Life Insurance

How Much Life Insurance Do I Need?
Evaluating your family's needs is the first step in purchasing a policy. Gather all your personal financial information and estimate how much money your family will need after you're gone. Include ongoing expenses such as day care, tuition or retirement and immediate expenses at the time of death like medical bills, burial costs, and estate taxes.

Your family also may need funds to help them readjust ... perhaps to finance a move or pay expenses while job hunting.

It boils down to this: life insurance provides financial protection. If protection is not your primary goal, you should consider other financial products.

While there's no substitute for careful evaluation of how much life insurance your own individual family will need, one rule of thumb is to buy an amount equal to five to seven times your annual gross income.

Review your policy periodically or when your situation changes to be sure your coverage is adequate.

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What is Spouse Life Insurance?
In determining whether or not a spouse needs life insurance or how much he or she may need, you should consider the following:

In a dual income household, it is important to protect the earning capacity of both spouses. The loss of one income earner could be a severe financial hardship on the family.

If a spouse is a non-wage earner such as a stay-at-home parent, life insurance should still be considered. If the non-earner dies, new expenses such as child care and house-cleaning will be incurred.

Burial expenses and final medical expenses are further considerations.

Spousal protection can be accomplished with term life insurance or permanent life insurance.

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Do I need Child Life Insurance?
You might be considering child life insurance or a Child Protection Rider (CPR) to a term life insurance policy.

In certain circumstances, it may be advisable to purchase life insurance on children. A parent or a grandparent may wish to purchase permanent policy so that the child starts out its adult life with low, guaranteed premium.

However, such purchases should not be made in lieu of purchasing appropriate amounts of life insurance on the family breadwinner(s). It is of utmost importance that the income earning capacity of the primary breadwinner be fully protected.

Only when this goal is met and the parents have discretionary income to spare should they contemplate the purchase of life insurance on children.

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As you become a higher risk at an older age, the level premium eventually becomes less than the amount it takes to insure you. Level premium payments build a reserve in your policy that is used to insure you as you age. Insurance companies call this reserve the "cash value."

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Types of Whole Life Insurance
Joint Whole Life Insurance
Provides basic whole life insurance benefits and features, but two lives are insured under the same policy. When one person dies, the benefit is paid to the survivor, who then has an option to purchase an individual whole life policy without having to prove insurability.

Last Survivor Whole Life
A type of joint whole life insurancethat is designed mainly for married couples. Federal estate taxes are not collected on property left to a spouse. But when the surviving spouse dies, estate taxes are due and can be very high. A last survivor policy pays a benefit only after both spouses have died, providing funds for estate taxes.

Universal
Lets you choose your insurance policy's face amount and premium, and change these factors while the policy is in effect. Your choices must fall within the company's specified minimum and maximum amounts. These guidelines are set to meet life insurance regulations and maintain healthy relationships between premium, face amount, benefit, and cash value.

Adjustable
Allows you to vary your coverage as your insurance needs change. You normally choose the face amount you need and the premium you want to pay, and the company calculates a plan that provides coverage for your request. The result could be any plan from a term policy with a short period to a limited-payment whole life policy. You can also choose the type of plan and face value you want, leaving it to the company to calculate the premium rate needed.

Indeterminate Premium Life
Specifies two premium rates -- a guaranteed maximum, and a lower rate you actually pay. The lower premium is level for a set period of time. Then the company establishes a new rate that may be higher or lower than the initial premium. But your premium can never be more than the guaranteed maximum.

Interest Sensitive Whole Life Insurance
Indeterminate premium life insurance taken a step further ... cash value can increase beyond the stated guarantee if economic conditions warrant. You decide whether you want favorable changes to result in lower premiums or higher cash value. Also called current assumption whole life.

Variable
Has benefits and features similar to traditional whole life insurance, but face amount and cash value depend on investment performance of a special fund. Reserves are placed in investment accounts that are separate from the company's general account. Values of these separate accounts rise or fall based on returns from the separate investments. Face amounts and cash values depend on how investments perform. Most policies guarantee the face amount will not fall below a set minimum. Minimum cash value is rarely guaranteed.

Variable Universal
Combines rate and benefit flexibility of universal life with investment and risk factors of variable life. Like variable life, this product is considered a security. It can only be sold by agents who have passed the National Association of Securities Dealers (NASD) exam.

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Ways to Pay Whole Life Pay Premiums
There are many different ways to pay premiums for whole life insurance, including:
Continuous - Premiums are payable throughout the life of the person insured.
Limited Payment - Payments are limited to a specified number of years, or an age after which premiums are no longer due. The annual premium amount is larger for limited payment policies than for continuous premium policies, but these policies build cash value more quickly.
Single Premium - A type of limited payment policy that requires only one payment and yields instant cash value.
Modified - For an initial specified period of time premium payments are lower, then increase to a level amount for the rest of the life of the policy. The policy's face amount does not change, so you can buy a larger policy than you might be able to afford otherwise. But the cash value grows more slowly than with traditional whole life policies.
Graded - A type of modified premium policy that has three or more steps of payment amounts.

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Participating Policies
Some whole life policies can return money to you in the form of dividends. These are called participating policies. If the company earns a surplus because of profitable operations, owners of participating policies could share in the surplus. Since earning such a surplus depends on many variables, dividends are never guaranteed.

Term Life Insurance - Defined
Term life insurance is the simplest form of life insurance. Term life insurance provides protection for a specific period of time. It pays a benefit only if you die during the term. If you live beyond the specified term, the policy expires without value. It is sometimes called temporary life insurance.

Policies generally last for 5, 10, 15, 20 or 30 years.

Some term life insurance policies can be renewed when you reach the end of the term. The premium rates increase at each renewal date. Many policies require that you present evidence of insurability at renewal to qualify for lower rates.

Some policies are convertible. They guarantee the right to switch or "convert" to one of the company's permanent life policies. Conversion rights usually guarantee that you will be accepted for the permanent life policy regardless of your health when you convert.

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Term Life Insurance Advantages
 Initial premiums generally are 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.
 It's good for covering needs that will disappear in time, such as mortgages or car loans.

Term Life Insurance Disadvantages
  Premiums increase as you grow older.
  Coverage may terminate at the end of the term or become too expensive to continue.
  The policy generally doesn't offer cash value or paid-up insurance.

Types of Term Life Insurance
There are three major types of term life insurance.
Level - Level term life insurance provides a death benefit that stays the same over the period. For example, a 5-year level policy with $10,000 in coverage means the company will pay $10,000 if you die any time during the 5 years the policy is in effect. Premiums normally stay the same ("level") during the term.

Decreasing - Decreasing term life insurance provides a death benefit that decreases over the life of the policy in a specified manner. For example, the benefit during the first year of a 5-year decreasing term policy may be $10,000, and decrease by $2,000 every year. At the end of the fifth year, the face value is zero and coverage expires. Premiums for decreasing term usually remain level.

Increasing - Increasing term life insurance provides a death benefit that increases over the term in a specified manner. For example, the benefit for a 5-year increasing term policy may have a face amount that starts at $10,000 and then increases 5% every policy anniversary date. Or the coverage may be tied to increases in the cost of living as measured by a standard index. Premiums usually increase with the coverage in this type of policy.

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Your choices must fall within the company's specified minimum and maximum amounts. These guidelines are set to meet life insurance regulations and maintain healthy relationships between premium, face amount, benefit, and cash value.

Universal Life Insurance Cash Value Options
It is not guaranteed, but it is possible the cash value in a universal life insurance policy could grow faster than is needed to pay the cost of insurance. You can generally choose how that money is used:
  Leave it there and accumulate interest. Taxes won't be due until you take it in cash, and future premiums may be reduced.
  Take it out in cash. The funds would be treated as taxable income and lower the policy's cash value.
Universal Life Insurance Death Benefit Choices
  Option A (or Option 1): Level death benefit is equal to the universal policy's face amount.
  Option B (or Option 2): Increasing death benefit is equal to the universal policy's face amount plus the policy's account value. Premiums will be higher for an Option B plan.

Should I replace my current life insurance policy with a new one?
Think twice before discontinuing or changing your current life insurance policy in order to buy a new one. It is rarely in your best interest; following are a few reasons why...

 It Could Cost You - During the early years of policy ownership, much of what you paid covered the insurance company's expense of selling and issuing the policy. This expense will be incurred all over again when you buy a new policy.

If a cash value policy is surrendered and the proceeds placed into a new policy, the cash value may be relatively small for several years due to the imposition of surrender charges. In fact, the new policy's cash value may never be as large as that of the existing policy.

If you are older and your health has changed, premiums and/or insurance charges for the new policy will often be higher. Beware of anyone offering free insurance or more insurance at a lower cost. It is likely the premium due on the new policy is being paid by drawing cash from an existing policy.

 You Could Lose Guarantees - Life insurance is purchased to assure the accumulation of a desired amount of liquid capital at death. If you are considering the purchase of a variable life (VL) or variable universal life (VUL) policy, be aware that you bear all of the investment risk and more of the risk of adverse trends in mortality and expenses than with a traditional whole life policy. The cash value, and perhaps the death benefit, under VL and VUL policies would not be guaranteed.

 You Could Lose Benefits - Certain provisions such as the suicide and contestable clauses are required by state law to safeguard the policy owner and beneficiary. Usually after one or two years from the date of the policy, the insurance company cannot challenge the validity of the policy or deny benefits if death is a result of suicide. These clauses, which may have already been satisfied in your existing policy, will often start over on a new policy. The result - the insurance company may have the right to cancel the contract or refuse to pay a claim for certain events during the initial period of the policy.

 You Could Owe Income Taxes - According to Section 72(e) of the Internal Revenue Code, upon the complete surrender of a policy, if the gross cash value of the present policy exceeds the new premiums paid, the difference is taxable to the policyowner. You should understand that a 1035 exchange does not eliminate taxable income if there is a taxable gain and there is an outstanding policy loan at the time of surrender.

 Get All The Facts - Before making the decision to replace or exchange an existing policy, make sure you get all the facts. Read over your existing policy, and ask your representative or a member of your insurer's policyowner service department for a detailed cost breakdown of premiums, cash surrender values and death benefits. Request the same information for the new policy you are considering. Then, compare the two thoroughly. Make sure you hear from both your existing company and your proposed company before you make your decision.

If your requirements have changed since you bought your policy, you may be able to change your present policy, or even add to it, to get the coverage and benefits you now need.

If you decide to replace the policy you now own with other insurance, be sure:
o To insist that the agent making the proposal put it in writing.
o  That you qualify for the insurance applied for.
o  That you do not take action to terminate your existing policy until your new policy has been issued and you have examined it and found it acceptable.

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What is Variable Life Insurance?
Variable life insurance differs from whole and universal life in that policy owners direct the distribution of their premium payments among several different accounts or funds rather than of the company's choosing. Typical account choices are: common stock, bond, mortgage, and money-market accounts.

With a variable policy, the death benefit and cash value benefits vary in relation to the value of the investments underlying the policy. If the value of the accounts increases, so will the benefits; if the value of the account decreases, so will the benefits, subject to a minimum guarantee. Variable life insurance is more risky to the policy owner than the other forms of cash value insurance, but there is a possibility of greater returns.

Variable life insurance is so much like "normal" investing that agents offering it must be licensed securities dealers and registered with the U.S. Securities and Exchange Commission.

What is the Cash Value of a life Insurance Policy?
One important feature of permanent life insurance, which is not found in most term life insurance policies, is a "cash value."  When your premium payments are more than the cost of insurance, the excess goes into a cash value account and draws interest. It is the "savings" portion of a life policy.

The actual amount depends on many factors, including:
 The policy's face amount.
 How long you've owned the policy.
 Length of the premium payment period.
 Whether you have any outstanding policy loans.
Your policy should have a table of cash values. If it doesn't, contact your agent.

Having cash value offers you some options:
1. You can cancel the policy and receive the cash value as a lump sum: the surrender cash value.
2. If you need to stop paying premiums, you can use it to continue your current policy for a specific time.
3. You can withdraw part of the cash value in the form of a policy loan.

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Surrender Cash Value
Cancelling a life insurance policy is called surrendering it. Surrendering the entire value, with termination of all insurance benefits, is often called "cashing out."  Surrender cash value is the amount of cash that is due to the policy owner who surrenders a life insurance policy. It is a refund.

Surrender charges may be deducted if your life insurance policy or annuity is cashed out. The amount of the surrender charges vary widely among insurance companies and may change over the life of the policy.

Life Insurance Policy Loans
Once a policy builds cash value you can use it to get a policy loan. The loan can be for any amount up to the policy's cash value.  A policy loan has some advantages over a commercial loan: the loan is easier to get and there is no schedule for repayment. The insurance company will not check your credit; it will grant the loan based only on your policy's cash value. You can repay a policy loan at any time, in part or in full. Of course, if you die before the loan is repaid, the amount of the unpaid loan (plus interest) is subtracted from the death benefit.

Tip: Some life insurance policyholders have fallen victim to a practice called "twisting" or "churning." Churning occurs when your coverage is changed only to benefit the seller while you suffer a loss in the process. Churning often happens when people with cash-value policies are persuaded to convert their coverage to another policy, often one with a promise of better benefits. The problem is that the cash value of the original policy is raided in order to pay for the new policy. Luckless consumers may not realize until years later that the "higher" benefit policy is actually worth only a fraction of the value of the original policy.

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Health Insurance

PPO (Preferred Provider Organization) Plans
A PPO or Preferred Provider Organization is a group system of health care organized by an insurance company. Physicians, health care providers of all types, hospitals and clinics sign contracts with the PPO system to provide care to its insured people. These medical providers accept the PPO’s fee schedule and guidelines for its managed medical care.

The insured members pay a co-payment at the time of each medical service. For example, at the time of an office visit to a physician, the patient pays $20. Each person will also have a yearly deductible to pay out of his/her pocket, before the insurance company will start paying medical fees. The insurance usually pays a percentage of the medical fees (often 80%) for the in-network doctor, with the patient responsible for the remainder of the bill. If the person wants to see an out-of-network doctor, he/she may do so without permission; but the deductible for out-of-network services may be higher and the percentage the insurance will pay may be lower. In other words, the patient will be responsible for a greater part of the fee. This encourages the people insured with a PPO to use the physicians, other medical providers and hospitals in their network.

Advantages of a PPO include the flexibility of seeking care with an out-of-network provider if so desired, even though it is more out-of-pocket expense for the patient. PPO networks also have prescription services which provide prescription drugs at a reduced cost. The overall premium for a PPO is less than for individual health coverage and will often include more covered medical services. There is a large network of medical providers representing large geographic areas.

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HMO (Health Maintenance Organization) Plans
An HMO, or Health Maintenance Organization, is a type of group health insurance plan. The medical needs of the people who subscribe are provided by a managed system of medical care. It provides its service for these needs through a group of doctors, medical personnel and facilities that work directly for the HMO. The care of its patients is done at its clinics by its doctors. Each patient is required to pick a primary care physician who will then direct his/her medical needs through one of the system’s clinics. So, it is necessary for the insured members to live or work in close proximity to the clinics or medical facilities.
If a person needs routine medical care, he/she would go to the HMO clinic for care, paying a small co-payment at each visit. Likewise, if the person is sick, he/she would do the same. The clinics have many types of doctors who will treat the patient for whatever illness is present. Until recently, few referrals for care outside of the system were given.

The advantage of this form of medical care includes slightly lower annual premiums, because the cost of care is spread out among the members. In addition, there is little paperwork dealing with insurance forms for the patients. And there is an influence of prevention at an HMO, whereby programs are provided to its members which promote healthier life choices and better health. The disadvantages include fewer choices for medical care outside of the HMO, since referrals to specialists are sometimes limited. If a specialist is needed for an unusual medical condition, the person may want to see someone outside of the system and there will also be a greater cost. The requirement to pick a primary care physician at the HMO may seem inflexible to many also.

For people requiring mostly routine care, people who have no unusual medical needs requiring out-of-network specialists, and people who like their medical care in an organized way, an HMO is excellent.

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POS (Point of Service) Plans
A POS or Point of Service plan is another type of managed care group health insurance with characteristics of both an HMO and a PPO. There is more flexibility than in the HMO plans and less than in a PPO. In a POS plan, you select a primary care physician from a list of participating providers, like in an HMO. All your medical care is directed by this physician, so he is your “point of service.” This doctor will normally refer you to other in-network physicians if you have a need for a specialist. There is a broad base of medical providers in the network which typically covers a wide geographic area.

You will also have a choice to see out-of-network providers when you need a specialist, like in a PPO plan. Here, however, you will be required to do paperwork yourself and submit claims for reimbursement from the insurance company. The percentage the insurance company pays for out-of-network charges is lower. Most plans require you to go through your primary care physician before you see the out-of-network specialist. If you refer yourself to an out-of-network doctor, the POS plan often pays even less.

In a POS, you have greater freedom to see out-of-network providers than with an HMO. However, this freedom comes with a price, so that every time you see an out-of-network provider, it costs extra. Your decision about choosing this type of plan may rest on whether this freedom is worth the extra premium price. There is an emphasis on prevention and health education, similar to that with an HMO, where members are encouraged to participate in programs which lead them to healthier choices and lifestyles.

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Health Savings Accounts (HSA)
In the attempt to provide help and affordable options in health insurance to Americans, the idea of the Health Savings Account (HSA) arose. It is meant to replace high cost, low deductible health insurance policies that may be out of the reach of many Americans. It can also be used to supplement retirement if you are healthy because the money can stay in the account and grow with tax advantages.

Health Savings Accounts are fairly new since they were only signed into law in December of 2003. They are actually a better version of medical savings accounts or MSAs. An HSA is an account, similar to an IRA, devoted solely to health expenses and used with a high deductible health insurance policy. The idea is the high deductible insurance policies cost less and the money saved can be put into the HSA account. The funds are then used for medical fees until the deductible is met. Any unused portion remains in the account and earns tax-free interest. The insurance is used for medical problems that exceed the deductible of the policy.

There are many other tax advantages with an HSA: within a limit, money deposited into an HSA account is exempt from income tax; some states also make the money free from state tax; the money withdrawn to pay medical expenses is also tax free; HSA money is portable and can be moved with you when changing jobs; and again, money not used is allowed to stay in the account, earning interest that is not taxed. Also, after the age of 65, you can withdraw your money from the account for any reason. That leads into a few disadvantages: until the age of 65, any money that is not spent on medical needs out of the account is added to the person’s gross income for tax purposes and will generate an additional 10% tax. Also, you must always have a high deductible health insurance policy in place, with the deductible a minimum of $1000 for single coverage and $2000 for family coverage. There is also a stipulation that in the insurance policy, out-of-pocket expenses cannot be more than $5000 for individuals and $10,000 for families. One more negative issue: there could be potential problems for employers when initially working with the new HSA and the existing health plan.

In order to utilize a Health Savings Account, you must be under 65 years of age and you cannot be claimed as a dependent under anyone else’s tax return. You must have a high deductible health insurance policy at the time of deposits into the HSA account. You also cannot have other health insurance at the same time, except the following types: specific injury and accident, disability, long term, dental and vision.

There is no doubt that the new Health Savings Accounts will provide lower premiums for health insurance, be a great investment vehicle, and provide tax benefits for those who are able to use them. Just the ability to use pre-tax dollars to pay for medical fees is a huge improvement. Because the high premium of regular health insurance is a stumbling block to many people’s ability to afford health insurance, the use of HSAs might be the edge they need to manage insurance now.

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