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Life Insurance Frequently Asked Questions
Why should I read this? If you
want to make provisions for the welfare of your loved ones after
your death but find the subject of life insurance confusing or intimidating,
read on. It's easier to understand than you think, and the rewards
can be substantial. What is life insurance? Life insurance is a financial resource for your loved ones in the event of your death. You enter into a contract with an insurance company, which promises to provide your beneficiary(ies) with a certain amount of money upon your death. In return, you make periodic payments, known as premiums. The amount of the premiums generally depends on factors such as your age, gender, occupation, medical history and whether you intend to build up cash value in your policy. Some policies may require a medical exam. Certain types of life insurance may also provide benefits for you
and your family while you're still living. Such policies accumulate
cash value on a tax-deferred basis that can be used for future needs
such as supplementing your retirement income or helping provide
for a child's education. Do I need life insurance? The
ability to earn an income can be considered your family's most valuable
asset because your income allows you to obtain other assets, particularly
the necessities of life and, of course, the creature comforts. However,
as we know, the ability to earn an income is not guaranteed. Yet,
the need for income may continue for those who were financially
dependent upon you. Consequently, your need for life insurance and
the amount will depend upon your personal and financial circumstances.
If any of the following statements apply to you, you probably do
need to consider life insurance:
What are some other reasons you may want
to consider life insurance? In addition to the comfort
of knowing that you have provided for your loved ones after your
death, there are several other reasons you may want to consider
life insurance, including:
How can I choose the policy that's right
for me? Life insurance is a Long Term commitment. Before
buying any policy, ask yourself these very important questions:
What are my options? There are four basic types of life insurance to meet your individual needs.
How can I conserve costs? Here are some ways you can save money when purchasing the life insurance that's right for you.
You may be able to obtain coverage up to a certain level without
providing evidence of good health, a key advantage. Additionally,
group insurance plans often provide for continued coverage during
periods of disability. Many plans are administered through payroll
deduction, a very convenient way to pay for coverage. And finally,
many plans allow you to continue your coverage even after you leave
employment by continuing payment of premiums or converting coverage
to an individual policy. What if I already have life insurance
coverage? Even if you have life insurance, keep in mind
that life changes and, as it changes, so do your needs for protection.
Your life insurance needs should be reviewed every few years. Any
of the changes listed below should prompt you to sit down with your
insurance agent to make sure your plan is still appropriate.
Can I trade or replace my policy?
You can trade or replace your policy, but it's not something to
be considered lightly, regardless of whether you are thinking of
switching policies within the same company or switching from one
company to another. New policies typically have high costs the first
few years and there is normally a new "contestability period"
during which the insurer can cancel the policy and refuse to pay
death benefits if an application was misleading. If you want to
increase your total life insurance, it is probably better to keep
your old policy and simply add a new one, or increase your specified
face amount under the same life insurance policy. For example, suppose
your objective is to have $100,000 of life insurance and you currently
have $50,000. It maybe better to keep the existing $50,000 policy
and buy a second $50,000 policy to reach your goal of $100,000.
Your existing policy premiums will generally be less than those
for the new policy, because you bought it when you were younger
and you won't lose any existing cash value. Be sure to ask your
agent, financial advisor or insurance company about the best alternative
for your specific situation. How can I tell how much life insurance
I need? Usually a good rule of thumb is 15 to 20 times
your annual income, if you have dependent children. It is recommended
that you have a professional evaluate your current situation to
determine how much coverage you should have. What is the difference between “term” and “whole life” insurance? Term life provides death benefit only for a low cost in the early years. It gets very expensive as time goes on. Only 2% of term policies ever pay a death benefit because most people drop them when the cost goes up. It is excellent for short-term coverage. Whole life provides lifetime coverage. The premiums are more expensive in the early years, but you get level cost, a cash value buildup in a tax friendly environment, low cost loans, and lifetime coverage. This can be an excellent Long Term solution. What is the best way to compare alternative
policies? You need to look at how long you will need the
coverage, what your financial situation is now, and what the outlook
for you and your family is in the future. You can compare surrender
cost indexes on policies to give you an indication of the net cost
of insurance. Meeting with an advisor will also help you evaluate
which plan is best for you. I heard that disability insurance is
sometimes more important that life insurance. Is this true?
It depends. Disability insurance is very important, and you should
get as much as you can. If you were suddenly unable to work and
your income disappeared, then the effect on you and your family
could be very detrimental, financially and otherwise. In addition,
you need life insurance if people are dependent on your income for
their survival. As you get closer to retirement and you have accumulated
substantial assets, life insurance becomes more important for estate
planning reasons. The bottom line is that most people need the maximum
amount of both types of coverage. I have life insurance at work and have other policies, why should I review my life insurance? You should review your insurance coverage every few years. Perhaps your income has increased or decreased. You may have more responsibilities such as new children, new marriage, a spouse may not be working any more, larger debt obligations. The amount of coverage and the type of coverage may need to be
changed or modified. You may be at the tail end of a 10 or 20-year
term life insurance policy and the rates are ready to increase substantially. How do I determine the amount of life
insurance that is needed for my spouse and me? The first
thing to determine is the amount of your outstanding monthly obligations,
then you need to determine your future obligations such as college
cost and taxes on retirement plans. In addition you need to look
at inflation, your cost of living today will increase by 2 to 10
percent per year due to inflation. If you are spending $50,000 per
year to live in 2005 dollars you will need more money to live 10,
20, 30 or 40 years from now. Typically people need 10 to 20 times
their income in life insurance and other liquid assets. Most people
are substantially underinsured based on their income and their consumption.
It is good to run a human life value calculation to see what you
are worth to your family in the event of your death. What insurance issues should I be concerned
with during divorce proceedings? There are several issues.
First of all, just as with any other property, you need to determine
who will be the owner of your various insurance policies. Secondly,
if both spouses and child(ren) are covered under a group health
plan, how will both spouses and child(ren) be covered after the
divorce? Thirdly, consider what will happen to the income from the
support order or alimony if the provider should die. Why is ownership of the insurance policies
important? The owner controls the policy and has the right
to name the beneficiaries. For instance, your spouse may be the
current owner of a life insurance policy that has you named as the
beneficiary. This means that your spouse could change the beneficiary
at any time, contrary to what you might desire or need. What will happen to the income from the
support order or alimony if the provider should die? You
should ask your attorney whether the divorce settlement will include
a provision for life insurance on the provider, to protect the support
order or alimony. If not, you might consider purchasing such a policy
yourself. How much life insurance is needed to
protect the support order or alimony? We have provided
a life insurance calculator to assist
you in this regard. How much does life insurance cost? We
have provided a life insurance quote engine
to assist you in this regard. What health considerations are important
in buying life insurance? Your personal and family health
history are big factors in determining the rate class under which
you can purchase life insurance. Many sites only quote the rates
for the healthiest people, but this can be misleading. Follow
this link to obtain life insurance quotes that consider your
underwriting profile. If I need to purchase life insurance,
which companies have the cheapest rates? See this independent
survey of competitive term life insurance companies by accessing
our life insurance quote engine. College Funding Frequently Asked Questions
How do I use Life Insurance as a College Funding Source? A life insurance policy is a good resource to make current college tuition costs more affordable. Anyone with children is already well aware of the high cost of college tuition and may have even started saving up for the thousands you'll spend. A life insurance policy can be used as an additional college savings resource as well as a guarantee that, in the event of a premature death of you or your spouse, your child will have access to sufficient funds to finance a college education. Using cash value feature as a tool for college savings. The savings component of a cash-value insurance policy can be used to put aside money to cover the cost of tuition. This savings feature allows a portion of your premiums to be invested. Depending upon the type of policy, either you or the insurance company creates and maintains your personal portfolio. If the bills for tuition become too burdensome, you can take out a loan up to the amount of accumulated savings. The insurance company charges you a lower interest on the loan than any other financial institution will. If you take this route, the death benefit of your insurance policy will be reduced by the amount you have taken out on loan. If you choose to pay off the loan, the original amount of your death benefit will be re-established. The advantage to using your savings from a life insurance policy instead of from another source is that no taxes are applicable to these loans as long as you make your premium payments. Furthermore, the interest you earn from your life insurance policy's investments is non-taxable as income. Because your earnings are never reduced by taxes, your policy's portfolio increases more rapidly than if it were invested without the aid of a life insurance policy. In essence, your money grows tax-deferred and can be used tax-free!! Remember, a permanent life insurance policy with a cash-value is
needed if saving for college is part of the reason why you would
choose to get insured. Give us a call and we can discuss your protection
and investment options, and present you with a quote on what the
associated costs would be. What are my options of paying for my children’s college education?
How many parents want their children to start out with such substantial debt?
If my child chooses not go to college will I lose the money I invested in a 529 Plan? One option you would have is to change the beneficiary to another member of the family. That could be the current beneficiary’s brother or sister. It could also be the beneficiary’s cousin, although the cousin alternative will disappear at the end of 2010 unless Congress extends current treatment (which we expect to happen). You could even move the beneficiary up or down the family tree, naming the beneficiary’s child, parent, or even yourself as replacement beneficiary. Another option you have is to take the money back out of the 529
plan for yourself. However, you probably won’t want to do
this unless you have a real need for the funds. Any earnings growth
in the account will be taxable to you at your ordinary income rate
plus a 10-percent penalty rate. The fact that the account beneficiary
can be changed as many times as you want means that any excess funds
in your 529 plan can remain there to be passed down from generation
to generation (check to see if your 529 plan has a restriction on
how long the account can stay open—many do not). LTC Frequently Asked Questions
Why would I need Long Term Care Insurance?
You could need Long Term Care Insurance if you were to
suffer an illness, need major surgery, get in a severe car accident,
slip and fall, and break a hip, or encounter a disability or simply
grow old and fragile, you may require long term care. Wouldn't my health insurance pay for my
long term care? No. Health insurance pays for medical treatment
that is making you “better”. Once there is no sign of improvement
from the care being delivered, it is consider long term care, and
your health insurance no longer pays for that. Who Needs Long Term Care Insurance?
Long Term care goes beyond medical care and nursing care to include
all the assistance you could need if a chronic illness or disability
leaves you unable to care for yourself for an extended period of
time. If you can afford Long Term Care Insurance, you should consider
it. What is Long Term Care Insurance?
It is a transfer of risk, which you can use at any age, and it pays
for care anywhere. How much does Long Term Care cost?
Nationally - the average cost per year in a nursing home is $61,000. In some regions,
it can cost twice that. Home care is also expensive. A home health
aide visiting just three times a week for eight hours – to help
with bathing, dressing, and other activities of daily living – can
cost $20,000 per year. These costs are expected to increase at least
5 percent each year. Can I afford Long Term Care Insurance?
A good rule of thumb is to purchase a policy if it costs no more
than 7 percent of your gross income. The other question to ask yourself,
is “Can you afford not to have the insurance and spend the $60,000-$100,000
per year if and when you need care?” Will Long Term Care Insurance allow me
to have care at home ? Long Term Care Insurance pays for
care in your home or at any level of care facility. (See LTC Definitions
– Types of Facilities). What are activities of daily living? ADL's
are used to determine whether a person needs Long Term Care and
is eligible to receive benefits from a Long Term care insurance
policy. ADLs are bathing, eating, dressing, toileting, transferring,
and continence. (See LTC Definitions – Benefit Triggers). Most policies
require that a person be unable to perform two of the six ADLs to
qualify for Long Term care insurance benefits. Is Alzheimer's disease covered by Long Term
care insurance? Most policies today cover Alzheimer's disease.
Check your policy before purchasing. What are the tax implications of having
Long Term Care Insurance? Recent changes in the law allow
the premiums and benefits of Long Term care insurance, as well as
consumers' out of pockets expenses for Long Term care, to be tax
deductible under certain circumstances. Employers may count their
contributions to employee Long Term care insurance planes as a business
expense. How can I keep my premium costs down?
Premiums are based on your age and the coverage you receive.
The younger you are when you purchase Long Term Care Insurance,
the lower your premiums will be. More limited coverage, such as
a lower daily benefit, a longer elimination period, or a shorter
benefit period, will also result in lower premiums. How do I know the coverage I buy today
will still be sufficient in 15 years? Inflation protection
is a critical option that increases coverage by five percent annually
on either a simple or compounded basis, or allows the purchase of
increased coverage based on the Consumer Price Index. For those
buying Long Term Care Insurance at a younger age, this feature is
essential for full protection against rapidly rising costs. What is a Life Insurance policy with a
Long Term Care Insurance rider? This policy is purchased
to satisfy to purposes insurance protection in the event of an illness
or injury (Long Term Care Insurance) and a death benefit in the
event of your death. If at any point you cannot perform 2 ADL's
the LTC rider would begin paying your benefit. In the event of your
death, your beneficiaries would receive a predetermined death benefit
when you die. Money/Divorce Frequently Asked Questions
What is Separate property? What is Community property? How is property divided? Are insurance policies considered community
property? What do I do if I received my spousal
support in a lump sum? What should I do when I receive my portion
of my ex-husbands retirement plan? How are pensions and other retirement
benefits treated in the divorce proceedings? Retirement
Planning Frequently Asked Questions Yet saving, especially for retirement, should start early and continue throughout your lifetime. Here are fifteen questions to help you think about retirement and take charge of your financial future:
Do you work for an employer that offers
a pension plan or a 401K? Do you know what type of plan it is? Are you included in the plan? Have you worked at the job long enough
to earn a pension? Too often employees, especially women, quit work, transfer to another
job or interrupt their work lives just short of the time required
to become vested. Ask the personnel office, pension plan administrator
or union representative about the vesting period and other details
of your company pension plan. Do you know how much your pension will
be? What happens to your pension if you change
jobs? A word of caution: If you receive your pension in a lump sum, you will owe additional income taxes, and may owe a penalty tax. A better way is to reinvest your savings in another qualified pension plan or an Individual Retirement Account (IRA) within 60 days. You avoid tax penalties and you keep your Long Term retirement goals on track. If you do want to reinvest the money, it is important that you
do not directly receive it. If you receive the money directly, you
will have to pay a 20 percent withholding tax on the amount you
receive and then file for a refund in the next year, providing proof
that you have transferred the funds to an IRA. Instead, you should
instruct the pension plan to transfer your pension money directly
to an IRA or other qualified pension fund you have established.
This is easy to do using simple forms supplied by the new plan.
If you want help with the forms, representatives of the plan are
generally available to assist you. Do you know what happens to your pension
if you retire early? Do you know what happens to a pension
if you or your spouse dies? Is your pension insured? Are you tracking your Social Security
earnings? Can my pension benefits be reduced by
Social Security or other government payments? Do you have pension information from all
your jobs? Do you know what benefits your spouse's
plan provides? Are you entitled to a portion of your
spouse pension benefit if you and your husband divorce? Do you know how you can save for retirement
if you do not have a pension plan? |
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