Life Insurance, General

Insurance Q.& A. : Life Insurance, General

Do I really need life insurance?

You don't need life insurance as long as no one else is financially dependent on you. But examine this question carefully. If you have children and their financial well-being would be materially affected by your death, you probably need life insurance. If you're married but childless, you might still want coverage. The same might be true if you feel your parents will someday depend on you financially. The larger the financial load you carry, and the more people depend on you in this way, the more you need life insurance.

How much life insurance do I need?

A fairly good rule of thumb offered by the National Insurance Consumer Organization is that you need coverage equal to at least seven years of current annual income, assuming you are married and have two or more children. According to "Personal Finance for Dummie$" (IDG Books Worldwide Inc., Foster City, Calif.), "Another way to determine the amount of life insurance to buy is to think about how much you will need to pay for major debts or expenditures, such as your mortgage, other loans, and college for your children. If, for example, you'd like your spouse to have enough of a life insurance death benefit to be able to pay off half of your mortgage and pay for half of your children's college education, then simply add half of your mortgage amount to half of their estimated college costs and buy that amount of life insurance." Of course, you can always ask an insurance agent, financial planner or other expert to help you determine how much life insurance coverage is adequate.

When should life insurance be purchased on my spouse's life?

If you're married and both you and your spouse work, each of you should probably have an individual life insurance policy. Creating a single irrevocable life insurance trust to hold the policies could provide some important tax benefits if the value of your estate exceeds $650,000 for 1999. According to "Wealth Enhancement & Preservation" (The Institute Inc., Denver), "The single irrevocable life insurance trust provides a tool to insure a spouse without correspondingly increasing the federal estate taxes to the children and grandchildren. This approach also allows the surviving spouse and family members to offset the financial consequences due to the loss of a spouse's income or contributions to the family as a homemaker. This arrangement is both income tax-free and estate tax-free, and the trust makers get full value for the premium dollars they spend on their coverage. Life insurance should be purchased on your life or your spouse's life individually whenever there is a need to provide an income stream or principal amount to the survivor."

Is it a good idea to buy life insurance on our children?

Most parents need life insurance, but for children life insurance is usually a waste of money. "What secures a child's future is life insurance on the parents and the child's own college-savings fund," sums up "Making the Most of Your Money" (Simon & Schuster Inc., New York). "Some parents are persuaded to save for college in a cash-value, kid-insurance policy. But the cost of the needless life insurance greatly slashes the return on investment. For a larger college fund, put money into a growth mutual fund instead." You may want to consider buying a small term life insurance policy to cover burial expenses if you think it might be difficult to pay the $5,000 to $10,000 cost of a funeral.

As a single person, do I really need life insurance to pay funeral expenses and take care of my debts?

If you're single, you may need life insurance for a variety of reasons. However, the old industry sales pitch that you need insurance to pay for your funeral and retire your debts if you die prematurely is not among them. According to "Get a Financial Life: Personal Finance in Your Twenties and Thirties" (Simon & Schuster), "Your parents, other relatives, or friends will probably be willing to pay for your funeral in the unlikely event you die with no assets. As for your debts, unless you cosigned a loan with parents, partners, or friends, no one else will be responsible for paying them. If you have any assets, the creditors will sell them to pay your debts. Otherwise, the creditors will simply take the loss."

Is it best to buy life insurance through my employer's group plan or by myself?

Many large employers provide some life insurance for employees. A typical plan pays a $50,000 or $100,000 death benefit, or an amount equal to one or two years of your salary. According to "Get a Financial Life" (Simon & Schuster), "If you need more, you might be better off buying directly from an insurance company rather than through your employer. That's because some employers charge all employees the same rate for life insurance, regardless of age." If your employer charges the same amount to all employees, you might save money by buying directly from an insurer if you're in your 20s, 30s or possibly even in your 40s. If you're older, the insurance offered through your employer's group plan may be the cheapest you can get.

What is a life insurance policy's free look provision?

Just as one federal law provides consumers with a three-day "cooling off" period to back out of certain types of contracts, another federal law provides you with time to back out of a new life insurance policy. According to The Question and Answer Book of Money and Investing (Adams Publishing, Holbrook, Mass.), "A life insurance policy is required to specify that the owner has a 10-day 'free look.' This allows the owner to examine the policy after delivery and have the premium refunded if he or she decides to surrender the policy. Because of the complexity of insurance policies, the owner may need some time after receipt of the policy to understand any inappropriate features. Alternatively, the 10-day period may allow the owner to compare other competing policies and find a better bargain."

What is the 30-day grace period on a life insurance policy?

The 30-day grace period is required by law to be in every life insurance policy sold. It allows the insured to pay the policy premium any time during the 30 days following the due date of the premium without incurring a policy lapse. After the 30-day period expires with the premium still unpaid, the company may require evidence of good health before accepting the payment and reinstating the policy, since it has technically lapsed.

What does it mean when a life insurance agent refers to a substandard risk?

Substandard risk is insurance industry jargon for a condition that prevents a person from meeting the normal requirements of a standard insurance policy. According to "The New Century Family Money Book" (Dell Publishing), "Around 3% of life insurance policy applications are turned down on the basis of being substandard risks. Eight out of 10 of the turndowns are due to physical factors such as heart condition, obesity, and high blood pressure. The other 20% involve occupational hazards, excessive traveling, foreign residence or less common medical problems. One major source of coverage for such people is group insurance policies, which do not require individual assessment of insurability." If you are considered a substandard risk but are not eligible for a group life insurance plan, you might find an insurer willing to provide you with an individual policy without requiring a medical exam if you look hard enough. However, don't be surprised if the limits of the policy are relatively low, the premiums are unusually high, or both.

If I have been told I am uninsurable, is it still possible for me to purchase life insurance?

Just as you can be turned down for auto insurance, so can you be turned down for life insurance. Applications can be rejected for a variety of reasons, although most rejections are based on something worrisome about the applicant's current health or medical history. If you are denied life insurance, ask the insurer why your application was rejected. It's possible the insurer simply made a mistake or misinterpreted something on your application. Next, request a copy of your medical information file from the Medical Information Bureau, P.O. Box 105, Essex Station, Boston, MA 02112. The bureau keeps medical records on more than 10 million Americans, much as credit bureaus keep records on consumers' credit histories. If there's a mistake on your MIB records, you have the right to correct it. Finally, if one insurer turns you down, keep looking elsewhere. Some insurance companies understand certain medical conditions better than others, and some firms actually specialize in policies for people who have had trouble getting coverage elsewhere. An independent insurance agent, who works with several different insurers instead of only one, will be happy to help you with your search.

If I am rated uninsurable today and am unable to obtain life insurance, can I, at some later date, become insurable?

Even if every insurer you contact says that you are uninsurable, you may become insurable later. You could eventually recover from a medical problem that prevents you from getting a life insurance policy today. Or an insurer might change its policies concerning who is eligible for coverage. Your chances of getting life insurance may also improve if you go to work for a company that offers a life insurance plan to all of its workers, because the insurer can spread its risks over hundreds or even thousands of employees and typically offers insurance to the few with special medical problems.

What is a death-benefit only plan?

If you're an executive, the company you work for may provide you with a death-benefit only plan. Typically, the employer promises to pay a specified death benefit to your spouse or heirs if you die while still working for the company. This death benefit is tax-deductible to the employer and taxable when paid to your beneficiaries.

What is endowment life insurance?

Endowment life insurance is unusual because it's designed to pay you benefits while you are still alive rather than pay your beneficiary after you have died. According to The Question and Answer Book of Money and Investing (Adams Publishing, Holbrook, Mass.), "Endowment life insurance pays the face value of the policy either at the insured's death or at a certain age or after a number of years of premium payment. A whole life insurance policy is an endowment at age 95 (or 100) policy. Unlike whole life, an endowment life insurance policy is designed primarily to provide a living benefit and only secondarily to provide life insurance protection. Therefore, it is more of an investment than a whole life policy. "Endowment life is a method of accumulating capital for a specific purpose and protecting this savings program against the saver's premature death. Many investors use endowment life insurance to fund anticipated financial needs, such as college education or retirement." Premiums for an endowment life policy are much higher than those for a term life policy, so you might be better off simply buying term life and investing the savings by yourself. However, endowment life often appeals to people who don't have enough discipline to do so. They know that they will lose their policy if they don't pay their annual premium, so it acts as a forced savings plan. Another alternative to an endowment life policy is term insurance combined with a deferred fixed annuity. It may be cheaper than an endowment life policy.

Is there a difference between a joint-life insurance policy and a second-to-die life insurance policy?

Many people confuse "joint-life" insurance policies with "second-to-die" policies. Although both types of policies insure more than one person, there are major differences between how the policies work and the reasons why different consumers choose one type of policy over the other. According to The Question and Answer Book of Money and Investing (Adams Publishing, Holbrook, Mass.), "Joint-life policies name two or more people as the insured parties, with the death benefit payable upon the first death among the insured parties. Most often a joint-life policy involves spouses or business partners providing for the security of the survivor. "Last survivor policies, or second-to-die policies, pay the death benefit only when the survivor dies. Such policies are popular for several purposes, the primary one being estate settlement for couples." In short, a joint-life policy pays off as soon as the first person dies; a last survivor or second-to-die policy pays off only when the last person dies.

What is mortgage life insurance and do I need it?

Many lenders and insurance companies offer mortgage life insurance that will pay your mortgage off if you die. For most homeowners, this is a lousy deal. Mortgage life insurance is just too expensive. If you want to make sure your heirs have enough money to pay your home-loan off when you die, it would be much cheaper to purchase term life insurance for the number of years your mortgage will last. You can consider buying mortgage insurance if you're in poor health, your medical problems prevent you from getting an inexpensive term life policy, and the insurer who offers the mortgage life insurance does not require that you take a physical examination. Otherwise, you should probably skip mortgage insurance.

Do life insurance proceeds go through probate?

Whether proceeds from your life insurance policy will have to go through probate depends on who you have named as your beneficiary. According to The Five-Minute Attorney's Guide to Estate Planning (Dell Publishing, New York), "If you name an individual (other than yourself) or a trust as the beneficiary of the policy, the money is transferred outside of probate directly to the beneficiary, saving time and money in the process. If your goal is to make those proceeds available to your family to cover expenses, this would be the way to go." Conversely, if you have named your estate as the beneficiary of the policy or have chosen no beneficiary at all, the proceeds will become part of your estate and must go through probate. The insurer will issue the check to the probate court, which will then distribute the proceeds, net of probate fees and attorney fees, according to your will.

Do I have to wait before I can collect the proceeds of my late spouse's life insurance?

If you're married and your spouse dies, it's important to file any necessary life insurance claims as quickly as possible. No waiting period is required. According to the second edition of Ernst & Young's Personal Financial Planning Guide (John Wiley & Sons Inc., New York), "Although the value of the death benefit is counted as part of the estate's value for tax purposes, life insurance payments pass to the beneficiary outside of probate. Life insurance companies also usually pay routing death benefits within weeks. This money provides a necessary financial cushion for the survivor."

Do I have to take the proceeds of a life insurance death benefit in a lump sum?

If someone dies and you are the beneficiary of their life insurance policy, you can usually accept the proceeds in one of three ways. Get a lump sum, take it in fixed payments over a specified period of time, or use it to establish an annnuity that will pay you a certain amount of money (usually monthly) for the rest of your life. According to "The New Century Family Money Book" (Dell Publishing), "Lump-sum payments-getting the whole amount at once-are usually appropriate for small policies and/or for those beneficiaries who are capable of investing wisely or who can rely on competent investment advisers. Lump-sum payouts occur automatically when insurance proceeds are payable into a trust." If you don't need all the money right away or wouldn't know where to invest it all, you may instead be able to take the benefits in fixed payments for a specified number of years-say, 10 or 20-or "annuitize" the payments to guarantee monthly or annual payments for the rest of your life. Those alternatives might also make more sense if you'd be tempted to take a lump-sum payout and spend it all on a fancy vacation or an extravagant purchase.

When does it make sense to take the death benefits from a life insurance policy in fixed payments?

If someone dies and you are the beneficiary of their life insurance policy, you usually don't have to accept the money in a lump sum. One alternative would be to accept the payout in fixed installments -- perhaps monthly or quarterly -- for a specified number of years. According to "The New Century Family Money Book" (Dell Publishing), "You can opt to have the insurance company distribute the proceeds and interest thereon over a fixed period of time, usually in installment payments of a fixed amount paid at stated intervals until the money is used up. You should make certain that you can change your mind and withdraw the entire sum at a later date. If you have not received the entire payment and have not exercised the power to withdraw a lump sum by the time of your own death, the unpaid balance will be payable at your election to your estate or to some other beneficiary." You could even ask the insurer to make fixed payments to you that represent only the interest on the full value of the benefit, with the principal payable to your estate or to a beneficiary of your own when you die.

When does it make sense to annuitize the proceeds of a loved one's life insurance policy?

When someone dies and leaves you as the beneficiary of their life insurance proceeds, you can usually choose to "annuitize" the payment -- in other words, collect the money a little at a time (perhaps monthly) for the rest of your life. The size of the payments would be based on the size of the death benefit itself and your life expectancy. However, there are usually better alternatives than annuitizing the proceeds, such as investing the money in mutual funds. An investment in bond funds, for example, can provide the same income stream as an annuity, but without the very conservative assumptions used by the insurance company to secure its profit.

Is there an insurance product I can use to put away money for retirement?

A flexible-premium life insurance policy may be a good savings alternative, especially if you also need life insurance. If the funds you put into the policy are within certain Internal Revenue Service limits, you can access this money free of income tax with a combination of withdrawals and policy loans at your retirement. The interest earned by the policy will accumulate on a tax-deferred basis similar to an IRA. In addition, it will provide life insurance protection for your beneficiaries.

Is life insurance a good way to build a reserve for investing?

Regardless of which type of life insurance you buy, just remember that it's insurance, first and foremost. It should not be considered an investment. According to "Money Troubles: Legal Strategies to Cope with Your Debts" (Nolo Press, Berkeley, Calif.), "Yes, this is a cash equivalent. (Why do you think they call it 'cash value'?) But no, it is not suitable for use as reserves, because of potentially large surrender penalties, tax risks, and other restrictions."