What is term life insurance?

Life Insurance:





The term is simple. You pay premium for a period of time(the term) form one to thirty years and if you die during that period the insurance is paid to the person or the persons you designate to receive it- called the beneficiary.





The term life insurance usually have the lowest premium in the early years, making it most affordable life insurance-initially. Term doesn’t build cash value.





It covers you for a specified period of time (usually from 5 to 30 yeas of time you choose). If you purchase $1000000 term life insurance for 20 years period and you die any of those 20 years, your beneficiary receives the million dollars.





If you are still living at the end of the term, your insurance policy is over unless you can renew the policy. When you renew the policy (assuming your policy has that feature) it will renew at higher price reflecting now your older age. Term insurance has no buildup of cash as with whole life insurance. Some term life insurance policies do offer return of premium.





LIFE INSURANCE BASICS:


Why should I buy life insurance?

Many financial experts consider life insurance to be the cornerstone of sound financial planning. It can be an important tool in the following situations:


Replace income for dependents

If people depend on your income, life insurance can replace that income for them if you die. The most commonly recognized case of this is parents with young children. However, it can also apply to couples in which the survivor would be financially stricken by the income lost through the death of a partner, and to dependent adults, such as parents, siblings or adult children who continue to rely on you financially. Insurance to replace your income can be especially useful if the government- or employer-sponsored benefits of your surviving spouse or domestic partner will be reduced after your death.


Pay final expenses:

Life insurance can pay your funeral and burial costs, probate and other estate administration costs, debts and medical expenses not covered by health insurance.


Create an inheritance for your heirs:

Even if you have no other assets to pass to your heirs, you can create an inheritance by buying a life insurance policy and naming them as beneficiaries.


Pay federal “death” taxes and state “death” taxes:

Life insurance benefits can pay estate taxes so that your heirs will not have to liquidate other assets or take a smaller inheritance. Changes in the federal “death” tax rules between now and January 1, 2011 will likely lessen the impact of this tax on some people, but some states are offsetting those federal decreases with increases in their state-level “death” taxes.


Make significant charitable contributions:

By making a charity the beneficiary of your life insurance, you can make a much larger contribution than if you donated the cash equivalent of the policy’s premiums.


Create a source of savings:

Some types of life insurance create a cash value that, if not paid out as a death benefit, can be borrowed or withdrawn on the owner’s request. Since most people make paying their life insurance policy premiums a high priority, buying a cash-value type policy can create a kind of “forced” savings plan. Furthermore, the interest credited is tax deferred (and tax exempt if the money is paid as a death claim).



How much life insurance do I need?



In most cases, if you have no dependents and have enough money to pay your final expenses, you don’t need any life insurance.



If you want to create an inheritance or make a charitable contribution, buy enough life insurance to achieve those goals.



If you have dependents, buy enough life insurance so that, when combined with other sources of income, it will replace the income you now generate for them, plus enough to offset any additional expenses they will incur to replace services you provide (for a simple example, if you do your own taxes, the survivors might have to hire a professional tax preparer). Also, your family might need extra money to make some changes after you die. For example, they may want to relocate, or your spouse may need to go back to school to be in a better position to help support the family.

You should also plan to replace “hidden income” that would be lost at death. Hidden income is income that you receive through your employment but that isn’t part of your gross wages. It includes things like your employer’s subsidy of your health insurance premium, the matching contribution to your 401(k) plan, and many other “perks,” large and small. This is an often-overlooked insurance need: the cost of replacing just your health insurance and retirement contributions could be the equivalent of $2,000 per month or more.



Of course, you should also plan for expenses that arise at death. These include the funeral costs, taxes and administrative costs associated with “winding up” an estate and passing property to heirs. At a minimum, plan for $15,000.



What are the principal types of life insurance?



There are two major types of life insurance—term and whole life. Whole life is sometimes called permanent life insurance, and it encompasses several subcategories, including traditional whole life, universal life, variable life and variable universal life. In 2003, about 6.4 million individual life insurance policies bought were term and about 7.1 million were whole life.



Life insurance products for groups are different from life insurance sold to individuals. The information below focuses on life insurance sold to individuals.

Term:

Term Insurance is the simplest form of life insurance. It pays only if death occurs during the term of the policy, which is usually from one to 30 years. Most term policies have no other benefit provisions.



There are two basic types of term life insurance policies—level term and decreasing term.

1. Level term means that the death benefit stays the same throughout the duration of the policy.


2. Decreasing term means that the death benefit drops, usually in one-year increments, over the course of the policy’s term

In 2003, virtually all (97 percent) of the term life insurance bought was level term.



Whole Life/Permanent:



Whole life or permanent insurance pays a death benefit whenever you die—even if you live to 100! There are three major types of whole life or permanent life insurance—traditional whole life, universal life, and variable universal life, and there are variations within each type.



In the case of traditional whole life, both the death benefit and the premium are designed to stay the same (level) throughout the life of the policy. The cost per $1,000 of benefit increases as the insured person ages, and it obviously gets very high when the insured lives to 80 and beyond. The insurance company could charge a premium that increases each year, but that would make it very hard for most people to afford life insurance at advanced ages. So the comapny keeps the premium level by charging a premium that, in the early years, is higher than what’s needed to pay claims, investing that money, and then using it to supplement the level premium to help pay the cost of life insurance for older people.



By law, when these “overpayments” reach a certain amount, they must be available to the policyowner as a cash value if he or she decides not to continue with the original plan. The cash value is an alternative, not an additional, benefit under the policy. In the 1970s and 1980s, life insurance companies introduced two variations on the traditional whole life product—universal life insurance and variable universal life insurance.





What is a beneficiary?

Beneficiary is the person or entity you name in a life insurance policy to receive the death benefit. You can name:

1. One person


2. Two or more people


3. The trustee of a trust you’ve set up


4. A charity


5. Your estate

If you don’t name a beneficiary, the death benefit will be paid to your estate.

Two “levels” of beneficiaries:

Your life insurance policy should have both “primary” and “contingent” beneficiaries. The primary beneficiary gets the death benefits if he or she can be found after your death. Contingent beneficiaries get the death benefits if the primary beneficiary can’t be found. If no primary or contingent beneficiaries can be found, the death benefit will be paid to your estate.

As part of naming beneficiaries, you should identify them as clearly as possible and include their social security numbers. This will make it easier for the life insurance company to find them, and it will make it less likely that disputes will arise regarding the death benefits. For example, if you write "wife [or husband] of the insured" without using a specific name, an ex-spouse could claim the death benefit. On the other hand, if you have named specific children, any later-born or adopted children will not receive the death benefit—unless you change the beneficiary designation to include them.

Besides naming beneficiaries, you should specify how the benefits are to be handled if one or more beneficiaries can’t be found. For example, suppose you have two children and you name each one to receive half of the death benefit. If one of the children dies before you do, do you want the other child to get the entire death benefit, or the deceased child’s heirs to get his or her share?

If the death benefit goes to your estate, probate proceedings could delay distributing the money, and the cost of probate could diminish the amount available to your heirs.

Choosing beneficiaries, and keeping those choices up-to-date, is an important part of owning life insurance. The birth or adoption of a child, marriage or divorce can affect your initial choice. Review your beneficiary designation as new situations arise in order to make sure your choice is still appropriate.

TYPES OF LIFE INSURANCE:

What are the types of term insurance policies?

Term insurance comes in two basic varieties—level term and decreasing term. These days, almost everyone buys level term insurance. The terms “level” and “decreasing” refer to the death benefit amount during the term of the policy. A level term policy pays the same benefit amount if death occurs at any point during the term.



Common types of level term are:

• yearly- (or annually-)


• renewable term5-year


• renewable term10-year term


• 15-year term


• 20-year term


• 25-year term


• 30-year term


• term to a specified age (usually 65)

Yearly renewable term, once popular, is no longer a top seller. The most popular type is now 20-year term. Most companies will not sell term insurance to an applicant for a term that ends past his or her 80th birthday.

If a policy is “renewable,” that means it continues in force for an additional term or terms, up to a specified age, even if the health of the insured (or other factors) would cause him or her to be rejected if he or she applied for a new life insurance policy.

Generally, the premium for the policy is based on the insured person’s age and health at the policy’s start, and the premium remains the same (level) for the length of the term. So, premiums for 5-year renewable term can be level for 5 years, then to a new rate reflecting the new age of the insured, and so on every five years. Some longer term policies will guarantee that the premium will not increase during the term; others don’t make that guarantee, enabling the insurance company to raise the rate during the policy’s term.

Some term policies are convertible. This means that the policy’s owner has the right to change it into a permanent type of life insurance without additional evidence of insurability.“

Return of Premium”

In most types of term insurance, including homeowners and auto insurance, if you haven’t had a claim under the policy by the time it expires, you get no refund of the premium. Your premium bought the protection that you had but didn’t need, and you’ve received fair value. Some term life insurance consumers have been unhappy at this outcome, so some insurers have created term life with a “return of premium” feature. The premiums for the insurance with this feature are often significantly higher than for policies without it, and they generally require that you keep the policy in force to its term or else you forfeit the return of premium benefit. Some policies will return the base premium but not the extra premium (for the return benefit), and others will return both.

Here’s a Return of Insurance Premium Example:

You obtain a20 years of premium insurance policy at $50 per month. At the end of 20 years you get a check for $12000(100% of what you paid $600 per year x 20 years) from the life insurance company, tax free. There is no obligation to keep it for 20 years but if you do, you are guaranteed to get all your money back.

What are the different types of permanent policies?


Whole or ordinary life:

This is the most common type of permanent insurance policy. It offers a death benefit along with a savings account. If you pick this type of life insurance policy, you are agreeing to pay a certain amount in premiums on a regular basis for a specific death benefit. The savings element would grow based on dividends the company pays to you.


Universal or adjustable life:

This type of policy offers you more flexibility than whole life insurance. You may be able to increase the death benefit, if you pass a medical examination. The savings vehicle (called a cash value account) generally earns a money market rate of interest. After money has accumulated in your account, you will also have the option of altering your premium payments – providing there is enough money in your account to cover the costs. This can be a useful feature if your economic situation has suddenly changed. However, you would need to keep in mind that if you stop or reduce your premiums and the saving accumulation gets used up, the policy might lapse and your life insurance coverage will end. You should check with your agent before deciding not to make premium payments for extended periods because you might not have enough cash value to pay the monthly charges to prevent a policy lapse.


Variable life:

This policy combines death protection with a savings account that you can invest in stocks, bonds and money market mutual funds. The value of your policy may grow more quickly, but you also have more risk. If your investments do not perform well, your cash value and death benefit may decrease. Some policies, however, guarantee that your death benefit will not fall below a minimum level.


Variable-universal life:

If you purchase this type of policy, you get the features of variable and universal life policies. You have the investment risks and rewards characteristic of variable life insurance, coupled with the ability to adjust your premiums and death benefit that is characteristic of universal life insurance.



Why should I purchase permanent insurance?


A permanent life policy provides lifelong insurance protection. The policy pays a death benefit if you die tomorrow or if you live to be a hundred. There is also a savings element that will grow on a tax-deferred basis and may become substantial over time. Because of the savings element, premiums are generally higher for permanent than for term insurance. However, the premium in a permanent policy remains the same, while term can go up substantially every time you renew it.



There are a number of different types of permanent insurance policies, such as whole (ordinary) life, universal life, variable life, and variable/universal life. In a permanent policy, the cash value is different from its face value amount. The face amount is the money that will be paid at death. Cash value is the amount of money available to you. There are a number of ways that you can use this cash savings. For instance, you can take a loan against it or you can surrender the policy before you die to collect the accumulated savings.



There are unique features to a permanent policy such as:

1. You can lock in premiums when you purchase the policy. By purchasing a permanent policy, the premium will not increase as you age or if your health status changes.


2. The policy will accumulate cash savings.Depending on the policy, you may be able to withdraw some of the money. You also may have these options:

• Use the cash value to pay premiums. If unexpected expenses occur, you can stop or reduce your premiums. The cash value in the policy can be used toward the premium payment to continue your current insurance protection – providing there is enough money accumulated.

• Borrow from the insurance company using the cash value in your life insurance as collateral. Like all loans, you will ultimately need to repay the insurer with interest. Otherwise, the policy may lapse or your beneficiaries will receive a reduced death benefit. However, unlike loans from most financial institutions, the loan is not dependent on credit checks or other restrictions.

HELP!

If I can’t pay my premium, what should I do?

If unexpected expenses come up and you can’t pay your life insurance premium, you should know the possible consequences. The effect depends on the type of policy and coverage you have and the policy terms and conditions.

Term:

If you stop paying premiums, your coverage lapses.



Permanent:



If you have this type of policy, you will have the following choices:


Cash out the policy.

This means that you can stop paying the premium and collect the available cash savings. You will no longer be covered by life insurance, but you will at least save some of the proceeds of the policy. You may, however, have to pay taxes on some of the cash value if the sum exceeds what you have paid in premiums.


Non-forfeiture options

There may be a “reduced paid-up” option. This means that you can stop paying premiums completely in return for a reduced death benefit and no cash saving. You may also be able to convert the permanent policy to an extended term policy for a time period based on the accumulated cash savings in the policy.


Policy will lapse

If this happens, see if the policy can be reinstated. Some insurers may allow this if you do it within five years of lapsing. You will most likely have to pass a physical examination for the reinstated policy and pay back the premiums you would have paid plus interest. Annual premiums for the reinstated policy may be lower than those for a new, comparable policy.



How do I file a life insurance claim?



To begin the claims process:

1. Get several copies of the death certificate.


2. Call your insurance agent. He or she can help you fill out the necessary forms and act as an intermediary with the insurance company. (Don’t keep life insurance policies in your safe deposit box. In most states, safe deposit boxes are sealed temporarily upon the death of the owner, which can delay the settlement. ) If you don’t have an insurance agent, or don’t know who the deceased's agent was, contact the company directly.


3. Submit a certified copy of the death certificate from the funeral director with the policy claim. Once the claim is submitted, a settlement should be issued to you shortly. Once a life insurance claim is submitted, you must determine how the proceeds will be distributed.

These are some of the options available:

• Lump sum -- You receive the entire death benefit in a single amount.


• Specific income provision -- The company pays you both principal and interest on a predetermined schedule.


• Life income option -- You receive a guaranteed income for life. The amount of income depends on the death benefit, your gender and your age at the time of the insured's death.


• Interest income option -- The company holds the proceeds and pays you interest on them. The death benefit remains intact and goes to a secondary beneficiary upon your death.

How can I locate a lost life insurance policy?



If a family member dies and you are unable to locate his or her life insurance policies, there is, unfortunately, no national or statewide database of all life insurance policies that you can consult. However, you can try to determine:

• which insurance company might have issued the policy


• which agent or broker might have sold or serviced the policy


• whether the deceased might have had insurance through an employer, union or trade association, or other group to which he/she belonged.

Here are some strategies that might turn up useful information:


Look for insurance-related documents.



Search through files, bank safe deposit boxes, and other storage places to see if there are any insurance-related documents. Also, look through address books to see if the names of any insurance agents or companies are listed. An agent or company who sold the deceased their auto or home insurance may know about the existence of a life insurance policy.


Contact current and prior financial advisors.

Contact current or prior attorneys, accountants, investment advisors, bankers, business insurance agents/brokers and others who might have known about the deceased’s life insurance.


Review life insurance applications.

The application for each policy is attached to that policy. So if you can find any of the deceased’s life insurance policies, look at the applications for them. The application will have a list of all other life insurance policies owned at the time of the application.


Contact previous employers.

Former employers may have a record of a past group policy or policies.


Check bank books and canceled checks.

See if any checks have been made out to life insurance companies over the years.


Check the mail for a year following the death of the policyholder.

Look for premium notices or dividend notices. If a policy has been paid up, there will no notice of premium payments due. However, the company may still send an annual notice regarding the status of the policy or it may pay or send notice of a dividend.


Review the deceased’s income tax returns for the past two years.

Look for interest income from and interest expenses paid to life insurance companies. Life insurance companies pay interest on accumulations on permanent policies and charge interest on policy loans.


Contact all relevant state insurance departments.

The National Association of Insurance Commissioners has a “Life Insurance Company Location System” to help you find state insurance department personnel who might help identify companies that might have written life insurance on the deceased.



Check with the state's unclaimed property office.

If a life insurance company knows that an insured client has died but can’t find the beneficiary, it must turn the death benefit over to the state in which the policy was bought as “unclaimed property.” If you know (or can guess) where the policy was bought, you can contact the state comptroller’s department to see if it has any unclaimed money from life insurance policies belonging to the deceased.


Contact a private service that will search for “lost life insurance.”

Several private companies will, for a fee, contact insurance companies for you to find out if the deceased was insured. This service is often provided through their Web sites.