Life Faqs

Who Needs Life Insurance?

Your need for life insurance varies with your age and responsibilities. It is a very important part of financial planning. There are several reasons to purchase life insurance. You may need to replace income that would be lost with the death of a wage earner. You may want to make sure your dependents do not incur significant debt when you die. Life insurance may allow them to keep assets versus selling them to pay outstanding bills or taxes.
Consumers should consider the following factors when purchasing life insurance:

Medical expenses previous to death, burial costs and estate taxes;

Support while remaining family members try to secure employment; and

Continued monthly bills and expenses, day-care costs, college tuition and retirement.

What is the Right Kind of Life Insurance?

All policies are not the same. Some give coverage for your lifetime and other cover you for a specific number of years. Some build up cash values and others do not. Some policies combine different kinds of insurance, and others let you change from one kind of insurance to another. Some policies may offer other benefits while you are still living. There are two basic types of life insurance: term insurance and permanent insurance.

Term Insurance

Term insurance generally has lower premiums in the early years, but does not build up cash values that you can use in the future. You may combine cash value life insurance with term insurance for the period of your greatest need for life insurance to replace income.

Term insurance covers you for a term of one or more years. It pays a death benefit only if you die in that term. Term insurance generally offers the largest insurance protection for your premium dollar. It generally does not build up cash value.

You can renew most term insurance policies for one or more terms, even if your health has changed. Each time you renew the policy for a new term, premiums may be higher. Ask what the premiums will be if you continue to renew the policy. Also ask if you will lose the right to renew the policy at a certain age. For a higher premium, some companies will give you the right to keep the policy in force for a guaranteed period at the same price each year. At the end of that time you may need to pass a physical examination to continue coverage, and premiums may increase. You may be able to trade many term insurance policies for a cash value policy during a conversion period even if you are not in good health. Premiums for the new policy will be higher than you have been paying for the term insurance.

Permanent Insurance

Permanent insurance (such as universal life, variable universal life and whole life) provides long-term financial protection. These policies include both a death benefit and, in some cases, cash savings. Because of the savings element, premiums tend to be higher.

How Much Life Insurance Do I Need?
Ask yourself the following questions:

How much of the family income do I provide?

If I were to die, how would my survivors, especially my children, get by?

Does anyone else depend on me financially, such as a parent, grandparent, brother or sister?

Do I have children for whom I would like to set aside money to finish their education in the event of my death?

How will my family pay final expenses and repay debts after my death?

Do I have family members or organizations to whom I would like to leave money?

Will there be estate taxes to pay after my death?

How will inflation affect future needs?

Some insurance experts suggest that you purchase five to eight times your current income. However, it is better to go through the above questions to figure a more accurate amount.

Tips on Buying Life Insurance

Make sure you feel confident in the insurance agent and company.

Decide how much you need, for how long, and what you can afford to pay.

Learn what kinds of policies will provide what you need and pick the one that is best for you.

Do not sign an application until you review it carefully to be sure the answers are complete and accurate.

Do not buy life insurance unless you intend to stick with your plan. It may be very costly if you quit during the early years of the policy.

When you buy a policy, make the check payable to the company, not the agent.

Who can take out a policy on my life?

Only someone who has an “insurable interest” can purchase an insurance policy on your life. That means a stranger cannot buy a policy to insure your life. People with an insurable interest generally include members of your immediate family. In some circumstances your employer or business partner might also have an insurable interest.

Insurable interest may also be proper for institutions or people who become your major creditors.

Must my beneficiary have an insurable interest?

No. If you buy a policy on your own life, you become the owner of the policy. As the owner, you can name anyone as beneficiary, even a stranger.

What about companies that advertise “no physical exam?”

The insurance may be more expensive than if the company required a physical. Although there is no physical, you will probably have to answer a few, broad health questions on your application.

Some life insurance ads claim “you can not be turned down.” What’s the catch?

Such ads are for “guaranteed issue” policies that ask no health history questions. The company knows it is taking a risk because people with bad health could buy their policies. The company balances the risk by charging higher premiums or by limiting the amount of insurance you can buy. The premiums can be almost as much as the insurance. After a few years you could pay more to the insurance company than it will have to pay to your beneficiary. Such policies may offer only the return of your premiums if you die within the first couple of years after you buy the policy.

Why is term life often called “temporary” insurance?

Insurance agents sometimes refer to term insurance as “temporary” because the term policy lasts only for a specific period. It is probably no more “temporary” than your auto or homeowner insurance. Just like term, those types of policies provide coverage for a specific period of time, and must be renewed when that period ends.

What do I get when I buy term insurance?

You have bought and received the company’s guarantee that if you die during the term of the policy, it will pay a death benefit to your beneficiary.

Does that mean I’ve wasted my money if I don’t die?

No more than you have wasted money by buying car insurance but never having an accident. You’ve purchased peace of mind. With term life insurance, if you die during the term, you know the company will pay your beneficiaries.

I understand my permanent policy would be “fully paid up” at age 65. What does that mean?

“Fully paid up” means just that. You have made enough premium payments to cover the cost of insurance for the rest of your life.

What happens to the cash value after the policy is fully paid up?

The company plans to use the cash value to pay premiums until you die. If you take cash value out, there may not be enough to pay premiums. The company could require you to resume paying premiums, or reduce the amount of the death benefit to an amount that the remaining cash value will support.

What is a “participating” policy?

That is a policy that may pay you dividends. You have a chance to “participate” in the company’s earnings. A life insurance dividend is actually a refund of part of your premium. When a company collects more money in premiums than it needs to pay death claims and maintain the insurance pool for future claims, the company may pay dividends at the end of that year.

An insurance agent has suggested that I buy term instead of whole life. Does it make sense to buy term and invest the difference?

“Buy term and invest the difference” has been a popular sales slogan for term life. The pitch compares term, the least expensive form of life insurance, with other kinds of life insurance.

Example:

$100,000 death benefit at age 35

Annual whole life premium: $1,800

Annual renewable term premium: $250

Difference: $1,550

What are your choices?

Buy whole life. The “difference” is used to keep your premiums lower than the actual cost of insurance as you get older.

Buy term. You keep the difference.

In addition, make sure you consider the following:

As you get older your term premiums will increase to keep up with the cost of insurance

If you invested the difference, you could use your investment to pay the higher cost of insurance

If you spent the difference you will have to dip into other savings to pay higher premiums

If your health deteriorates you may not be able to buy a new policy

How much cash value is in my policy?

Read your policy. It has a table of cash values that should provide the answer. Call your agent if you are still not sure of the cash value amount.

What happens to the cash value in my policy when I die?

When you die, the insurance company will pay the death benefit. No matter how much cash value you may have had in the policy the moment before you died, your beneficiaries can collect no more than the stated death benefit. Any loans you have not repaid (plus interest) will be subtracted from the death benefit.
The result: your beneficiary could wind up with less than the face amount of the policy.
The exception: some whole life policies pay both the death benefit and the cash value when you die.

What are property and perils are excluded from most homeowner policies?

Most homeowner policies provide coverage that does not apply to animals, birds, fish, automobiles and business property; for loss or damage caused by flood, surface water, water which backs up through sewers or drains, earth movement, nuclear damage, war, etc. Section II coverages (personal liability and medical payments) do not apply to the operation, ownership, use, etc., of any aircraft, automobile, recreational motor vehicle, water craft powered by more than 50 horsepower motor; bodily injury or physical damage caused by an intentional act of the insured. It must be noted that these are a mere sample of property and perils not covered. A complete review of your policy is the only way to determine what property is covered and what perils are insured against. Also, there are specific limits of coverage on property insured under the homeowner’s policy such as money, securities, water craft, theft of jewelry, silverware, and/or guns.

My house was completely destroyed by fire. I’m trying to collect on my personal property that I had in the house, but the insurance company is telling me I need an inventory. Can they do that?

Yes. Whether your policy pays for the replacement or just the actual cash value, the company is only obligated to pay for personal property that you can show you owned at the time of loss. It is a very good idea to keep an up to date inventory in a secure place. Also, to help you remember what you had, it is helpful to take pictures of each room and keep them with your inventory.

Our sump pump failed and the insurance company is denying our claim because the water backed up through our sewers. Can they do this?

Most insurance policies exclude water damage from water that backs up through sewers or drains. You may wish to contact your agent and inquire about putting an endorsement on your policy, which would cover sewer back up.

All my CDs and tapes were recently stolen from my vehicle. My insurance company advised there is no coverage for these items in either my auto insurance or my homeowner’s insurance policy. Is this true?

Almost all auto and homeowners policies exclude coverage for any losses of tapes, disks and other sound transmitting or receiving equipment used in an automobile. Some insurance companies however, will provide coverage for these items for an additional premium. Check with your agent to determine if coverage can be purchased for the stereo, tapes and disks used in your auto.

My boat was stolen and now my insurance company will not pay the claim on my homeowner’s policy. Can they deny my claim?

Theft to watercraft, including furnishings, equipment and outboard motors, are typically excluded if the theft occurs outside your residential premises. To adequately cover your boat and its accessories, you should contact your agent regarding a separate policy covering the boat.

I have specifically insured antique items listed on my homeowner’s policy. If I have a total loss, would the insurance company pay me the insured value?

Your insurance company would first confirm the value of the items with one or more independent antique dealers. You should then be paid a dollar value based on the dealer(s) estimate of the worth of the antique items. If you disagree with the settlement offered by your insurer, then you can follow the dispute resolution process outlined in your policy. There is a simpler way: Get appraisals and have your agent establish the stated values in the policy. You should also keep your appraisals up-to-date.

During a storm, a tree from my neighbor’s yard fell and destroyed my fence. Does my homeowner’s policy pay for the damage or does my neighbor’s policy?

Generally, your own policy should cover the loss. Your insurance company may be able to recover the amount it pays you for the loss and your deductible from the homeowners insurance that your neighbor may have if the loss occurred as a result of your neighbor’s negligence.

Recent rainstorms have flooded and damaged my basement. Is there any coverage under my homeowner’s policy?

Flood coverage is generally excluded on the basic homeowners policy. However, some homeowners policies provide coverage for backup of sewers and drains that cause flooding in your basement. This coverage can be purchased for a nominal premium. You should check with your agent to see if this coverage is provided and how much it costs.
If, however, you live in a flood-prone area, you should consider – and may be required by your lending institution – to purchase a flood insurance policy. Your agent should be able to inform you about the Federal Flood Insurance Plan and the exclusions and limitations of coverage in this policy.

When can an insurance company cancel my homeowners coverage during the policy term?

• Non-payment of premium
• Material misrepresentation/Fraud
• Conviction of a crime arising out of acts increasing the hazard insured against. (For example, conviction for illegal storage of fireworks)
• Discovery of willful or reckless acts or omissions by the insured increasing the hazard insured against. (For example, not getting a gas leak fixed)
• Physical changes in the property insured which result in the property becoming uninsurable. (For example, should the home become vacant for more than 60 consecutive days, a greater exposure to vandalism and damage is assumed to exist)
• A determination by the Commissioner of Insurance that continuation of the policy would place the insurance company in violation of the law

The food in my freezer went bad because I lost power in my home. Does my homeowners policy provide coverage for this?

The basic homeowner policy usually does not. However, this is a popular coverage for insurance companies to offer and you may be able to buy this coverage for a nominal additional premium. There is also the issue of where the power was lost. Some policies are limited to coverage for electricity lost in the home or where the electricity enters the home. Others will limit coverage to within so many yards from the home. Your agent should be able to tell you about the availability of coverage and how much it would cost.