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What You Should Know About Buying Life Insurance

PART 2 of 3

Most permanent policies including whole, ordinary, universal, adjustable and variable life have a feature known as "cash value" or "cash surrender value". This feature, which is not found in most term insurance policies, provides you with some options:

You can cancel or "surrender" the policy "in total or in part" and receive the cash value as a lump sum of money. If you surrender your policy in the early years, there may be little or no cash value.l If you need to stop paying premiums, you can use the cash value to continue your current insurance protection for a specific period of time or to provide a lesser amount of protection to cover you for as long as you live. Usually, you may borrow from the insurance company, using the cash value in your life insurance as collateral. Unlike loans from most financial institutions, the loan is not dependent on credit checks or other restrictions. You ultimately must repay any loan with interest or your beneficiaries will receive a reduced death benefit.

The cash values of many life insurance policies may be affected by your company's future experience, including mortality rates, expenses and investment earnings. Keep in mind that with all types of permanent policies, the cash value of a policy is different from the policy face amount. Cash value is the amount available when you surrender a policy before its maturity or your death. The face amount is the money that will be paid at death or at policy maturity.

What are the types of permanent insurance? There are many different types of permanent insurance. The major ones are described below:

Whole Life or Ordinary Life

This is the most common type of permanent insurance. The premiums for a whole life policy must be paid periodically in the amount indicated in the policy. These premium amounts generally remain constant over the life of the policy.

Universal Life or Adjustable Life

This variation of permanent insurance allows you, after your initial payment, to pay premiums at any time, in virtually any amount, subject to certain minimums and maximums. You also can reduce or increase the amount of the death benefit more easily than under a traditional whole life policy. (To increase your death benefit, you usually will be required to furnish the insurance company with satisfactory evidence of your continued good health.)

Variable Life
This type of permanent policy provides death benefits and cash values that vary with the performance of an underlying portfolio of investments. You can choose to allocate your premiums among a variety of investments which offer varying degrees of risk and reward stocks, bonds, combinations of both, or accounts that provide for guarantees of interest and principal. You will receive a prospectus in conjunction with the sale of a variable product.

The cash value of a variable life policy is not guaranteed, and the policyholder bears that risk. However, by choosing among the available fund options, the policyholder can create an asset allocation that meets his or her objectives and risk tolerance. Good investment performance will lead to higher cash values and death benefits. On the other hand, poor investment performance will lead to reduced cash values and death benefits.

Some policies guarantee that death benefits cannot fall below a minimum level. There are both universal life and whole life versions of variable life.

What are the advantages and disadvantages of term and permanent insurance?

Term Insurance

Advantages
Initially, premiums are generally lower than those for permanent insurance, allowing you to buy higher levels of coverage at a younger age when the need for protection often is greatest.l It's good for covering specific needs that will disappear in time, such as mortgages or car loans.

Disadvantages
Premiums increase as you grow older.l Coverage may terminate at the end of the term or may become too expensive to continue.l Generally, the policy doesn't offer cash value or paid-up insurance.

Permanent Insurance

Advantages
As long as the necessary premiums are paid, protection is guaranteed for your entire life.l Premium costs can be fixed or flexible to meet personal financial needs.l Policy accumulates a cash value that you can borrow against. (Loans must be paid back with interest or your beneficiaries will receive a reduced death benefit.) You can borrow against the policy's cash value to pay premiums or use the cash value to provide paid-up insurance. The policy's cash value can be surrendered' in total or in part ' for cash or converted into an annuity. (An annuity is an insurance product that provides an income for a person's life-time or for a specific period of time.)l A provision or "rider" can be added to a policy that gives you the option to purchase additional insurance without taking a medical exam or having to furnish evidence of insurability. (For more information on riders, see page 19.)

Disadvantages
Required premium levels may make it hard to buy enough protection.l It may be more costly than term insurance if you don't keep it long enough.

GETTING STARTED

After you have thought about your financial needs and have become familiar with the basic types of life insurance, you will need to choose a company and agent.

How do I choose a company?
More than 2,000 companies in the United States sell life insurance. While some consumers prefer to buy policies directly from a company, most people buy life insurance through agents or brokers. Much of the information provided here will be helpful whichever way you decide to buy life insurance.

Before purchasing a policy, check the company's financial condition. You can do this by asking the agent or requesting information from your state's insurance department. A number of insurance rating services rate the financial strength of companies. These ratings can be found in large public or business libraries, or can be obtained directly from the rating service. There may be a fee forthat information.

Also check with the state insurance department to be sure the company is licensed in your state.

How do I choose an agent?
Collect the names of several agents through recommendations from friends, family and other sources. The following are some questions you may want to ask a potential agent:

Is the agent licensed in your state? All states require that agents be licensed to sell life insurance. In addition, agents who sell variable products must be regis-tered with the National Association of Securities Dealers and have additional state licenses.

What company or companies does the agent represent? Does the agent have any professional designations?Professional designations include Chartered Life Underwriter (CLU) and Life Underwriting Training Council Fellow (LUTCF). Agents who also are financial planners may have designations, such as Chartered Financial Consultant (ChFC), Certified Financial Planner (CFP) or Member of The Registry of Financial Planning Practitioners.

Is he or she a member of a professional association? The major association for agents is The National Association of Life Underwriters (NALU). Through NALU's local associations, agents can attend educational seminars and can stay on top of trends in the business. Similar training and services are provided to financial planners through the American Society of CLU & ChFC, the Institute of Certified Financial Planners (ICFP), and the International Association for Financial Planning (IAFP).

What can I expect an agent to do for me? An agent should be willing and able to explain various policies and other insurance-related matters. Let your agent know what you expect from him or her. You should feel satisfied that the agent is listening to you and looking for ways to get you the right type and amount of insurance at an affordable price. If you are not comfortable with the agent, or you aren't convinced he or she is providing the service you want, find another agent.

About The Author

Chad McDonald is the founder of www.ProContentSite.com a content provider membership site to help you produce professional streaming video and audio media content on your site.
For more information on life insurance visit met life insurance or Wawanesa mutual insurance today!

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