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Life Insurance Buyer's Guide
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This guide can help you when you shop for life insurance. It discusses how to:
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Find a Policy That Meets Your Needs and Fits Your Budget
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Decide How Much Insurance You Need
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Make Informed Decisions When You Buy a Policy
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Prepared by the National Association of Insurance Commissioners
The National Association of Insurance Commissioners is an association of state insurance regulatory officials. This
association helps the various insurance departments to coordinate insurance laws for the benefit of all consumers.
This guide does not endorse any company or policy.
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Important Things to Consider
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Review your own insurance needs and circumstances. Choose the kind of policy that has benefits that most closely fit your needs.
Ask an agent or company to help you.
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Be sure that you can handle premium payments. Can you afford the initial premium? If the premium increases later and you still need insurance,
can you still afford it?
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Don't sign an insurance application until you review it carefully to be sure all the answers are complete and accurate.
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Don't buy life insurance unless you intend to stick with your plan. It may be very costly if you quit during the early years of the policy.
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Don't drop one policy and buy another without a thorough study of the new policy and the one you have now. Replacing
your insurance may be costly.
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Read you policy carefully. Ask your agent or company about anything that is not clear to you.
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Review you life insurance program with your agent or company every few years to keep up with changes in your income and needs.
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Buying Life Insurance
When you buy life insurance, you want coverage that fits your needs.
First, decide how much you need - and for how long - and what you can afford to pay. Keep in mind the major reason you buy life insurance is
to cover the financial effects of unexpected or untimely death. Life insurance can also be one of many ways you plan for the future.
Next, learn what kinds of policies will meet your needs and pick the one that best suits you.
Then, choose the combination of policy premium and benefits that emphasizes protection in case of early death,
or benefits in case of long life, or a combination of both.
It makes good sense to ask a life insurance agent or company to help you. An agent can help review your insurance needs
and give you information about the available policies. If one kind of policy doesn't seem to fit your needs, ask about others.
This guide provides only basic information. You can get more facts from a life insurance agent or company or from your public library.
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What About the Policy You Have Now?
If you are thinking about dropping a life insurance policy, here are some things you should consider:
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If you decide to replace your policy, don't cancel your old policy until you have received the new one.
You then have a minimum period to review your new policy and decide if it is what you wanted.
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It may be costly to replace a policy. Much of what you paid in the early years of the policy you have now,
paid for the company's cost of selling and issuing the policy. You may pay this type of cost again if you
buy a new policy.
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Ask your tax advisor if dropping your policy could affect your income taxes.
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If you are older or your health has changed, premiums for the new policy will often be higher.
You will not be able to buy a new policy if you are no insurable.
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You may have valuable rights and benefits in the policy you now have that are not in the new one.
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If the policy you have now no longer meets your needs, you may not have to replace it. You might be able to
change your policy or add to it to get the coverage or benefits you now want.
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At least in the beginning, a policy may pay no benefits for some causes of death covered in the policy you have now.
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In all cases, if you are thinking of buying a new policy, check with the agent or company that issued ou the one
you have now. When you bought your old policy, you may have seen an illustration of the benefits of your policy.
Before replacing your policy, ask your agent or company for an updated illustration. Check to see how the policy
has performed and what you might expect in the future, based on the amounts the company is paying now.
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How Much Do You Need
Here are some questions to ask yourself:
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How much of the family income do I provide? If I were to die early, how would my survivors, especially my children,
get by? Does anyone else depend on me financially, such as a parent, grandparent, brother or sister?
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Do I have children for whom I'd like to set aside money to finish their education in the event of my death?
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How will my family pay final expenses and repay debts after my death?
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Do I have family members or organizations to whom I would like to leave money?
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Will there be estate taxes to pay after my death?
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How will inflation affect future needs?
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As you figure out what you have to meet these needs, count the life insurance you have now, including any group insurance
where you work or veteran's insurance. Don't forget Social Security and pension plan survivor's benefits. Add other assets
you have: savings, investments, real estate and personal property. Which assets would your family sell or cash in to pay
expenses after your death?
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What is the Right Kind of Life Insurance?
All policies are not the same. Some give coverage for your lifetime and others cover you for a specific number of years.
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. Some policies may offer other benefits while you are still living. Your choice should be
based on your needs and what you can afford.
There are two basic types of life insurance: term insurance and cash value insurance. Term insurance gernerally has
lower premiums in the early years, but does not build up cash values that you can use in the future. You may combine cash
value life insurance with term insurance forthe period of your greatest need for life insurance to replace income.
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 offers the largest insurance protection for your premium dollar. It generally does not build up cash value.
You can renew most term insurance policies for one or more terms even if your health has changed. Each time you renew
the policy for a new term, premiums may be higher. Ask what the premiums will be if you continue to renew the policy. Also,
ask if you will lose the right to renew the policy at some age. For a higher premium, some companies will give you the right
to keep the policy in force for a guaranteed period at the same price each year. At the end of that time you may need to pass
a physical examination to continue coverage, and premiums may increase.
You may be able to trade many term insurance policies for a cash value policy during a conversion period - 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.
Cash Value Life Insurance is a type of insurance where the premiums charged are higher at the beginning than they would
be for the same amount of term insurance. The part of the premium that is not used for the cost of insurance is invested by
the company and builds up a cash value that my be used in a variety of ways. You may borrow against a policy's cash value
by taking a policy loan. If you don't pay back the loan and the inerest on it, the amount you owe will be subtracted from the
benefits when you die, or from the cash value if you stop paying premiums and take out the remaining cash value. You can also
use your cash value to keep insurance protection for a limited time or buy a reduced amount without having to pay more
premiums. You can also use the cash value to increase your income in retirement or to help pay for needs such as a child's
tuition without canceling the policy. However, to build up this cash value, you must pay higher premiums in the earlier years
of the policy. Cash value life insurance may be one of several types; whole life, universal life and variable life are all types of
cash value insurance.
Whole Life Insurance covers you for as long as you live if your premiums are paid. You generally pay the same amount in
premiums for as long as you live. When you first take out the policy, premiums can be several times higher than you would
pay initially 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 you 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 since the premium payments are made during a shorter period.
Universal Life Insurance is a kind of flexible policy that lets you vary your premium payments. You can also adjust the face
amount of coverage. Increases may require proof that you qualify for the new death benefit. The premiums you pay (less
expense charges) go into a policy account that earns interest. Charges are deducted from the account. If your yearly
premium payment plus the interest your account earns is less than the charges, your account value will become lower. If it
keeps dropping, eventually your coverage will end. To prevent that, you may need to start making premium payments, or
increase your premium payments, or lower your death benefits. Even if there is enough in your account to pay the premiums,
continuing to pay premiums yourself means that you build up more cash value.
Variable Life Insurance is a kind of insurance where the death benefits and cash values depend on the investment
performance of one or more separate accounts, which may be invested in mutual funds or other investments allowed under
the policy. Be sure to get the prospectus from the company when buying this kind of policy and STUDY IT CAREFULLY.
You will have higher death benefits and cash value if the underlying investments do well. Your benefits and cash value
will be lower or may disappear if the investments you choose didn't do as well as you expected. You may pay an extra
premium for a guaranteed death benefit.
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Life Insurance Illustrations
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You may be thinking of buying a policy where cash values, death benefits, dividends or premiums may vary based on
events or situations the company does not guarantee (such as interest rates). If so, you may get an illustration
from the agent or company that helps explain how the policy works. The illustration will show how the benefits
that are not guaranteed will change as interest rates and other factors change. The illustration will show you what
the company guarantees. It will also show you what could happen in the future. You should be
ready to adjust your financial plans if the cash value doesn't increase as quickly as shown in the illustration.
You will be asked to sign a statement that says you understand that some of the numbers in the illustration are
not guaranteed.
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Finding a Good Value in Life Insurance
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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. A simple comparison of the premiums is not enough. There are
other things to consider. For example:
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Do premiums or benefits vary from year to year?
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How much do the benefits build up in the policy?
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What part of the premiums or benefits is not guaranteed?
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What is the effect of interest on money paid and received at different times on the policy?
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Remember that no one company offers the lowest cost at all ages for all kinds and amounts of insurance. You
should consider other factors:
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How quickly does the cash value grow? Some policies have low cash values in the early years that build quickly
later on. Other policies have a more level cash value buildup. A year-by-year display of the values and benefits can be
very helpful. (The agent or company will give you a policy summary or an illustration that will show benefits and
premiums for selected years.)
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Are there special policy features that particularly suit your needs?
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How are the non guaranteed values calculated? For example, interest rates are important in determining policy returns. In
some companies increases reflect the average interest earnings on all of that company's policies regardless of
when issued. In others, the return for policies issued in a recent year, or a group of years, reflects the interest
earnings on that group of policies; in this case, amounts paid are likely to change more rapidly when interest rates
change
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