questions and answers on life insurance
This was one of the first books I won from Goodreads First Reads! So I'm very excited about that.
My rating is based on the fact that this book was useful, but as an insurance workbook it's not really something I got excited about. It's well-written, concise, accessible and informative.
The workbook is a supplement to a book I don't have, I believe called the Questions and Answers on Life Insurance. Even without the main book, the workbook gave me a much clearer idea of what my options for life insurance are, what each kind has to offer, and why I would want such a thing. When (if?) I decide it's time for me to get life insurance I will probably buy the main book.
Keep in mind I knew absolutely nothing about life insurance before reading this workbook. I always kind of considered it one of the big huge adult messes that I would probably have to deal with one of these days. Now I have a fair (and personalized) idea of when I should start thinking about it, where to start looking, how to evaluate and reevaluate my needs, and where to find more information and an agent. The sections on permanent life insurance are a bit technical and fairly confusing compared to the rest of the book, but he always tells where relevant information can be found.
The only real complaint I have is that he defines terms like "riders" multiple times, but doesn't define field specific terms that may have different uses in other fields, like underwriter and premium. I'm sure a quick google search would answer my questions, and probably the book the workbook is intended to accompany would also answer them
How Life Insurance Works . . .
for you and your loved ones
1
The reasons for owning life insurance are
simple, but the more you know about how it
works and what choices you have, the
better you can fit your coverage to your
family’s needs.
This short booklet is designed to help you
build a better understanding of what life
insurance can do for you and your family.
In a straightforward question and answer format,
it answers typical questions we receive from
policyholders about life insurance coverage.
It also attempts to anticipate and address
other issues you might have concerning life
insurance in general.
Keep in mind, though, that life insurance
and related financial matters can be complex
and each situation should be evaluated on an
individual basis. For this reason, we recommend
strongly that you contact an Amica Life
representative to seek professional assistance
in determining your particular needs and the
solutions to those needs.
Why do I need life insurance?
In practice, life insurance creates an “instant estate” for
you. That is, when you die, cash can be paid to your
beneficiary and used for any purpose — and, in most cases,
this payment is received income tax-free!
Normally, this asset is used to provide an income to your
spouse and children or to fulfill some other obligation or
desire that you have, such as paying off a mortgage or a
business loan, financing children’s education or protecting
your assets from the diminishing effects of federal and
state estate taxes.
In addition to benefits paid at death, cash value life insurance
(as compared with term insurance) has benefits while you
live. Living benefits include the build-up of a cash fund
that can be borrowed from in the case of an unexpected
financial need. If withdrawals from the cash fund are not
paid back, however, the death benefit will be reduced by
the amount withdrawn (plus unpaid accrued interest).
Another living benefit that is becoming increasingly
important today is that life insurance can provide a
supplemental income at retirement or help pay the cost of
long-term care. In certain instances, life insurance can ease
the financial burden of terminal illness on families by
allowing policyowners to collect a portion of the death
benefits early — before dying — to cover such extraordinary
expenses. This option is not intended to replace health
insurance or long-term care insurance, but it can provide
assistance for special medical needs that result from
terminal illness. In fact, life insurance — unlike most other
financial products on the market today — guarantees that
money will be paid to the individuals you select at exactly
the time it is needed most.
What are the different types of life insurance?
Today, there are literally thousands of different life insurance
policies available from hundreds of companies, with a
variety of combinations, options and benefits that can be
tailored to fit your individual needs.
However, most policies fall into one of two basic groups: term
life and whole life (also called permanent or straight life).
Term life, as its name implies, provides protection for a
specific, limited amount of time — usually in five-year
segments, such as for 5, 10, 15, 20, 25 or 30 years. In the
vast majority of policies, the cost of term life insurance
covers only death benefits and policy expenses. As such,
it is the least expensive type of life insurance in regards to
premium payments.
Term policies may be renewable without evidence of
insurability (medical exams, etc.) and generally are convertible
to a whole life policy — an important option for younger
couples with the potential to earning higher incomes as
they age. Keep in mind, though, that the premiums for most
term life policies increase with age. The older the insured,
the higher the annual premium for this type of coverage.
Annual renewable term insurance is renewed on a year-
to-year basis, and is typically owned by policyholders with
short-term life insurance needs. These may include people
whose children are in college or those who need financial
protection over the last years of a mortgage or equity loan.
Whole life is designed to stay in force for as long as you
live. The main advantages of whole life are that generally
premiums remain unchanged as you grow older, and the
policy accumulates a cash fund that can be accessed if you
need it. When you retire, whole life can provide you with a
guaranteed income for the rest of your life.
Permanent insurance — such as whole life — also has
many other variations that are typically centered around
how the cash fund is handled within the policy. These
include universal life, under which a policyholder may
pay premiums on a flexible basis at any time and in any
amount, subject to certain minimums. Universal life is an
excellent choice if you want to have a high degree of
flexibility in structuring your policy.
Variable life is similar to whole life except that death
benefits and cash values are driven by the performance
of stock and bond funds selected by the policyowner and
managed by the insurance company — rather than based
on the insurance company’s general investment account,
which is used for traditional whole life and universal life
policies. In operation, variable life is a type of investment
with built-in life insurance protection guarantees. Since
it is classified as a security, it is offered only through a
prospectus and can only be sold by an insurer and agent
who both must be specially licensed for such products.
How do I determine how much life insurance
I need?
Before addressing this question, you might be interested
in this snapshot of the life insurance marketplace, gleaned
from a study done by LIMRA International, a leading research
organization for the insurance industry.
According to LIMRA:
• 32 percent of adult U.S. citizens have no personal
life insurance coverage.
• Of those who are insured, 30 percent will provide
their beneficiaries with less than one year of their
annual income.
• 33 percent of people with annual incomes of more
than $100,000 are severely underinsured.
• Many people in the LIMRA study did not know that
group life insurance provided by their employer
usually ends when they are no longer employed.
• On the other hand, one of every two people are
aware that they need additional life insurance.
• One of every three people said they will add life
insurance coverage within the next year.
If the LIMRA study is reflective of your own situation,
you likely need more life insurance . . . but how much?
Financial planners suggest an amount of life insurance that
is equal to six to eight times your annual income. However,
this is just a rule of thumb, and many other factors should
be considered before determining the amount of life
insurance you need.
These include other sources of income, such as any existing
life insurance coverages, investments, pension plans or
other assets that might be accessed. Also, if you are married,
your spouse’s earning capacity and the number of individuals
who are financially dependent on you (and for how long)
could significantly impact the amount of coverage you may
need. This might include money for your children’s education
or paying off any other liabilities, such as a mortgage or loans.
The process of determining how much insurance you
need should not be approached lightly. Keep in mind
that it is very useful to prepare a conceptual budget of
what your family’s financial needs will be should you die
prematurely. Your budget should include everyday living
costs (food, utilities, insurance, taxes, etc.) and the need for
future cash for items such as children’s education, paying
off a mortgage, relocation expenses and the like.
Many companies, including Amica Life, offer free needs-
analysis worksheets and checklists that can help you
organize the needs determination process and make it
easier to develop minimum and optimal budget estimates.
Should my spouse and children be insured as well?
In a dual-income household, it is vitally important to protect
the income-earning capacity of both spouses. Life insurance
on an at-home spouse is recommended for the purpose of
paying for household services and childcare that may be
otherwise unavailable when the surviving spouse returns
to work. In some cases, it may be advisable to have life
insurance on children. However, insuring children should
not be done if it reduces purchasing appropriate amounts
of life insurance for the family’s main income earner. Most
insurers offer some type of inexpensive “children’s insurance
benefit” rider that provides a small, but usually adequate,
amount of life insurance coverage to pay for funeral and
other final expenses.
What about group life insurance?
Many life insurance companies offer employers and various
organizations the fringe benefit of life insurance for their
employees or members through group life insurance policies.
But, in most cases, when employment or membership ends,
so does the life insurance!
Although group life policies typically provide only term
coverage, most states require that departing employees be
given the option to convert to permanent insurance and
pay premiums directly to the insurer.
Smaller employers tend to offer insurance programs under
which employees pay most or all of the policy cost and
retain coverage on their own after leaving the company.
What is a policy rider?
Additional benefits can be added to your base life insurance
policy with riders that enable you to design your life
insurance coverage so that it fits your individual needs.
Because riders entail additional risks for and/or financial
commitments by the issuing company, there is a cost for
each rider. Common riders include:
• Accidental Death Benefit. An accidental death
benefit rider adds an additional death benefit to
your policy if the insured dies in an accident. The
accidental death benefit rider amount typically
cannot exceed the face amount of the base policy.
• Waiver of Premium. With this rider, the insurance
company will waive the requirement that you pay
premiums and will continue your coverage should
you become disabled for a time, usually six months.
After six months, the company refunds your
premiums back to the date of disability* and all
future premiums are waived until you recover.
• Purchase Option Rider. A valuable benefit for
younger insureds, this rider allows the purchase
of additional insurance without answering any
health questions, having a medical exam or
otherwise having to show proof of insurability at
some time in the future.
• Cost of Living Rider (COLA). A COLA rider
enables you to increase the face amount of your
insurance based on increases in the Consumer
Price Index. COLA is a great way to systematically
keep your coverage in step with inflation. Your
company may not make it available on all policies
or in all states.
How are life insurance cash value funds,
dividends and death benefits taxed?
The annual increase in a policy’s cash value currently does
not incur any income tax liability for the policyowner.
Dividends generally are considered to be a “return of
premium” and are not taxable for the policyowner.
In most instances, life insurance death proceeds will not
be subject to income taxation for the beneficiary. If the
insured has ownership in the policy at the time of death,
the proceeds may be counted in the insured’s estate for
federal estate tax purposes.
State inheritance taxes and federal gift taxes may also
apply to life insurance proceeds in certain situations.
You should consult with your tax adviser regarding
questions about possible income, estate and gift taxes
in connection with life insurance that you own or may be
planning to purchase.
How do I choose a good, reliable company?
In general, state laws regulate all life insurance companies.
Each state insurance department keeps close tabs on the
life insurance operations within its borders, with the goal
of assuring consumers that companies are managed in an
acceptable fashion and have the financial reserves to pay
their contractual obligations when the time comes.
Beyond that, there are important differences among
companies. Some are large multi-line companies that offer
both casualty (e.g., home and auto) and life insurance, and
some concentrate only on life insurance and annuities.
Some are focused on specific markets such as small
businesses or seniors — or “niche” products, such as
variable life. There are approximately 1,600 companies
providing life insurance in the U.S., according to LIMRA.
Another way to distinguish life insurance companies is
how they distribute their products. Many are involved in
some type of national or regional general agency system,
where the general agent is authorized to retain and train
agents who sell the company’s lines. A growing number of
companies, like Amica Life, sell their products on a “direct
basis” to consumers and businesses using direct marketing
and regional offices.
