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Top 10 life insurance myths

2008-03-21T14:30:00.000-07:00

The facts of life

True or false? Fact or fiction? Understanding term life insurance and its benefits means sifting through the myths surrounding it. So we've taken a look at the most common misconceptions about term life insurance to set the record straight, helping you to make the right choice for you and your family.

Myth #1: I don't need life insurance.

Probably false. Unless you are an individual who does not have children, has money on hand to cover all debts and funeral expenses, and does not feel the need to offset the loss of their income to a spouse, leave any additional money to family, or to a charity, then it may be true, you don’t need life insurance. But few people have the funds readily available to fulfill all their wishes or meet their obligations after their death.

At the very minimum, if you have anyone who relies on your income for their day-to-day needs like a spouse or children, or if you have debts like a mortgage, credit cards, or car loans, then you likely need life insurance.

Myth #2: I don't work outside the home so I don't need life insurance.

Definitely false! Just because there's no paycheque to replace, doesn't mean life insurance is unnecessary. In fact, have you ever considered how much it would cost to pay for childcare and housekeeping in the absence of a stay-at-home parent? It's a lot of money and reason enough to have life insurance.

Myth #3: I have life insurance through my job. I don't need any more coverage.

False. The truth is your life insurance coverage through your work may not be protecting yourself and your loved ones as much as you think. Review how much your employer-paid insurance provides and calculate whether this is enough to keep your family comfortable through the difficult times if you're not around. What's more, when you leave your job for any reason, including retirement, your coverage will cease.

Myth #4: I have coverage from my mortgage lender. It’s enough.

Mortgage life insurance pays off your mortgage if one of the people listed on the loan dies before it’s paid—but that’s it. What about the rest? Term life insurance offers coverage that can be used for anything, including funeral expenses, paying down a mortgage, car loan and credit cards, or to offset the loss of income into the family finances.

Myth #5: I don't need life insurance once my children are self-supporting and my mortgage is paid off.

Everybody's insurance needs vary. But how would your spouse manage daily living expenses without your help? And what if your spouse outlived you by 10, even 20 years?

Myth #6: I won’t be able to get insurance because I’m a smoker.

Not true. What is true is that as a smoker, the premium you pay for your life insurance coverage will be slightly higher than a non-smoker’s premium. Even though as a smoker you’ll pay more for your coverage, it’s likely more affordable than you think.

Plus, many life insurers offer ‘preferred rates’ to smokers as well. After all, even though you are a smoker doesn’t mean you are unhealthy, so why not?

Myth #7: Once a smoker, always a smoker in the eyes of the life insurers

Wrong! Good news for ex-smokers. Most life insurance companies consider you a non-smoker once you’ve been smoke-free for 1 full year. So congratulations, after one year you can get non-smoker rates.

Myth #8: I'm young so odds are I won't need life insurance.

Although it is unlikely you'll die during your working years, you're not insuring for what's likely to happen but instead, for the worst-case scenario. That's why term life insurance is inexpensive for young, healthy people. Buying life insurance now means you'll be providing financial security without spending a lot of money for it. For example, an online quote at kanetix for a $250,000 10-year term policy for:
a healthy 35-year old non-smoking woman costs as little as $173 a year*
a healthy 35-year old non-smoking man costs as little as $215 a year*
a healthy 35-year old non-smoking married couple costs as little as $313 a year*
What's more you may even be eligible for 'preferred' rates that mean the annual premiums are even less!

Myth #9: If term life insurance is really so cheap there must be a catch.

There's no catch. Your basic term life insurance policy will offer you coverage so long as you pay your premium. You buy term insurance for the duration of time you'll need life insurance, whether that's until the kids are out of school or until your mortgage is paid off. Plus, your premiums are fixed for the length of the term. They won't increase even if the status of your health changes.

Myth #10: It's such a hassle to get life insurance.

Thanks to the Internet, getting quotes is fast, free and easy. Online quotes for term life insurance are available online at kanetix from some of Canada's most respected and known insurance companies.

Final Fact:

Life insurance policies provide you with customized coverage for your family's needs.

Life (insurance) after divorce

2008-03-21T14:26:00.000-07:00

When a couple gets divorced, the person making support payments is under no obligation to protect the income they provide if they die. The estate of the deceased ex-spouse is also not obliged to continue any support payments if not stipulated in the original divorce agreement. However, many ex-spouses depend on support payments to live and if children are involved, can be left without the funds necessary to provide for basic needs.

Financial obligations

Family law experts suggest including a clause in the divorce settlement making it mandatory the provider of support payments have a current life insurance policy. These settlements usually include a mandatory minimum coverage amount and often require the ex-spouse be named as the beneficiary. The life insurance policy should include enough coverage to provide the recipients of support payments with an income similar to that which they would have received before the payer's death. In the case where one spouse is paying to help support one or more children, life insurance arrangements should provide enough coverage to ensure each child is cared for until they are an adult.

The benefits of term life insurance

If you are purchasing life insurance to protect income provided to your ex-spouse, term life insurance can be an attractive option. Term life insurance policies are less expensive than most types of life insurance, and the rate is usually consistent for the entire term of the life insurance policy. If the policy is renewable, you can purchase a new one when the current one expires, without having to take another medical.

Since term life insurance is a cost-effective and simple way to purchase life insurance coverage, it is one of the most popular ways to protect payments made to an ex-spouse.

Choosing a beneficiary for the life insurance

The purchaser of a life insurance policy can specify who they want to receive the benefits when they die - even if the intended beneficiary is under the age of 18. This can be important if the supporter is concerned about making sure the proceeds of the policy go directly to the child.

If you choose to name your child as your beneficiary, you will need to set up a trust, governed by a trustee until the child is of a certain specified age. The money doesn't automatically go to your child on their 18th birthday. You can choose to extend the time the trust is in force until you think your child is old enough to be financially responsible.

If you are comfortable that your ex-spouse would properly manage any life insurance benefits, you could name them as the beneficiary, knowing they would still be in charge of providing for your child.

As the recipient of support payments, you may also want to name your ex-spouse as the beneficiary on your own personal life insurance policy as they would most likely become the primary caregiver of your child if you died.

Life insurance from Wikipedia

2008-03-21T14:21:00.000-07:00

Life insurance or life assurance is a contract between the policy owner and the insurer, where the insurer agrees to pay a sum of money upon the occurrence of the insured individual's or individuals' death or other event, such as terminal illness or critical illness. In return, the policy owner (or policy payer) agrees to pay a stipulated amount called a premium at regular intervals or in lump sums. There may be designs in some countries where: (Assets, Bills, and death expenses plus catering for after funeral expenses should be included in Policy Premium. Anyone whose assets equal more than the value of their primary residence should not be compensated beyond that value in case they cannot sell their house. In the case of those whose lost their spouse should be compensated also for one full year the wages of their spouse which would or should be included to avoid lawsuits.) However in the United States, the predominant form simply specifies a lump sum to be paid on the insured's demise.

As with most insurance policies, life insurance is a contract between the insurer and the policy owner (policyholder) whereby a benefit is paid to the designated Beneficiary (or Beneficiaries) if an insured event occurs which is covered by the policy. To be a life policy the insured event must be based upon life (or lives) of the people named in the policy.

Insured events that may be covered include:

* sickness

Life policies are legal contracts and the terms of the contract describe the limitations of the insured events. Specific exclusions are often written into the contract to limit the liability of the insurer; for example claims relating to suicide (after 2 years suicide has to be paid in full)(in India after one year Suicide is covered), fraud, war, riot and civil commotion.

Life based contracts tend to fall into two major categories:

Protection policies - designed to provide a benefit in the event of specified event, typically a lump sum payment. A common form of this design is term insurance.
Investment policies - where the main objective is to facilitate the growth of capital by regular or single premiums. Common forms (in the US anyway) are whole life, universal life and variable life policies.

Parties to contract

There is a difference between the insured and the policy owner (policy holder), although the owner and the insured are often the same person. For example, if Joe buys a policy on his own life, he is both the owner and the insured. But if Jane, his wife, buys a policy on Joe's life, she is the owner and he is the insured. The policy owner is the guarantee and he or she will be the person who will pay for the policy. The insured is a participant in the contract, but not necessarily a party to it.

The beneficiary receives policy proceeds upon the insured's death. The owner designates the beneficiary, but the beneficiary is not a party to the policy. The owner may change the beneficiary unless the policy has an irrevocable beneficiary designation. With an irrevocable beneficiary, that beneficiary must agree to any beneficiary changes, policy assignments, or cash value borrowing.

In cases where the policy owner is not the insured (also referred to as the cestui qui vit or CQV), insurance companies have sought to limit policy purchases to those with an "insurable interest" in the CQV. For life insurance policies, close family members and business partners will usually be found to have an insurable interest. The "insurable interest" requirement usually demonstrates that the purchaser will actually suffer some kind of loss if the CQV dies. Such a requirement prevents people from benefiting from the purchase of purely speculative policies on people they expect to die. With no insurable interest requirement, the risk that a purchaser would murder the CQV for insurance proceeds would be great. In at least one case, an insurance company which sold a policy to a purchaser with no insurable interest (who later murdered the CQV for the proceeds), was found liable in court for contributing to the wrongful death of the victim (Liberty National Life v. Weldon, 267 Ala.171 (1957)).

Contract terms

Special provisions may apply, such as suicide clauses wherein the policy becomes null if the insured commits suicide within a specified time (usually two years after the purchase date; some states provide a statutory one-year suicide clause). Any misrepresentations by the insured on the application is also grounds for nullification. Most US states specify that the contestability period cannot be longer than two years; only if the insured dies within this period will the insurer have a legal right to contest the claim on the basis of misrepresentation and request additional information before deciding to pay or deny the claim.

The face amount on the policy is the initial amount that the policy will pay at the death of the insured or when the policy matures, although the actual death benefit can provide for greater or lesser than the face amount. The policy matures when the insured dies or reaches a specified age (such as 100 years old).

Costs, insurability, and underwriting

The insurer (the life insurance company) calculates the policy prices with an intent to fund claims to be paid and administrative costs, and to make a profit. The cost of insurance is determined using mortality tables calculated by actuaries. Actuaries are professionals who employ actuarial science, which is based in mathematics (primarily probability and statistics). Mortality tables are statistically-based tables showing expected annual mortality rates. It is possible to derive life expectancy estimates from these mortality assumptions. Such estimates can be important in taxation regulation.^[1] ^[2]

The three main variables in a mortality table have been age, gender, and use of tobacco. More recently in the US, preferred class specific tables were introduced. The mortality tables provide a baseline for the cost of insurance. In practice, these mortality tables are used in conjunction with the health and family history of the individual applying for a policy in order to determine premiums and insurability. Mortality tables currently in use by life insurance companies in the United States are individually modified by each company using pooled industry experience studies as a starting point. In the 1980s and 90's the SOA 1975-80 Basic Select & Ultimate tables were the typical reference points, while the 2001 VBT and 2001 CSO tables were published more recently. The newer tables include separate mortality tables for smokers and non-smokers and the CSO tables include separate tables for preferred classes. ^[3]

Recent US select mortality tables predict that roughly 0.35 in 1,000 non-smoking males aged 25 will die during the first year of coverage after underwriting.[2] Mortality approximately doubles for every extra ten years of age so that the mortality rate in the first year for underwritten non-smoking men is about 2.5 in 1,000 people at age 65.[3] Compare this with the US population male mortality rates of 1.3 per 1,000 at age 25 and 19.3 at age 65 (without regard to health or smoking status).[4]

The mortality of underwritten persons rises much more quickly than the general population. At the end of 10 years the mortality of that 25 year-old, non-smoking male is 0.66/1000/year. Consequently, in a group of one thousand 25 year old males with a $100,000 policy, all of average health, a life insurance company would have to collect approximately $50 a year from each of a large group to cover the relatively few expected claims. (0.35 to 0.66 expected deaths in each year x $100,000 payout per death = $35 per policy). Administrative and sales commissions need to be accounted for in order for this to make business sense. A 10 year policy for a 25 year old non-smoking male person with preferred medical history may get offers as low as $90 per year for a $100,000 policy in the competitive US life insurance market.

The insurance company receives the premiums from the policy owner and invests them to create a pool of money from which it can pay claims and finance the insurance company's operations. Contrary to popular belief, the majority of the money that insurance companies make comes directly from premiums paid, as money gained through investment of premiums can never, in even the most ideal market conditions, vest enough money per year to pay out claims.^{[citation needed]} Rates charged for life insurance increase with the insured's age because, statistically, people are more likely to die as they get older.

Given that adverse selection can have a negative impact on the insurer's financial situation, the insurer investigates each proposed insured individual unless the policy is below a company-established minimum amount, beginning with the application process. Group Insurance policies are an exception.

This investigation and resulting evaluation of the risk is termed underwriting. Health and lifestyle questions are asked. Certain responses or information received may merit further investigation. Life insurance companies in the United States support the Medical Information Bureau (MIB) ^[4], which is a clearinghouse of information on persons who have applied for life insurance with participating companies in the last seven years. As part of the application, the insurer receives permission to obtain information from the proposed insured's physicians.^[5]

Underwriters will determine the purpose of insurance. The most common is to protect the owner's family or financial interests in the event of the insured's demise. Other purposes include estate planning or, in the case of cash-value contracts, investment for retirement planning. Bank loans or buy-sell provisions of business agreements are another acceptable purpose.

Life insurance companies are never required by law to underwrite or to provide coverage to anyone, with the exception of Civil Rights Act compliance requirements. Insurance companies alone determine insurability, and some people, for their own health or lifestyle reasons, are deemed uninsurable. The policy can be declined (turned down) or rated.^{[citation needed]} Rating increases the premiums to provide for additional risks relative to the particular insured.^{[citation needed]}

Many companies use four general health categories for those evaluated for a life insurance policy. These categories are Preferred Best, Preferred, Standard, and Tobacco.^{[citation needed]} Preferred Best is reserved only for the healthiest individuals in the general population. This means, for instance, that the proposed insured has no adverse medical history, is not under medication for any condition, and his family (immediate and extended) have no history of early cancer, diabetes, or other conditions.^{[citation needed]} Preferred means that the proposed insured is currently under medication for a medical condition and has a family history of particular illnesses.^{[citation needed]} Most people are in the Standard category.^{[citation needed]} Profession, travel, and lifestyle factor into whether the proposed insured will be granted a policy, and which category the insured falls. For example, a person who would otherwise be classified as Preferred Best may be denied a policy if he or she travels to a high risk country.^{[citation needed]} Underwriting practices can vary from insurer to insurer which provide for more competitive offers in certain circumstances.

Life insurance contracts are written on the basis of utmost good faith. That is, the proposer and the insurer both accept that the other is acting in good faith. This means that the proposer can assume the contract offers what it represents without having to fine comb the small print and the insurer assumes the proposer is being honest when providing details to underwriter.^{[citation needed]}

Death proceeds

Upon the insured's death, the insurer requires acceptable proof of death before it pays the claim. The normal minimum proof required is a death certificate and the insurer's claim form completed, signed (and typically notarized).^{[citation needed]} If the insured's death is suspicious and the policy amount is large, the insurer may investigate the circumstances surrounding the death before deciding whether it has an obligation to pay the claim.

Proceeds from the policy may be paid as a lump sum or as an annuity, which is paid over time in regular recurring payments for either a specified period or for a beneficiary's lifetime.^{[citation needed]}

Insurance vs. assurance

Outside the United States, the specific uses of the terms "insurance" and "assurance" are sometimes confused. In general, in these jurisdictions "insurance" refers to providing cover for an event that might happen, while "assurance" is the provision of cover for an event that is certain to happen. However, in the United States both forms of coverage are called "insurance".

When a person insures the contents of their home they do so because of events that might happen (fire, theft, flood, etc.) They hope their home will never be burglarized, or burn down, but they want to ensure that they are financially protected if the worst happens. This example of insurance shows how it is a way of spending a little money to protect against the risk of having to spend a lot of money.

When a person insures their life they do so knowing that one day they will die. Therefore a policy that covers death is assured to make a payment. The policy offers assurance on death; even if the policy has a prescribed termination date the policy is still assured to pay on death and therefore is an assurance policy. Examples include Term Assurance and Whole Life Assurance. An accidental death policy is not assured to pay on death as the life insured may not die through an accident, therefore it is an insurance policy.

A policy might also be assured for other reasons. For example an endowment policy is designed to provide a lump sum on maturity. Under certain types of policy the lump sum is guaranteed. Therefore, this may also be called an assurance policy.

The test of whether a policy is assurance or insurance is that with an assurance policy the insured event will definitely occur (at some point) whereas with an insurance policy there is a risk the insured event might occur.

With regard to Whole Life policies, the question is not whether the insured event (in this case death) will occur, but simply when. If the policy has nonforfeiture values (or cash values) then the policy is assured to pay.

During recent years, the distinction between the two terms has become largely blurred. This is principally due to many companies offering both types of policy, and rather than refer to themselves using both insurance and assurance titles, they instead use just one.

Types of life insurance

Life insurance may be divided into two basic classes – temporary and permanent or following subclasses - term, universal, whole life, variable, variable universal and endowment life insurance.

Temporary (Term)

Term life insurance (term assurance in British English) provides for life insurance coverage for a specified term of years for a specified premium. The policy does not accumulate cash value. Term is generally considered "pure" insurance, where the premium buys protection in the event of death and nothing else. (See Theory of Decreasing Responsibility and buy term and invest the difference.) Term insurance premiums are typically low because both the insurer and the policy owner agree that the death of the insured is unlikely during the term of coverage.

The three key factors to be considered in term insurance are: face amount (protection or death benefit), premium to be paid (cost to the insured), and length of coverage (term).

Various (U.S.) insurance companies sell term insurance with many different combinations of these three parameters. The face amount can remain constant or decline. The term can be for one or more years. The premium can remain level or increase. A common type of term is called annual renewable term. It is a one year policy but the insurance company guarantees it will issue a policy of equal or lesser amount without regard to the insurability of the insured and with a premium set for the insured's age at that time. Another common type of term insurance is mortgage insurance, which is usually a level premium, declining face value policy. The face amount is intended to equal the amount of the mortgage on the policy owner’s residence so the mortgage will be paid if the insured dies.

A policy holder insures his life for a specified term. If he dies before that specified term is up, his estate or named beneficiary(ies) receive(s) a payout. If he does not die before the term is up, he receives nothing. In the past these policies would almost always exclude suicide. However, after a number of court judgments against the industry, payouts do occur on death by suicide (presumably except for in the unlikely case that it can be shown that the suicide was just to benefit from the policy). Generally, if an insured person commits suicide within the first two policy years, the insurer will return the premiums paid. However, a death benefit will usually be paid if the suicide occurs after the two year period.

Permanent

Permanent life insurance is life insurance that remains in force (in-line) until the policy matures (pays out), unless the owner fails to pay the premium when due (the policy expires). The policy cannot be canceled by the insurer for any reason except fraud in the application, and that cancellation must occur within a period of time defined by law (usually two years). Permanent insurance builds a cash value that reduces the amount at risk to the insurance company and thus the insurance expense over time. This means that a policy with a million dollars face value can be relatively inexpensive to a 70 year old because the actual amount of insurance purchased is much less than one million dollars. The owner can access the money in the cash value by withdrawing money, borrowing the cash value, or surrendering the policy and receiving the surrender value.

The three basic types of permanent insurance are whole life, universal life, and endowment.

Whole life coverage

Whole life insurance provides for a level premium, and a cash value table included in the policy guaranteed by the company. The primary advantages of whole life are guaranteed death benefits, guaranteed cash values, fixed and known annual premiums, and mortality and expense charges will not reduce the cash value shown in the policy. The primary disadvantages of whole life are premium inflexibility, and the internal rate of return in the policy may not be competitive with other savings alternatives. Riders are available that can allow one to increase the death benefit by paying additional premium. The death benefit can also be increased through the use of policy dividends. Dividends cannot be guaranteed and may be higher or lower than historical rates over time. Premiums are much higher than term insurance in the short-term, but cumulative premiums are roughly equal if policies are kept in force until average life expectancy.

Cash value can be accessed at any time through policy "loans". Since these loans decrease the death benefit if not paid back, payback is optional. Cash values are not paid to the beneficiary upon the death of the insured; the beneficiary receives the death benefit only. If the dividend option: Paid up additions is elected, dividend cash values will purchase additional death benefit which will increase the death benefit of the policy to the named beneficiary.

Universal life coverage

Universal life insurance (UL) is a relatively new insurance product intended to provide permanent insurance coverage with greater flexibility in premium payment and the potential for a higher internal rate of return. A universal life policy includes a cash account. Premiums increase the cash account. Interest is paid within the policy (credited) on the account at a rate specified by the company. This rate has a guaranteed minimum but usually is higher than that minimum. Mortality charges and administrative costs are charged against (reduce) the cash account. The surrender value of the policy is the amount remaining in the cash account less applicable surrender charges, if any.

With all life insurance, there are basically two functions that make it work. There's a mortality function and a cash function. The mortality function would be the classical notion of pooling risk where the premiums paid by everybody else would cover the death benefit for the one or two who will die for a given period of time. The cash function inherent in all life insurance says that if a person is to reach age 95 to 100 (the age varies depending on state and company), then the policy matures and endows the face value of the policy.

Actuarially, it is reasoned that out of a group of 1000 people, if even 10 of them live to age 95, then the mortality function alone will not be able to cover the cash function. So in order to cover the cash function, a minimum rate of investment return on the premiums will be required in the event that a policy matures.

Universal life policies guarantee, to some extent, the death proceeds, but not the cash function - thus the flexible premiums and interest returns. If interest rates are high, then the dividends help reduce premiums. If interest rates are low, then the customer would have to pay additional premiums in order to keep the policy in force. When interest rates are above the minimum required, then the customer has the flexibility to pay less as investment returns cover the remainder to keep the policy in force.

The universal life policy addresses the perceived disadvantages of whole life. Premiums are flexible. The internal rate of return is usually higher because it moves with the financial markets. Mortality costs and administrative charges are known. And cash value may be considered more easily attainable because the owner can discontinue premiums if the cash value allows it. And universal life has a more flexible death benefit because the owner can select one of two death benefit options, Option A and Option B.

Option A pays the face amount at death as it's designed to have the cash value equal the death benefit at age 95. Option B pays the face amount plus the cash value, as it's designed to increase the net death benefit as cash values accumulate. Option B does carry with it a caveat. This caveat is that in order for the policy to keep its tax favored life insurance status, it must stay within a corridor specified by state and federal laws that prevent abuses such as attaching a million dollars in cash value to a two dollar insurance policy. The interesting part about this corridor is that for those people who can make it to age 95-100, this corridor requirement goes away and your cash value can equal exactly the face amount of insurance. If this corridor is ever violated, then the universal life policy will be treated as, and in effect turn into, a Modified Endowment Contract (or more commonly referred to as a MEC).

But universal life has its own disadvantages which stem primarily from this flexibility. The policy lacks the fundamental guarantee that the policy will be in force unless sufficient premiums have been paid and cash values are not guaranteed.

Universal life policies are sometimes erroneously referred to as self-sustaining policies. In the 1980s, when interest rates were high, the cash value accumulated at a more accelerated rate, and universal life coverage was often sold by agents as a policy that could be self-paying. Many policies did sustain themselves for a prolonged period, but the combination of lower interest rates and an increasing cost of insurance as the insured ages meant that for many policies, the cash option was diminished or depleted.

Variable universal life Insurance (VUL) is not the same as universal life, even though they both have cash values attached to them. These differences are in how the cash accounts are managed; thus having a great effect on how they are treated for taxation. The cash account within a VUL is held in the insurer's "separate account" (generally in mutual funds, managed by a fund manager).

Limited-pay

Another type of permanent insurance is Limited-pay life insurance, in which all the premiums are paid over a specified period after which no additional premiums are due to keep the policy in force. Common limited pay periods include 10-year, 20-year, and paid-up at age 65.

Endowments

Main article: Endowment policy

Endowments are policies in which the cash value built up inside the policy, equals the death benefit (face amount) at a certain age. The age this commences is known as the endowment age. Endowments are considerably more expensive (in terms of annual premiums) than either whole life or universal life because the premium paying period is shortened and the endowment date is earlier.

In the United States, the Technical Corrections Act of 1988 tightened the rules on tax shelters (creating modified endowments). These follow tax rules as annuities and IRAs do.

Endowment Insurance is paid out whether the insured lives or dies, after a specific period (e.g. 15 years) or a specific age (e.g. 65).

Accidental death

Accidental death is a limited life insurance that is designed to cover the insured when they pass away due to an accident. Accidents include anything from an injury, but do not typically cover any deaths resulting from health problems or suicide. Because they only cover accidents, these policies are much less expensive than other life insurances.

It is also very commonly offered as "accidental death and dismemberment insurance", also known as an AD&D policy. In an AD&D policy, benefits are available not only for accidental death, but also for loss of limbs or bodily functions such as sight and hearing, etc.

Accidental death and AD&D policies very rarely pay a benefit; either the cause of death is not covered, or the coverage is not maintained after the accident until death occurs. To be aware of what coverage they have, an insured should always review their policy for what it covers and what it excludes. Often, it does not cover an insured who puts themselves at risk in activities such as: parachuting, flying an airplane, professional sports, or involvement in a war (military or not). Also, some insurers will exclude death and injury caused by proximate causes due to (but not limited to) racing on wheels and mountaineering.

Accidental death benefits can also be added to a standard life insurance policy as a rider. If this rider is purchased, the policy will generally pay double the face amount if the insured dies due to an accident. This used to be commonly referred to as a double indemnity coverage. In some cases, some companies may even offer a triple indemnity cover.

Related life insurance products

Riders are modifications to the insurance policy added at the same time the policy is issued. These riders change the basic policy to provide some feature desired by the policy owner. A common rider is accidental death, which used to be commonly referred to as "double indemnity", which pays twice the amount of the policy face value if death results from accidental causes, as if both a full coverage policy and an accidental death policy were in effect on the insured. Another common rider is premium waiver, which waives future premiums if the insured becomes disabled.

Joint life insurance is either a term or permanent policy insuring two or more lives with the proceeds payable on the first death.

Survivorship life or second-to-die life is a whole life policy insuring two lives with the proceeds payable on the second (later) death.

Single premium whole life is a policy with only one premium which is payable at the time the policy is issued.

Modified whole life is a whole life policy that charges smaller premiums for a specified period of time after which the premiums increase for the remainder of the policy.

Group life insurance is term insurance covering a group of people, usually employees of a company or members of a union or association. Individual proof of insurability is not normally a consideration in the underwriting. Rather, the underwriter considers the size and turnover of the group, and the financial strength of the group. Contract provisions will attempt to exclude the possibility of adverse selection. Group life insurance often has a provision that a member exiting the group has the right to buy individual insurance coverage.

Senior and preneed products

Insurance companies have in recent years developed products to offer to niche markets, most notably targeting the senior market to address needs of an aging population. Many companies offer policies tailored to the needs of senior applicants. These are often low to moderate face value whole life insurance policies, to allow a senior citizen purchasing insurance at an older issue age an opportunity to buy affordable insurance. This may also be marketed as final expense insurance, and an agent or company may suggest (but not require) that the policy proceeds could be used for end-of-life expenses.

Preneed (or prepaid) insurance policies are whole life policies that, although available at any age, are usually offered to older applicants as well. This type of insurance is designed specifically to cover funeral expenses when the insured person dies. In many cases, the applicant signs a prefunded funeral arrangement with a funeral home at the time the policy is applied for. The death proceeds are then guaranteed to be directed first to the funeral services provider for payment of services rendered. Most contracts dictate that any excess proceeds will go either to the insured's estate or a designated beneficiary.

These products are sometimes assigned into a trust at the time of issue, or shortly after issue. The policies are irrevocably assigned to the trust, and the trust becomes the owner. Since a whole life policy has a cash value component, and a loan provision, it may be considered an asset; assigning the policy to a trust means that it can no longer be considered an asset for that individual. This can impact an individual's ability to qualify for Medicare or Medicaid.

Investment policies

With-profits policies

Main article: With-profits policy

Some policies allow the policyholder to participate in the profits of the insurance company these are with-profits policies. Other policies have no rights to participate in the profits of the company, these are non-profit policies.

With-profits policies are used as a form of collective investment to achieve capital growth. Other policies offer a guaranteed return not dependent on the company's underlying investment performance; these are often referred to as without-profit policies which may be construed as a misnomer.

Insurance/Investment Bonds

Main article: Insurance bond

Pensions

Pensions are a form of life assurance. However, whilst basic life assurance, permanent health insurance and non-pensions annuity business includes an amount of mortality or morbidity risk for the insurer, for pensions there is a longevity risk.

A pension fund will be built up throughout a person's working life. When the person retires, the pension will become in payment, and at some stage the pensioner will buy an annuity contract, which will guarantee a certain pay-out each month until death.

Annuities

An annuity is a contract with an insurance company whereby the purchaser pays an initial premium or premiums into a tax-deferred account, which pays out a sum at pre-determined intervals. There are two periods: the accumulation (when payments are paid into the account) and the annuitization (when the insurance company pays out). For example, a policy holder may pay £10,000, and in return receive £150 each month until he dies; or £1,000 for each of 14 years or death benefits if he dies before the full term of the annuity has elapsed. Tax penalties and insurance company surrender charges may apply to premature withdrawals (if indeed these are allowed; in most markets outside the U.S. the policy owner has no right to end the contract prematurely).

Tax and life insurance

Taxation of life insurance in the United States

Premiums paid by the policy owner are normally not deductible for federal and state income tax purposes.

Proceeds paid by the insurer upon death of the insured are not includible in taxable income for federal and state income tax purposes; however, if the proceeds are included in the "estate" of the deceased, it is likely they will be subject to federal and state estate and inheritance tax.

Cash value increases within the policy are not subject to income taxes unless certain events occur. For this reason, insurance policies can be a legal and legitimate tax shelter wherein savings can increase without taxation until the owner withdraws the money from the policy. On flexible-premium policies, large deposits of premium could cause the contract to be considered a "Modified Endowment Contract" by the IRS, which negates many of the tax advantages associated with life insurance. The insurance company, in most cases, will inform the policy owner of this danger before applying their premium.

Tax deferred benefit from a life insurance policy may be offset by its low return or high cost in some cases. This depends upon the insuring company, type of policy and other variables (mortality, market return, etc.). Also, other income tax saving vehicles (i.e. IRA, 401K or Roth IRA) appear to be better alternatives for value accumulation, at least for more sophisticated investors who can keep track of multiple financial vehicles. The combination of low-cost term life insurance and higher return tax-efficient retirement accounts can achieve better performance, assuming that the insurance itself is only needed for a limited amount of time.

The tax ramifications of life insurance are complex. The policy owner would be well advised to carefully consider them. As always, Congress or the state legislatures can change the tax laws at any time.

Taxation of life assurance in the United Kingdom

Premiums are not usually allowable against income tax or corporation tax, however qualifying policies issued prior to 14 March 1984 do still attract LAPR (Life Assurance Premium Relief) at 15% (with the net premium being collected from the policyholder).

Non-investment life policies do not normally attract either income tax or capital gains tax on claim. If the policy has as investment element such as an endowment policy, whole of life policy or an investment bond then the tax treatment is determined by the qualifying status of the policy.

Qualifying status is determined at the outset of the policy if the contract meets certain criteria. Essentially, long term contracts (10 years plus) tend to be qualifying policies and the proceeds are free from income tax and capital gains tax. Single premium contracts and those run for a short term are subject to income tax depending upon your marginal rate in the year you make a gain. All (UK) insurers pay a special rate of corporation tax on the profits from their life book; this is deemed as meeting the lower rate (20% in 2005-06) liability for policyholders. Therefore if you are a higher rate taxpayer (40% in 2005-06), or become one through the transaction, you must pay tax on the gain at the difference between the higher and the lower rate. This gain may be reduced by applying a complicated calculation called top-slicing based on the number of years you have held the policy.

Although this is complicated, the taxation of life assurance based investment contracts may be beneficial compared to alternative equity based collective investment schemes (unit trusts, investment trusts and OEICs). One feature which especially favors investment bonds is the ability to draw 5% of the original investment amount each policy year without being subject to any taxation on the amount withdrawn. The withdrawal is deemed by HMRC (Her Majesty's Revenue and Customs) to be a payment of capital and therefore the tax calculation is deferred until further encashment above the 5% limit. This is an especially useful tax planning tool for higher rate taxpayers who expect to become basic rate taxpayers at some predictable point in the future (e.g. retirement).

The proceeds of a life policy will be included in the estate for inheritance tax (IHT) purposes. Policies written in trust may fall outside the estate for IHT purposes but it's not always that simple. If in doubt you should seek profession advice from an IFA (Independent Financial Adviser) who is registered with the government regulator: the Financial Services Authority.

Pension Term Assurance

Although available before April 2006, from this date pension term assurance became widely available in the UK. Most UK product providers adopted the name "life insurance with tax relief" for the product. Pension term assurance is effectively normal term life assurance with tax relief on the premiums. All premiums are paid net of basic rate tax at 22%, and higher rate tax payers can gain an extra 18% tax relief via their tax return. Although not suitable for all, PTA briefly became one of the most common forms of life assurance sold in the UK until the Chancellor, Gordon Brown, announced the withdrawal of the scheme in his pre-budget announcement on 6 December 2006. The tax relief ceased to be available to new policies transacted after 6 December 2006, however, existing policies have been allowed to continue to enjoy tax relief so far.

History

Insurance began as a way of reducing the risk of traders, as early as 5000 BC in China and 4500 BC in Babylon. Life insurance dates only to ancient Rome; "burial clubs" covered the cost of members' funeral expenses and helped survivors monetarily. Modern life insurance started in late 17th century England, originally as insurance for traders: merchants, ship owners and underwriters met to discuss deals at Lloyd's Coffee House, predecessor to the famous Lloyd's of London.

The first insurance company in the United States was formed in Charleston, South Carolina in 1732, but it provided only fire insurance. The sale of life insurance in the U.S. began in the late 1760s. The Presbyterian Synods in Philadelphia and New York created the Corporation for Relief of Poor and Distressed Widows and Children of Presbyterian Ministers in 1759; Episcopalian priests organized a similar fund in 1769. Between 1787 and 1837 more than two dozen life insurance companies were started, but fewer than half a dozen survived.

Prior to the American Civil War, many insurance companies in the United States insured the lives of slaves for their owners. In response to bills passed in California in 2001 and in Illinois in 2003, the companies have been required to search their records for such policies. New York Life for example reported that Nautilus sold 485 slaveholder life insurance policies during a two-year period in the 1840s; they added that their trustees voted to end the sale of such policies 15 years before the Emancipation Proclamation.

Market trends

Life insurance premiums written in 2005

According to a study by Swiss Re, EU was the largest market for life insurance premiums written in 2005 followed by the USA and Japan.

Criticism

Although some aspects of the application process (such as underwriting and insurable interest provisions) make it difficult, life insurance policies have been used in cases of exploitation and fraud. In the case of life insurance, there is a motivation to purchase a life insurance policy, particularly if the face value is substantial, and then kill the insured.

The television series Forensic Files has included episodes that feature this scenario. There was also a documented case in 2006, where two elderly women are accused of taking in homeless men and assisting them. As part of their assistance, they took out life insurance on the men. After the contestability period ended on the policies (most life contracts have a standard contestability period of two years), the women are alleged to have had the men killed via hit-and-run car crashes.^[6]

Recently, viatical settlements have thrown the life insurance industry into turmoil. A viatical settlement involves the purchase of a life insurance policy from an elderly or terminally ill policy holder. The policy holder sells the policy (including the right to name the beneficiary) to a purchaser for a price discounted from the policy value. The seller has cash in hand, and the purchaser will realize a profit when the seller dies and the proceeds are delivered to the purchaser. In the meantime, the purchaser continues to pay the premiums. Although both parties have reached an agreeable settlement, insurers are troubled by this trend. Insurers calculate their rates with the assumption that a certain portion of policy holders will seek to redeem the cash value of their insurance policies before death. They also expect that a certain portion will stop paying premiums and forfeit their policies. However, viatical settlements ensure that such policies will with absolute certainty be paid out. Some purchasers, in order to take advantage of the potentially large profits, have even actively sought to collude with uninsured elderly and terminally ill patients, and created policies that would have not otherwise been purchased. Likewise, these policies are guaranteed losses from the insurers' perspective.

Understanding and Controlling Your Finances:Life Insurance

2008-03-21T14:18:00.000-07:00

Life insurance is a form of insurance that pays out when someone dies. Life insurance is a funny thing for three reasons:

You are never going to use a life insurance policy that you buy on your own life. After all, you will be dead when the policy pays out. Life insurance is therefore a gift that you give to someone else.
The chances of you dying "before your time" (say, before age 70) are pretty slim in this day and age. Therefore, the chances of a life insurance policy ever paying out at a time when it is really needed (for example, at age forty when you have a spouse and two teenage daughters depending on your income) are slim as well.
However, it is guaranteed that you will die at some point, and there is a fair amount of emotion around this particular fact of life.

These three facts make life insurance work like no other insurance policy ever will. The emotional component attached to death is, in and of itself, enough the alter the entire sales process and the types of conversation that happen during the sale.

Compare life insurance to an automobile insurance policy, for example. If you wreck your car the insurance policy pays you a check, so you get a direct benefit from the policy. The chances of you being in a wreck are pretty good - you see wrecks every day. Finally, if you wreck your car it is not the end of the world. You will simply go buy another one. Automobile insurance is therefore a commodity item that you purchase without emotion - you have to have it, so you buy it at the cheapest price you can find.

Not so with life insurance. If you do not know what life insurance is and why you do or do not need it, there are two things that can happen should a life insurance salesman happen to call:

You can be "guilted" in to purchasing insurance that you do not need.
You can be sold other components that are ancillary to life insurance at inflated prices.

The following sections therefore give you a brief introduction to life insurance and how to purchase it rationally.

What is Life Insurance?

As mentioned at the beginning of the article, life insurance is a form of insurance that pays a beneficiary in the event of someone's demise. You purchase a specific death benefit when you purchase the policy. You might buy a $100,000 life insurance policy, for example. You then assign that $100,000 benefit to a specific beneficiary, like your spouse. Should you die during the term of the insurance, then your spouse will receive $100,000. It is as simple as that.

Types of Life Insurance

There are two types of life insurance: 1) Term life insurance, and 2) everything else. Term life insurance is pure, unadulterated life insurance. "Everything else" is term life insurance bonded to some sort of savings component. It is called various things by various companies: "whole life", "universal life", and so on. Click here if you are interested in more specific descriptions of the different types of life insurance.

Let's say that you would like to buy $100,000 worth of life insurance. If you bought that as a term policy you might pay $15 per month. If you bought it as whole life, you might pay $100 per month. Depending on the company selling the policy, you will then be assured that the difference ($85 per month) will act as an investment that will "pay off the life insurance" and/or pay you a cash value at age 65.

The problem with everything besides term insurance is that the savings part is inefficient. Also, it is only as secure as the company issuing the policy. You would be much better off simply depositing the $85 in a stock mutual fund each month (as described in the article entitled "Investment Options"). You would, over time, make much more money that way.

There is now also a growing "mini-life" industry. This industry tries to attach special purpose life insurance policies to car loans, mortgages, etc. These too are totally inefficient. If you feel that insurance to cover your mortgage is important then comparison shop a normal term policy of the same value against the policy being offered by the mortgage company. You will be amazed at the price difference. Never buy mini-life policies until you comparison shop.

Who Needs Life Insurance?

Some people truly need life insurance. For others it is a waste of money. Let's look at some scenarios to see who does and does not need a policy.

Let's say that you are a single man or woman living alone in an apartment. Do you need life insurance? No. Who, exactly, would be the beneficiary? There is no one in your life who is dependent on your income. The only reason you might buy life insurance is the same reason you would buy a lottery ticket - you might win. You might, after all, die young. And if you had a life insurance policy and you did die young you could make someone very happy. Or you might buy a small policy to pay your funeral expenses at death. In that case $10,000 is all that you would need, and that would be one nice funeral. There are probably better things to do with your money while you are alive.

Let's say that you are a single man or woman living alone in a house with a $100,000 mortgage. Do you need life insurance? Maybe. The reason you might buy life insurance is to save your parents (or whomever else you have willed the house to) the problem of disposing of your estate. For example, imagine that you die. Your parents (or whomever) inherits the house. Now they want to dispose of the house, but it sits on the market for two years before selling. During that time they are having to pay the mortgage payments, and that might be a hardship. Therefore you might buy a policy to cover the expected payments over (for example) two years, or the entire mortgage.

Let's say that you are a married man or woman living alone in an apartment or a house. Do you need life insurance? If your spouse does not work and you want to provide for your spouse should you die, then yes. If your spouse does work but could not possibly support his or her current lifestyle should you die (for example, could not possibly pay the house payments), then yes. Otherwise, probably not. Having life insurance would be a nice remembrance if you were to die, but it is not essential.

What if you have kids and you provide income that they depend on? Then almost certainly, unless you are rich enough to be "self insured", you need life insurance. Yes yes yes. You need enough coverage to allow your spouse and children to live a comfortable life in the absence of your income.

PROS AND CONS OF WHOLE LIFE INSURANCE

2008-03-21T14:03:00.000-07:00

The main advantage of whole life insurance is the ability to accumulate a cash value on a tax-deferred basis. This cash value also contributes to the total value of an estate when the policy is owned by the insured. You can borrow against this cash value, if needed; plus, if you no longer need any type of insurance protection, you can cancel your policy and the cash value will be returned to you.

Another advantage is that the coverage is for the insured’s entire life, unless the policy is canceled. As compared with term, the coverage from a whole life policy is designed to last for as long as the insured is either alive, or wants it. Term policies expire after a specific amount of time. Of course, term policies can be renewed, but the cost of the premium will increase. Conversely, the premiums of a whole life policy remain level as long as the policy is in force.

Because of the savings feature, many people have said that they are forced to save because of the premium payments. Additionally, policyholders can budget their premiums over a longer period of time (with the exception of single-payment policies), thus eliminating the potential risks of coverage not being affordable. This also reduces the chance that people who need coverage will be without it.

However, whole life policies aren’t without their drawbacks, too. Although term policies need to be renewed, and there is an added cost at every renewal as compared with whole life policies, term policies purchase more coverage for the amount of premium paid. This is because of the very nature of term insurance, but could be a contributing factor to the fact that term policies are popular.

Interestingly, the cash value also poses a disadvantage to the policies. But that is more due to the misuse of the policy than for any other reason. Whole life insurance policies shouldn’t be used in place of other investments, especially when the other investments can earn the investor a potentially larger return. As a general rule, the interest rate for the cash values of whole life policies is rather small and not competitive with other types of interest rates. Although it’s guaranteed, investing your money in the stock market may mean a great deal when it comes to overall return. Assuming no need for insurance, how would you feel if you made a 6 percent return on your money in a policy’s cash value, instead of a 11-percent return in the stock market? Would you be happy? I certainly wouldn’t be. This isn’t to say that you should invest your money in the stock market instead of purchasing an insurance policy. What I am saying is that if you don’t need the insurance, don’t buy it. The accumulation of the cash value won’t be significant, and you’ll be paying for insurance you don’t need.

http://e-articles.info/e/a/title/PROS-AND-CONS-OF-WHOLE-LIFE-INSURANCE/

Pros and cons of Variable Life Insurance

2008-03-21T13:59:00.000-07:00

The types of subaccounts vary with the company that is offering the policy, however; you can generally choose from a wide range of asset classes. In fact, the subaccounts are set up like mutual funds. You could choose to have a portion of your premium invested in a junk bond fund, or perhaps a high-growth fund. The possibilities are only limited by the insurance company. You will also be able to switch between funds at no cost, just as you would be able to with an annuity. Plus, since the investment account grows on a tax-deferred basis, you won’t be generating any capital gains tax when moving your money between accounts.

With variable policies, the emphasis is more on the separate accounts and the investment aspect of the policy than it is with any other type of policy. Because of that, variable policies have increased expenses that you wouldn’t necessarily see with universal or whole life policies. In addition to commissions for the insurance agent that sells you the policy, there are annual fees for servicing the insurance and managing the portfolio. These all help lower your overall return. As with universal life, variable life policies have been misused. It’s very important that you make an informed decision when purchasing this kind of policy. Because the cash value goes up and down with the market, the potential to lose money is great. Of course, there is also a great possibility that you will gain quite a bit, or just break even. Although this is an insurance product, you should enter into a purchase as if you were about to buy a mutual fund. Make sure you do your research before committing to any type of policy.

http://e-articles.info/e/a/title/Pros-and-cons-of-Variable-Life-Insurance/

Tutorial Group's CFP Exam Review:Insurance Planning

2008-03-21T13:55:00.000-07:00

A. Life Insurance Planning – policy owner rights, primary vs. contingent beneficiary, revocable vs. irrevocable beneficiary, entire contract clause, incontestable clause, misstatement of age clause, grace periods, reinstatement clause, suicide clause, settlement options, life income settlement options, loan provisions, life insurance dividends, dividend options, nonforfeiture provisions, disability waiver of premium, accidental death benefit, guaranteed insurability, common disaster clause, spendthrift clause, premium calculations, insurance reserve, participating vs. nonparticipating, term insurance, renewable vs. convertible term, pure vs. modified endowment, whole life, variable life, universal life, first-to-die, second-to-die, split dollar and policy ownership methods, buy-sell agreements, cross purchase buy-sell, entity redemptions, human life approach, needs approach, black-out period, annuity premium payments, annuity benefit accumulation, annuity payout types, taxation of proceeds, taxation of fixed annuities, taxation of variable annuities, taxation of adjusted basis, taxation of withdrawals, inclusion of proceeds in gross estate, incidents of ownership, revocable vs. irrevocable life insurance trusts, funded vs. unfunded irrevocable trusts, crummy power, first-to-die vs. second-to-die, insurance rating companies.

B. Health & Social Security – guaranteed renewal provisions, types of health coverage, hospital reimbursement vs. hospital service contract, surgical reimbursement vs. surgical service contract, major medical, stop loss, health maintenance organizations, preferred provider organizations, COBRA, COBRA qualification, medical savings accounts, taxation of contributions to MSAs, currently vs. fully insured for social security, social security coverage, social security old age benefits, social security survivors benefits, social security disability, reduction or loss of benefits, taxation of social security, medicare part A & B, medicare premiums, medicaid, medigap insurance.

C. Disability & Workers Comp – short-term disability, long-term disability, disability criteria, waiting period, probation period, occupational vs. nonoccupational coverage, disability benefit taxation, worker’s compensation principles, worker’s compensation benefit classification, worker’s compensation benefit taxation, unemployment insurance.

D. Homeowners Insurance – types of coverage, types of property eligibility, replacement cost coverage, actual cash value, types of homeowners insurance policies, components of homeowner’s policies, dwelling coverage, loss formula for coinsurance, other structures coverage, personal property coverage, classes of property exclusions, special item limits, loss of use coverage, personal liability coverage, medical payments to others coverage, insured’s responsibilities after loss, settlement options, event exclusions, HO2 vs. HO3 policies, HO6 policy, assignment of ownership, roof damage, title insurance, inland marine forms, boatowner’s policy.

E. Auto & Liability Insurance – comprehensive personal liability policy, professional liability insurance, umbrella policy, auto insurance, personal auto policy, vehicle requirements, liability coverage, split limits, insured persons, insured vehicles, liability exclusions, medical payments coverage, medical payment exclusions, uninsured motorist coverage, uninsured motorist coverage, physical damage coverage, collision coverage, comprehensive coverage.

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http://www.tutorialgroup.com/cfp-exam-review/index-insurance-planning.html

Spouse Life Insurance: Is It Needed?

2008-03-21T13:51:00.000-07:00

If a servicemember dies on active duty, his/her family is very well protected financially. There are significant government survivor benefits available and most servicemembers carry personal life insurance to provide additional protection.

But what about the Military Spouse? In many cases, military spouses have little or no life insurance. Should they? The answer is usually yes.

For young families, there are two primary concerns: child care and income replacement. A child care contingency plan is very important. If a servicemember has young children and loses his/her spouse, how will he/she provide quality child care, especially if faced with military duties and deployments? The quick answer is to rely on parents or siblings to help out. However, this is often not practical. The next quick answer is to leave the service -- usually a bad decision. High quality care such as a full-time nanny is a good plan, but expensive. Having sufficient life insurance coverage for the spouse can provide an excellent source of funds for quality child care.

The second issue is income replacement. With or without children, many military spouses work today, and the family relies on both incomes to support the family lifestyle. Funds for mortgages, private school tuition, automobiles, etc. are often provided based on both incomes. What if the spouse income were lost? Could the servicemember continue to afford the lifestyle that the family has grown accustomed to? Here again, spouse life insurance coverage could provide the funds necessary to replace the lost income.

How much coverage is needed? The military spouse will often need more life insurance coverage than the servicemember. This is because extensive survivor benefits are in place when the servicemember dies. These benefits come directly from the government and not from individual life insurance; no such benefits are in place if the servicemember's spouse dies. To help you estimate your coverage needs, there is a Life insurance Needs Analysis Calculator available at the Navy Mutual Aid Association Website: click on "Tools."

What type of insurance should be considered? Child care protection is a temporary need. The need will end when the children are old enough to care for themselves. So this is the ideal situation for term life insurance, which for a young spouse can be very inexpensive. Note that Servicemembers Group Life Insurance (SGLI) now provides up to $100,000 of coverage for the servicemember's spouse. However, that amount is inadequate in most circumstances, and an individual policy to replace or supplement the SGLI coverage is usually necessary. Income replacement protection may or may not be temporary depending on the family's overall financial plan. In this case, term insurance or permanent insurance (whole life), or a combination of both may be desired.

As stated before, term insurance provides excellent coverage for temporary needs. Whole life insurance with its tax-deferred cash value growth can be an important part of your overall financial strategy. Some whole life plans have Long Term Care Options which can be very valuable especially for female spouses whose need for long term care protection is usually greatest. You may want to consult a life insurance professional to discuss what is best for your family. To learn more about life insurance, there is a Life Insurance Tutorial available the Navy Mutual Aid Association Website: click on "Library" in "Member Resources."

In many cases, a family can be more devastated financially by the death of the spouse than by the death of the servicemember. However, most military families fail to adequately insure the military spouse. The Navy Mutual Aid Association (serving the Sea Services, Navy, Marine Corps, Coast Guard), at 1-800-628-6011, and the Army-Air Force Mutual Aid Association (Serving the Army, Air Force and National Guard), at 1-800- 522-5221, have been insuring the family protection needs of military families for over 125 years. Both of these non-profit organizations have counselors available that can discuss life insurance options for your family.

http://www.military.com/NewContent/0,13190,072204_Spouse,00.html?ESRC=family.nl

5 pointers for buying life insurance

2008-03-21T13:48:00.000-07:00

By Personalfn.com

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Life insurance plays an important role in any individual's financial planning process. For it is life insurance that helps secure the financial future of the nominees. However, many individuals do not know how to go about while considering life insurance products. We have identified five points to remember before zeroing in on a life insurance product.

1. Identify your needs
Before considering life insurance, it becomes imperative that individuals first identify their needs. An individual should understand whether buying life insurance is necessary to begin with. For example, if an individual is single and earning but has no financial dependants, then he may not really need life insurance. This stems from the fact that nobody is going to be 'financially hurt' in the absence of the insured (i.e. the individual in question).

On the other hand, we can consider a married individual who has family members dependent on him. He also happens to be the sole earning member in the family. Such an individual obviously needs life insurance. This stems from the fact that his entire family is dependant on him for financial support and in his absence, their lifestyle would be severely impaired. Such individuals should have adequate life cover as early as possible.

2. How much insurance do you need?
After having identified the need to buy insurance, the next step is to ascertain the amount of cover needed. The concept of human life value (HLV) can help in deciding how much life cover an individual should opt for. The HLV takes factors like the individual's annual income and expenses along with the inflation rate into consideration while calculating the value.

3. Which product should you consider?
After having quantified the need for insurance, the next step is to finalise a plan that will fulfil the individual's need. There are two kinds of insurance plans - term plans and savings-based plans. A term plan insures the individual for a high sum at a low cost. A term plan makes for a good fit in all individuals' portfolios, irrespective of their profile.

Many individuals also look at life insurance as a savings instrument. Here, apart from insuring the individual's life for a certain amount (i.e. the 'sum assured' in insurance parlance) savings-based life insurance plans also give returns on maturity. This is unlike term plans, which act as a pure risk cover and do not give any returns on maturity.

Term plan: A feasible alternative?

	Age (Yrs)	Sum Assured (Rs)	Tenure (Yrs)	Premium (Rs)
Term Plan	30	2,000,000	30	7,000
Savings-based plan	30	2,000,000	30	51,500

As can be seen from the table, it could become expensive for an individual to adequately cover himself for the necessary amount with a savings-based plan due to the higher premiums. Instead, individuals can look at covering themselves with a term plan for the necessary amount and invest their savings in various instruments at their disposal like the national savings certificate (NSC), public provident fund (PPF), bank deposits and mutual funds.

4. Select an insurance agent
Having understood how much insurance is needed, an individual then needs to approach a life insurance agent. Individuals wanting to buy insurance should preferably opt for full-time life insurance agents. The agent should have a good track record to show for in terms of offering objective advice in the client's favour and not his own. This will stand the individual in good stead over the long run since life insurance needs call for evaluation every few years and the insurance agent will help the individual with the same over a period of time.

5. Compare policies across companies
Before zeroing in on an insurance plan from any company, individuals should compare policies across insurance companies. This will help them in evaluating which insurance plan is best suited to their needs. One way of doing this is by contacting the insurance agent and asking him for a comparative analysis of insurance plans. Another way is by visiting the websites of different companies and scouting for relevant information.

For example, an ideal term plan for a 25 year old can be the one that offers him the necessary cover at the cheapest cost. For a unit linked insurance plan however, different criteria like expenses, fund management and flexibility offered will come into the picture. The comparison will differ across various parameters depending on individual needs as well as the type of plan chosen.

http://in.insurance.yahoo.com/070411/93/6eepo.html

THE PURPOSE OF INSURANCE

2008-03-21T09:33:00.000-07:00

We live in a world full of risk. Risk is the possibility of loss. Sometimes the loss is trivial, while other times it causes major personal and financial hardship. There is no way to completely eliminate all risk, but there are ways to avoid, minimize, or protect oneself from risk. When risk is low, or the cost is not too high, one can assume risk. When it is too costly to assume risk, we need other ways to manage it.

Insurance was invented to help merchants minimize financial losses from shipwrecks when moving goods across the ocean in sailing ships. It works on a mathematical principle based on "the law of large numbers," similar to the way odds are calculated in sporting events (statistics).

Shippers noticed that while some merchandise was lost due to shipwrecks, not all ships were lost. If all shippers anted money into a pool to cover the losses of the shippers whose merchandise was lost, then they all had a fair chance of not being wiped out, if disaster befell them. Odds-makers were able to compute the probability of losses to determine how much each shipper needed to pay in order to cover the probable losses, based on the cost of each shipment. Of course, the odds-makers and investors would receive compensation for their services, and they factored that into the premiums, too.

Modern insurance works in the same way. Regardless of the risk, one can determine the mathematical probability of it occurring and the financial risk at stake. Anyone who owns an automobile knows that he or she is required to have automobile insurance to cover the risk of damage to someone else's property. With many years of statistics on automobile damage costs, insurers are able to determine the amount of premium necessary to provide benefits to insure automobile owners. Using the same principles, one can buy insurance to minimize financial loss due to accident, natural disaster, legal liability, illness, disability, and even death.

Over many centuries, the purpose of insurance remains the same: to provide financial relief due to catastrophic losses. Money from many people is pooled to pay for losses incurred by a few.

Insurance is not the only means of managing risk. One way is to avoid risk. Risk avoidance can lower the financial cost of risk. That is why insurance premiums are lower for persons and businesses that take measures to lower risk. For example, automobile insurance premiums are lower for drivers with good driving records (no accidents and no cited violations of driving laws), and non-smokers pay lower medical insurance and life insurance premiums than do smokers. But it is not always possible to avoid risk, and sometimes, insurance premiums may be too costly.

Another way to manage risk is to share it with others. Some insurance policies allow you to share the risk in order to get a lower premium. If you can assume a certain amount of financial risk, then the insurance premium on the balance of the risk will be lower. For example, some automobile policies have lower premiums if you take responsibility for the first $500 of liability--known as a deductible. Medical insurance premiums can be lowered if you have higher co-payments.

Finally, for those who cannot tolerate any financial risk, risk can be transferred to someone else, usually the insurance company, who assumes full responsibility for financial risk. Of course, this method of risk management has the highest premium cost.

Now let's look at some of the different kinds of insurance used in personal financial planning.

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Life Insurance Tutorial

2008-03-21T09:24:00.000-07:00

Why is life insurance so important?

Life insurance ensures that, when you die, your beneficiaries will have the financial resources in place to protect their future income and pay for immediate and future financial obligations. Life insurance proceeds are paid quickly to the beneficiary(ies) without the delay of probate and are income tax-free. Without life insurance, your surviving family members could become financially burdened or even devastated at the time of your death. Survivors could possibly lose the house, children may not be able to attend college, a family business could be lost, monthly family bills could go unpaid, the family could be forced to increase their debt burden to pay for things like last illness expenses and burial costs, or any number of other possible issues.

Do you need life insurance?

If your financial obligations at death exceed the assets which will be in place to meet those financial obligations, you need life insurance. With life insurance in place, the family’s standard of living is protected and gives them critical support during a very trying time.

How much life insurance do you need?

Various methods can be used to calculate an individual’s need for life insurance. These methods include: Rules of Thumb (e.g., 10 times your annual salary); The Human Life Value (i.e., present value of the family’s share of the wage earner’s future income); Capital Retention (i.e., preserve assets and have the beneficiary’s income needs supported by income from assets); and The Needs Approach (i.e., considers assets and income at death to pay the for the remaining financial obligations). The needs approach is the most comprehensive in calculating the amount of life insurance needed. It subtracts the total assets from the total financial obligations to determine the amount of life insurance required. A “Life Insurance Needs Analysis” calculator is available to help you assess your needs. Below is a list of some of the financial obligations and assets that should be considered in your insurance needs calculation:

Financial Obligations

Future income for beneficiary(ies)	Child(ren)’s educational expenses
Outstanding debts (e.g., credit cards)	Funeral and Burial expenses
Estate taxes and administrative expenses	Mortgage payment
Business expenses	Last illness expenses

Assets

Investments (stocks, bonds, etc.)	Bank accounts (savings, CD’s)
Current life insurance plans	Annuities with survivor rights
Retirement Funds (IRA, 401(k), Pension, etc.)	Real Estate
Employer’s Survivor Benefit Plan	Social Security

Financial Obligations - Assets = Needed Insurance

What types of life insurance are available for members of the Sea Services (Navy, Marines, Coast Guard, PHS and NOAA)?

There are two basic classifications of life insurance, Term and Permanent.

Term insurance - Provides death benefit coverage for a specified period of time with a premium that is initially low relative to permanent insurance premiums. Premiums are initially low because most contracts do not cover individuals through old age, when death is most likely to occur. The premium is based on the type of term plan you elect, the amount of coverage, risk status (smokers and people in poor health or with dangerous lifestyles pay higher premiums), your current age and the age to which coverage is desired. Term insurance policies which provide a death benefit at older ages will have substantially higher premiums. The death benefit can be level or decreasing. Term insurance does not have cash value. If you terminate a term life insurance policy, none of the money paid in premiums is recoverable, with few exceptions. (More information about Term insurance options )

Permanent insurance - Provides insurance for the insured’s entire life, not just for a limited period, while also providing a savings element known as the plan’s cash value. The cash value is available to the policy owner by taking a loan against the cash value, making a partial withdrawal, or terminating the policy. Premiums for permanent coverage will be higher than term insurance because there is not just a chance that the death benefit will be paid out, but it is sure to be paid out.

The premium is based on the type of permanent plan you elect, the amount of coverage, your current age, risk status (smokers and people in poor health or with dangerous lifestyles pay higher premiums) and the number of years that you wish to take to pay off the plan. You may elect to pay up the plan with a single payment, or over a period of time such as seven or ten or twenty years, or you may elect to make payments for life. Permanent plans can have either level or increasing death benefits. (More information about permanent insurance policies)

A brief explanation of a few types of term and permanent insurance plans are provided along with a graphic illustration of each.

Term Insurance Types

Decreasing Term - Provides a death benefit which systematically decreases after a period of time (e.g., 1, 5, 10 yrs) until either the plan is terminated as a result of completing the term or the coverage becomes level at a very low value for the remainder of the insured’s life. Premiums for this policy are generally low and will remain level as the death benefit decreases. (More about Decreasing Term Insurance Policies)
Level Term - The death benefit and the premium will both remain level until the end of a specified term at which point the policy will be terminated. The premiums for these policies are generally more expensive than decreasing term due to the level death benefit. (More about Level Term Insurance Policies)
Renewable Term - This death benefit will remain level while the premium systematically increases after a period of time (1, 5, 10 yrs). In the later years of the policy, the premiums continue to increase and can become cost prohibitive. Renewing your coverage after each term period is guaranteed and does not require additional evidence of medical insurability.

Permanent Life Insurance Types

Whole Life (or Ordinary Life) - Whole Life is the traditional form of permanent life insurance which provides a guaranteed level death benefit for a fixed premium paid throughout the insured’s life (defined as either age 95 or age 100). This plan will have a guaranteed schedule of future cash values and allowable loan amounts.
Interest Sensitive Whole Life - Interest Sensitive Whole Life provides a guaranteed death benefit for a fixed premium which is calculated based on the number of years that you wish to take to pay off the plan (e.g., 7 years, 20 years, etc.). The growth of the plan’s cash value is determined by the company’s crediting rate (interest rate) and cost of insurance charges. As the plan’s cash value grows in the future, the death benefit may also begin to increase. (More about interest-sensitive Whole Life policies)
Universal Life (or Flexible Premium Life) -Universal Life insurance, also known as Flexible Life, has an adjustable death benefit and flexible premiums. The owner can choose between a level death benefit (option A) or an increasing death benefit (option B). Recommended premiums at the inception of the policy are calculated using anticipated investment performance and expenses. If the plan performs as favorably as or more favorably than anticipated, the premium payments will be sufficient to keep the policy in force. However, if performance is less than anticipated, additional premium payments may be required. A policy may make additional premium payments, within guidelines, to increase the savings portion of the policy, or skip a premium at any time. If the premium paid is not large enough, or too many are skipped, the policy could lapse and coverage would end. The amount of insurance can be decreased at any time, and in some cases increased (with evidence of insurability) without having to purchase an additional policy.
Variable Life - Variable Life provides no guarantees of either interest rate or minimum cash value. The death benefit and cash surrender value will vary depending on the investment performance of the plan. A unique feature of this plan is that the owner has the ability to choose among several investments from which to invest the premiums. The investments to choose from will range from high risk to low risk. The important thing to know is that the owner assumes all the investment risk and consequently can benefit directly from favorable results or bear the loss of unfavorable investment performance. Theoretically, if poor investment performance and/or high cost of insurance charges lower the cash value to $0, your policy will be terminated. To inform you of the nature of your prospective investment, a prospectus will be offered for each investment that you may be considering.

What type of life insurance is right for you?

Determining the appropriate type of insurance involves several factors including: the type of need you are protecting, the amount of time you will need the coverage, the amount of money you can afford for premiums, etc.. Conventional wisdom indicates that there are two times when term insurance coverage is appropriate: people with a temporary insurance need for a specific period of time or people who need permanent protection, but who temporarily cannot afford the premiums for permanent insurance.

In the latter case, the insured would maintain a term plan until such a time that his/her financial cash flow would permit a permanent insurance plan to be purchased. With that in mind there are two important features of term insurance that need to be understood and looked for when buying term insurance: Renewability and Convertibility. A renewable policy can be renewed (extended) without proof of insurability. The renewable premium will be higher and based on the renewal age. This is important if the period for your temporary need gets extended.

A convertible policy can be converted to permanent insurance without proof of insurability. This is important for those people who want permanent insurance, but temporarily cannot afford it. There may be an extra premium charged for these two features. Permanent plans are used to cover those expenses that will remain throughout the insured’s lifetime or for an indefinite duration, while providing a saving account that can be used for emergency cash or to supply future income.

Below is a graphic illustration showing some of the needs for insurance and their possible durations (indicated by the length of the line). Various needs for coverage will arise during a person’s lifetime and will range from long term to a comparatively short term. Based on the duration of the need for coverage we have assigned an insurance type that may be most appropriate to meet the obligation.

As illustrated above, you will have different coverage needs which may require different insurance types. It is important to understand that if you have multiple liabilities, which you will most likely have, then it may be best to have a combination of insurance plans rather than just one.

After arriving at the general type of the life insurance, you will want to break it down even further to determine the exact type of insurance coverage that would be most appropriate for covering the specific liability. To determine the specific type, you need to be aware of how the liability will perform in the future. In other words, will it decrease (mortgage), increase (income needs) or remain level? After assessing the type of liability, you can then choose from the various types of insurance, illustrated above under “Term Insurance Types” and “Permanent Insurance Types”, that will meet your needs and fit into your budget.

To help you further understand the differences between term life insurance & permanent life insurance, the table below has been developed to help you. Because there are different types of term & permanent insurance we have subdivided the categories to help you understand. A summary of the basic features for each category of insurance has been provided earlier in this tutorial. Please be aware that this is only intended to be a general summary of the various types of plans and may not be directly applicable to the plan you are looking at if the plan has been modified from the traditional type of plan.

	Term Life Insurance		Permanent Life Insurance
	Decreasing	Level	Whole Life	Universal Life	Variable Life
Are the premiums guaranteed to remain level until your plan terminates?	Maybe. Depends on the company and the specific product you purchase.	Maybe. Depends on the company and the specific product you purchase.	Yes	No. If interest rates and/or plan expenses have been unfavorable over time, the planned premiums may need to be changed.	Maybe. Depends on the specific product you purchase.
Can I pay a higher or lower premium whenever I want?	No	No	No	Yes. Generally after the first policy year.	Maybe. Depends on the specific product you purchase.
Can the premiums be paid over a limited period of time?	No	Maybe. Depends on the specific plan you purchase.	No	Maybe. Premiums can be paid over a wide range of payment years.	Maybe. If the company offers a limited pay plan.
Does the policy accumulate cash value?	No	No	Yes. The cash value is determined by a preset schedule.	Yes. The cash value will be determined by the crediting rate and policy expenses.	Yes. The cash value amount will be determined by the performance of the chosen investments and policy expenses.
Can I take policy loans?	No	No	Yes	Yes	Yes
Do I choose where the premiums are invested?	No	No	No	No	Yes. You many chose from a variety of investment vehicles which will range from high to low risk.
Will the death benefit remain level?	No. The death benefit will decrease based on a set schedule.	Yes. It will remain level until the scheduled termination date.	Yes. It remains level for your entire lifetime.	Maybe. If you elect the level benefit option your death benefit will remain level. If an increasing benefit option is elected then the death benefit will increase with the cash value.	No. The death benefit will increase or decrease as a result of the fluctuations in your investments.

*** Because life insurance policies can differ from company to company, please contact your insurance company to find out all the details before purchasing a plan. ****

What kind of insurance riders can be attached to your life insurance plan?

Insurance riders are separate plans, which are purchased with a set premium, that are attached to your primary insurance coverage to provide additional benefits. These riders can provide various forms of additional protection. In order for the benefits of the rider to take effect, several qualifying conditions will have to be met. The qualifying conditions will be explained in the rider explanation form that you will receive at the time of application.

A few types of riders are explained hereafter:

Waiver of Premium - Guarantees that future life insurance premiums will be paid in the event that the insured becomes disabled prior to a specified age.

Accidental Death (or Double Indemnity) - If the insured should die as a result of an accident, an additional amount of death benefit will be paid out to the beneficiary.

Disability - Upon a qualified disability, payments of income can be paid to the disabled owner in the form of an annuity for a set period of time.

Child Coverage - Provides a death benefit in the event of a child’s death prior to a specified age.

Guaranteed Insurability - Allows the insured to purchase a predetermined amount of coverage at certain times in the future without having to be medically insurable.

Cost of Living - Permits the policy owner to purchase an inflation adjusted one-year term insurance equal to the percentage change in the Consumer Price Index with no evidence of insurability.

Long Term Care - In the event an individual should be required to go into a nursing home or receive home care, an annuity can be paid out to the long term care provider to defray some of the nursing care payments.

Terminal Illness - Allows terminally ill insured with a life expectancy of usually under one year to receive all or part of the death benefit.

What should you do when comparing life insurance policies?

When you have established the amount, duration, and type of life insurance policy(s) that you feel will best meet your need(s), your next step is to shop for the best coverage. Here are several considerations when shopping for the best coverage:

- Always compare similar policies (apples to apples).
- Shop around and get quotes from different insurers.
- Compare premiums and ask if they can change in the future.
- Be aware of any commissions, surrender fees, or loads.
- Understand the guaranteed features, if any, of the policy.
- Ask for the crediting rate and crediting rate history (if applicable).
- For new permanent plans, ask for and compare net payment & surrender cost indices.
- Compare cash surrender values and future death benefits using a realistic crediting rate.
- Ask about the financial security of the company.

Term insurance is easier to compare and understand than the more complicated permanent plans and confusion can easily arise. Therefore, it is always in your best interest to have an unbiased insurance counselor or financial planner review your different plans with you if you are having a hard time with the comparison process.

Should you cancel or replace your current policy?

When thinking about the possibility of replacing your coverage, you should consider several things before taking action.

1) Are you going to be medically insurable? Never terminate your current plan before knowing that you have been approved for the replacement coverage.

2) Premiums for your new plan may be higher than your current plan. If this is the case, you should determine whether the new plan will provide you with a guaranteed death benefit or some other favorable feature which the current plan does not offer. Note: when comparing permanent plans, always assume that you are transferring the cash value of your current policy as a lump sum to the new policy. This will insure a more accurate comparison by lowering your monthly premium.

3) If you have not completed about 15 years with the current plan, you will usually incur a surrender charge on the policy which will lower your cash surrender value below the total premiums paid. You must weigh the advantages of the reduced cash value return with the newly acquired benefits of the proposed plan.

Whenever comparing policies, it is always important for you to ask for a break down of premiums, cost of insurance, death benefits, reasonable interest rates, as well as the various features of the two insurance plans. If a replacement policy is determined to be in your best interest, request to have the policy transferred through a 1035 exchange. The 1035 Exchange will allow the cash value and tax basis of your current plan to be transferred over to your new plan tax-deferred and possibly save you a lot of money in the future.

When should I review my needs for life insurance?

It is beneficial for you to review your insurance needs every few years or when a major life change occurs (marriage, children, house, new job, etc.). In addition, it is always important that you have your life insurance papers and other valuable papers in a safe location that can by reached by a family member or trustee in the event of your death. If they can’t get to it or do not know that the policies even exist, then you might as well not even have the coverage.

Will my beneficiary receive the death benefit in on payment or as a series of payments?

Insurance companies may offer a variety of payment options. The owner of the plan may designate the option(s) prior to the death of the insured. If no option is designated, the beneficiary(ies) of the life insurance plan may choose to receive the death benefit under the options shown below. Always remember to keep your beneficiary designation up to date.

Lump Sum Payment: Death benefit proceeds will be received as a single payment.

Fixed Period: The death benefit can be received over a fixed period of 1 to 30 years. If the annuitant should die during the fixed period, the remaining principal will be paid in full or payments will continue for the remainder of the fixed period to a beneficiary(ies).

Fixed Amount: The death benefit will be paid in equal amounts every month until the entire amount of proceeds has been paid. If the annuitant should die during the fixed amount payment period, the remaining principal will be paid in full or payments will continue to a beneficiary(ies) until the full amount is paid.

Interest Only: Interest payments are paid by the life insurance company on the amount of the proceeds retained. The death benefit remains available for full or partial withdrawals at any time or may be converted to an annuity payout option. Interest payments continue until the option is surrendered or converted to another option.

Life Income: The death benefit will be paid for life of the annuitant. The annuitant may elect an option, know as a guaranteed period certain, with the life income annuity which will ensure that payments will be paid to a beneficiary if death of the annuitant should occur within a certain number of years after the purchase of the annuity. The years which may be elected under the guaranteed period certain option are typically 5, 10, 15, or 20 years. Should the annuitant die during the guaranteed period certain, payments will continue to the new designated beneficiary for the remainder of the period certain.