, the cash value of a policy is considered an asset, meaning that you may need to consult a lawyer or financial advisor to review how owning a policy can change your life. For example, life insurance can change your eligibility for Medicaid.
Understand your renewal options- Most policies are renewable until the age of 70 or 75. Make sure you are comfortable with your renewal options. Know if you will have to take a medical exam to renew, or if your renewal premium is guaranteed.
Make sure you understand how your insurance rates are structured. Verify that your rate is guaranteed for the full term of your policy. In some cases, you may find a very low rate, but the rate might only be low because the rate is not guaranteed for the full term of the policy.
Beneficiaries won’t have to pay federal income tax on the money that they receive from a life insurance policy.
You can use your cash value policy as collateral for a loan, even if you don’t have a great credit score.
You can use your cash value policy to pay your premiums or to buy additional coverage.
You can exchange a cash value policy for an annuity.
If you have a cash value policy, you can cancel (surrender) the policy and receive the cash value in a lump sum. (You will have to pay taxes on the value that exceeds what you have paid in premiums.)
A whole life policy is the most traditional type of cash value life insurance. Premiums and death benefits stay the same over the life of the policy, and the policy’s cash value grows at a fixed rate.
Variable life insurance is another option. You can choose from a variety of investment tools that will guarantee your principal and interest. The value of a variable life policy is not guaranteed.
Never Buy a variable life policy without examining a prospectus.
Look for a variable life policy that guarantees that you death benefit will not fall beneath a certain level.
Universal life insurance will give you flexibility in setting your premium payments and the death benefit. The insurer will require evidence of continued good health.
Term insurance might be the better choice for you if you have financial obligations during a fixed period of time, such as college tuition or mortgage payments.
Generally speaking, term life insurance is less expensive that permanent/cash value life insurance. However, the premium for your term life policy will increase with age.
Only work with insurance companies that have been licensed in your state. You can contact your state insurance department for a complete list.
Use your local library to help to research life insurance companies. Most libraries have access to publications that rate the financial health of a given company.
All insurance agents who sell variable products must be registered with FINRA (Financial Institutions Regulatory Authority). In addition, they need to have a state license.
Look for an agent with professional accreditations. Ask if they are a member of the National Association of Insurance and Financial Advisors, the Society of Financial Service Professionals, or a similar body.
Look for an agent with a professional designation. Agents may earn such professional designations as Chartered Life Underwriter (CLU) and Life Underwriter Training Council Fellow (LUTCF). Agents who also are financial planners may carry such credentials as Chartered Financial Consultant (ChFC), Certified Financial Planner (CFP), or Personal Financial Specialist (CPA–PFS).
Look for an agent that gives you the attention you deserve. You agent should be happy to answer any questions you have, and should also follow-up with you on a regular basis after you have purchased your policy.
Above all, remember that your policy is, in effect, a legal document. Make sure you understand exactly what provisions your policy contains. Ask for a point-by-point breakdown for anything that you do not fully understand.
Make sure you can afford to pay your premiums, both now and in the long term.
If you are considering a term policy, ask up front how often you must renew your policy, and how much your premium will increase with each renewal. Again, make sure you will be able to afford to pay this over the long term.
When you receive your policy illustration, go over it with a fine-toothed comb. Verify all the information, including your classification (male/female, smoker/nonsmoker).
Consider a policy with an accelerated benefit rider. Under some conditions, you could receive your death benefit before you die. This can be helpful if you need money to treat a serious illness, or to pay for assisted living/hospice care.
When you buy your policy, make sure you know on what date your coverage is effective. This date may be different from the date on which the policy was purchased.
Some policies will waive your premiums if you become disabled.
If you discover any error in your application or policy documents, notify your insurance company immediately.
Beware of offers for “free” life insurance. Unscrupulous investors have been known to take advantage of seniors by offering them money to buy a life insurance policy, which they then sell off to investors. The investors expect to profit by receiving the death benefit when the policyholder dies.
Never make out a check to your insurance agent. Your check should always be made payable to the insurance company.
Make sure your insurance company gives you a receipt once they have received your payment.
If you have not received your policy within 60 days of purchase, you need to contact your agent/insurance company. Do not assume you have coverage until you have proof of insurance.
Keep your insurance policy in a safe place. It should be stored someplace where it will be found, such as with your other financial or legal documents.
Don’t keep your policy in your safe deposit box. In most states, safe deposit boxes are temporarily sealed upon the death of the owner. This may delay your beneficiaries settlement.
If you are thinking about changing your policy, contact your old provider first. They will be able to advise you if you are too old or too ill to insured at an affordable rate.
If you have a cash value policy, and are thinking about switching to a new insurance provider, keep in mind that it may take years for the cash value of your next policy to grow to an acceptable level.
Make note of when your premiums are due. Are they paid monthly, quarterly or annually? Is the payment due date the day when payment must be in hand, or simply the postmark date? What is the grace period? Does the grace period change if you have several late payments?
Shop for a “low-load” policy. You may save money on cash value policies by purchasing a policy with low commissions and administrative fees (“the load”). Low-load policies generally have fewer initial fees, you could save money with a low-load policy in the event that you cash out early.
Make sure you understand what will happen after you pass away. If a policy does not have a named beneficiary, or the beneficiary is deceased, the death benefit is paid to the insured’s estate. Your heirs will then have to pay taxes on the money. Heirs to the estate will then have to pay full taxes on the money.
Bankruptcy. In these uncertain financial times, it is comforting to know that the cash value and death benefit of a life insurance policy are fully exempt from creditors and from all demands in any bankruptcy proceeding. One exception to this is if there is a statutory exemption, such as fraud.
It’s never too early to start thinking about life insurance. When you are young and healthy, you will be able to secure low rates. People as young as 20 should seriously consider life insurance, especially if you do not want to burden your parents or spouse with you credit card debt or student loans in the event of your untimely death.
Seriously, it’s never too early to start thinking about life insurance. If you you purchase a life insurance policy at a young age, you can pay a very small sum every month. A teenager could purchase a term life policy from State Farm for as low as $10 a month for females and $11 a month for males with a death benefit of $50,000. At age 40, that policy can be converted to a permanent policy. A 16 to 20 year old can get permanent policies as low as $16 a month. Keep in mind, however, that although your monthly premium will be small, the amount of money you spend on life insurance over the course of your life may be more than if you had waited until your 40′s or 50′s to purchase your policy.
If you serve in the military, especially in a combat zone, you should have life insurance.
Beware of agents who misrepresent the advantages of whole life. Whole life may be the right choice for you…but then again, it may not. Beware of agents who try to dazzle you with the potential for your $100,000 policy to be worth over a million dollars by the time you retire. That number is an assumption, and may not be accurate.
Consider augmenting your life insurance with investments. The market it volatile, but what goes up most come down. Even in the face of the current economic climate, you could consider a variety of investments that are sure to increase in value 20 or 30 years down the line. It’s worth taking a little risk, especially when shares of certain companies are at an all-time low.
Be on the lookout for “dead peasant” policies. A “dead peasant” policy is a secret life insurance policy taken out by your company without your knowledge. When you die, your employer receives a secret, tax-free windfall. You might also hear them referred to as COLI policies, which stands for Corporate-owned Life Insurance Policy. How does this affect you? In Oklahoma, a federal judge recently ruled that employees have legal grounds to sue an insurance company for selling and maintaining secret life insurance policies on their lives. [Havenstrite v. Hartford Life Ins. Co., No. 4:2008cv00410 (N.D. Okla.] If you work for a large corporation (or worked for one in the past), be vigilant. Despite all the litigation surrounding COLI policies, they account for around 20% of all policies written every year.
Generally speaking, you will spend more money if you choose to split a term policy between 2 companies.
Stop smoking, get better rates. As was mentioned previously, making lifestyle changes will help to secure a better rate. The length of time varies, but to be considered a non-smoker, you must have been tobacco-free for 12 to 24 months. There can be as much as a 30-50% savings between smoker and non-smoker rates.
That includes cigars and pipe tobacco. Generally speaking, most insurance companies do not differentiate between people who smoke cigarettes, cigars, or pipe tobacco. A few select companies offer special insurance rates for pipe smokers, cigar aficionados, and those who chew tobacco.
If you decide to buy from an agent, make sure it’s an independent agent. You want to make sure that your agent has your best interests at heart. An independent agent can help you select the right policy from a selection of companies. If the agent is required to sell for just one company, chances are you might not get the best rate.
Beware of agents who offer you “a special deal”. The insurance company, not the agent, sets the price.
If you have recently had major surgery such as a bypass, you may need to wait at least 12 months before applying for life insurance.
Remember, a preliminary quote is not a guarantee or offer of coverage.
Even if you have health problems such as high blood pressure, you may still be able to get a favorable rate on life insurance if you are currently managing your condition successfully with prescription medication.
If you have been diagnosed with cancer, you may have some difficulty finding affordable coverage. However, your rates will be determined by the type of cancer and what kind of medical care you have been receiving.
Don’t cut corners in search of a lower premium. You should always buy from a top-rated company. In fact, the top rated companies often offer the best rates, as they are competing with other top companies.
Your insurance premiums may be tax-deductible if you are the owner of your company. You should seek advice from your tax professional or legal advisor.
Life insurance can be used to pay off estate taxes.
Another option for married couples is a special policy known as “joint second to die”. This policy covers both people, and pays benefits when the last person dies. This plan is usually the least expensive option. You can spend 50% less on a joint second to die policy than you would spend on two separate permanent policies to achieve the same goal.
You may need additional help with estate planning. Between life insurance, investments, and your other assets, you may feel more secure if you have additional professionals to assist you with estate planning. In addition to an insurance agent and/or financial advisor, you may want to engage the services of a lawyer who specializes in estate planning or what is sometimes known as “elder law”. You should make sure that everything is in place to allow for a smooth transition of assets from you to your beneficiaries.
If possible, pay your premiums annually or bi-annually. This is often less expensive than paying on a monthly basis.
If you truly do not have a single person who is dependent on you (parents, children, grandchildren, business partners), then life insurance may not be the best choice for you right now. However, life insurance can be incredibly useful to cover the costs of a funeral.
You don’t need life insurance for a child. No one likes to think of the pain of losing a child, and it is understandable that some parents choose to purchase a life insurance policy for their child. However, it makes more sense to invest in a mutual fund. That way, you can also use your money to fund positive events in your child’s life, like their first car or college tuition.
Avoid cookie-cutter formulas. One old adage advises purchasing life insurance coverage equal to 10 times your annual income, with the idea that your beneficiaries can invest the proceeds in the stock market. If they earn a 10% return each year, they will be set for life. Everyone’s needs are different. You would do better to meet with a good insurance agent, who has better resources and formulas at their disposal. You don’t want to end up with too much insurance, or too little.
Be careful when borrowing from your policy. The cash value of a permanent policy can generally be used for any reason you see fit, including tax-free withdrawals and loans. This is a great benefit, but you must proceed with caution. If you take too much money out of your policy and your policy lapses, or runs out of money, all the gains you’ve taken out will become taxable.
Find the balance between the lowest rate and the best value.
The purchase of life insurance isn’t a one-time activity. At the very least, review your needs every 2-3 years to make sure your current life insurance is still the right fir for you. Try not to get stuck in the mindset that once you buy life insurance, you don’t need to do anything else. After all, you wouldn’t buy a house and forget to mow the lawn or make repairs. Purchasing life insurance is the same thing. Plus, you will want to make sure that your beneficiaries are correctly listed. You may have gotten a divorce, but forgotten to remove your Ex’s name as the beneficiary.
If you ever change policies, be certain that you have continuous coverage. Avoid having any time between the cancellation of the first policy and the effective date of your new coverage.
The bottom line is that when you buy insurance, you are buying peace of mind. Make a confident, informed decision, and you will know that you have done a great thing for yourself and your family.
There has never been a better time to buy life insurance. Top companies are all vying for your business, and rates are much lower than they used to be. Shop around, take your time, and compare quotes from different companies.
If it sounds too good to be true, it probably is.