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Life insurance helps protect families by replacing lost income if a wage earner dies. Some policies also accumulate cash and provide payments during the policyholders lifetime. When purchasing life insurance, consider your individual circumstances and the standard of living you want for your dependents.

In most cases, you need life insurance only if someone depends on you for support. If you are thinking about purchasing life insurance, remember

Single adults usually have little need for life insurance, unless they are single parents or support someone such as an elderly parent.
Working couples without children or dependent parents usually do not need life insurance, particularly if the surviving spouse would make enough money to meet expenses and pay debts without exhausting savings.
Families (including single-parent households) usually need life insurance because the children depend on the parents income. The younger the children, the greater the need for life insurance. Older people whose children are grown and independent are less likely to need life insurance.
A well-planned savings program should decrease the familys need for life insurance as wage earners approach retirement age.
All life insurance policies are either "term" or "cash value" plans or a combination of the two.

Types of Life Insurance
Term Life

Term life policies cover you only for a "term"or a specific period of timeusually for one, five, 10, 15, or 20 years or until a specified age, such as 65.

Most term life policies provide only death benefits, a check to your beneficiary for the amount of the policy if you die. Because they usually have no savings feature, term life policies generally are less expensive and easier to understand than cash value life policies. Except for people past middle age, term life policies usually offer the best value for your money by giving you the biggest death benefit for your premium dollar. The price of a term life policy increases as you grow older. At the same time, your insurance needs may decrease as children grow up and savings and investments increase in value.

Renewable and Convertible Policies

Because term life expires at the end of the term, you should look for a renewable policy. A renewable policy allows you to continue your insurance for additional terms regardless of your health and without having to pass a medical exam. This is an important advantage because it may be harder for you to pass a physical exam as you grow older or if you become ill.

You will have a new contestable period with each new policy. During the contestable period, a company can deny payment of a claim because of suicide or material misrepresentation on the application

Most term insurance policies are convertible. This means that as your insurance needs change, you can exchange your term life policy for a cash value policy without taking a medical exam or answering health questions. You may choose to convert your term life policy if your health declines and it becomes difficult to qualify for a new term policy at standard rates. You also may convert your term life policy if you decide to use insurance as a way of accumulating funds instead of providing only death benefits. Insurance companies usually allow conversion until age 65.

Common Policy Variations

Annually renewable term (ART) - You may renew most ART policies up to age 100. However, ART premiums are extremely high for middle age and older consumers. If youre paying high premiums, you may want to shop around for a better value.

An ART provides a fixed premium and death benefit for one year. When the term ends, you may renew your policy, but the premium will probably increase. To avoid yearly increases, some people look for five-, 10-, or 20-year renewable term policies.

Decreasing term - This policy provides death benefits that decrease each year. Mortgage insurance and credit life insurance are examples of decreasing term policies. The initial death benefit may equal or approximate the amount of your loan, with the benefit decreasing as you pay off your loan. If you die, the insurance benefits pay off or reduce your loan balance.

Cash Value Life

Cash value life policies provide a death benefit and a way to accumulate funds over time. However, the primary purpose of a cash value policy is to provide permanent life insurance protection, not to be a savings or retirement plan.

Cash value life policies differ from term life policies in several ways, including

Higher initial premiums. You pay not only for a death benefit but also for the cash value feature of the policy. Overall, cash value policies offer less insurance protection per premium dollar than term life policies.
Greater flexibility. You can use the cash value as collateral for a loan. Some people buy cash value policies as a tax-deferred way to build an estate. Dividend-paying policies usually provide an option to apply the dividends to pay all or part of the premiums. Other cash value policies such as universal life provide for payment of the cost of the policy if the policy has accumulated sufficient value.
Much higher agent commissions. Keep this in mind if an agent continues to recommend a cash value life policy when you ask about term life.
Remember that surrender charges and other expenses may consume all or most of a policys cash value if you cash it in early. It usually takes at least three to five years to build any cash value. If you buy a cash value policy, try to continue your premium payments for at least 15 to 20 years.

About half the people who buy cash value policies drop them within five years. Dropping a cash value policy can be costly, so think carefully before buying one.

Tips to Protect Yourself

Life insurance agents use charts or illustrations as sales tools to show how a policys cash value might grow. Confirm that the illustration shows the guaranteed values based on the guaranteed interest rate the company promises to pay. Dont buy a policy based on projected future or current values. These are only estimates and may be higher than what you will actually receive. Understand the pattern of policy values, surrender charges, and other expenses. Ask your agent for this information if the illustration doesnt show it. Get copies of all the illustration pages, including those showing the guaranteed values.
Paid-up additions is additional insurance purchased with interest or dividends paid on your policy. Some policies include a column showing the paid-up additions increasing the death benefit over time. Remember, this additional insurance is not guaranteed.
Be careful if an agent tells you that interest or dividends on your policy will cause your premiums to "vanish" during the life of the policy. If interest rates or dividends drop, you may have to pay additional premiums for a longer time. Also, the amount you pay may be greater than you estimated.
Be sure the agent illustrates the guaranteed values based on the guaranteed assumptions stated in the policy. Projected values based on current assumptions are not guaranteed, and should never be considered or relied upon as a promise of future policy performance. Since a universal life policy is "interest-sensitive," it is likely to pay more in times of high interest rates and less in times of low interest rates.
Whole Life

Whole life policies are a type of cash value life insurance that offer protection throughout a lifetimethat is for a persons "whole life." You pay the same scheduled premium from the day you buy the policy. There is no need to renew whole life policies. As long as you pay the premium when due, the policy remains in force throughout your life or until you cash it in. The scheduled premium may be level or increase after a fixed time period, but the premium will not change from the amount shown in the policy schedule. It is important that you look at the policy schedule and understand what your premium payments will be and that you can afford them. An insurance company will base the premium on your age at the time of purchase. Initially, the premium for a whole life policy will be higher than that for a term policy. You likely will pay a lower premium when you are older, if you keep the policy for a long time. Part of each premium payment goes to the cash value growth, part for the death benefit, and part for expenses such as commissions and administrative costs.

There are two types of traditional whole life policies:

Nonparticipating policies provide a schedule of guaranteed premiums and death benefits and a table of guaranteed values, but they pay no dividends.
Participating policies guarantee premiums, death benefits, and cash values, and also may pay policy dividends. Because of the dividend feature, premiums tend to be higher. Consumers have several options for using policy dividends, including
letting the dividends accumulate with interest
taking the dividends in cash
using the dividends to pay toward the premium, buy permanent paid-up additions, or buy a combination of one-year term and additional permanent paid-up additions.
Some companies fail to pay dividends at the originally projected rate, while others exceed their original projections. When making your purchase decision, remember that dividends are not guaranteed and may differ from those shown in illustrations. Ask for a companys history of projected dividends versus paid dividends.

If you decide to switch policies, make sure your new policy is in effect before dropping your old one. It is generally not a good idea to cancel a cash value policy in favor of a new one, but there are exceptions. Contact an agent of the original company for your options. You also may contact the Consumer Federation of America (CFA) for an analysis of the return rate on a cash value life policy. For a fee CFA will calculate the actual interest rates on the cash values so that you can compare policies and make a more informed decision. For more information, contact the CFA or visit its Web site

Consumer Federation of America
1424 16th Street, N.W., Suite 604
Washington, DC 20036
www.consumerfed.org
Flexible Premium Universal Life

The key characteristic of a universal life policy is flexibility. Within limits, you can choose the amount of insurance and the premium you will pay. Later, depending on the policy value and your financial needs, you can change your premium amount. The policy stays in force as long as its value is enough to pay its costs and expenses. The policy value is "interest-sensitive," which means that it varies with the general financial climate.

Lowering the death benefit and raising the premium will increase the growth rate of your policy. The opposite is also true. Raising the death benefit and lowering the premium will slow the growth of your policy. If insufficient premiums are paid, the policy could lapse without value before it reaches a maturity date. The maturity date is the date your policy ceases and its cash surrender value is payable if the policyholder is still living. Therefore, it is your responsibility to consistently pay a premium that is high enough to ensure that your policys value is adequate to pay the policys monthly cost. The company must send you an annual report and notify you if you are in danger of losing your policy because of insufficient value.

Comparing the Major Types of Life Insurance
  TERM LIFE WHOLE LIFE UNIVERSAL LIFE
PREMIUM Lower initially. Increases with each renewal. Higher initially than term. Normally doesnt increase. Flexible premiums.
PROTECTS FOR A specified period. Entire life if you keep the policy. A flexible time period.
POLICY BENEFITS Death benefits only. Death benefits and eventually a cash and loan value. Flexible death benefits and eventually cash and loan value.
ADVANTAGE TO BUYER Low outlay. Initially buyer can purchase a larger amount of coverage for a lower premium. Buyer could consider developing outside investment program. Helps buyer with financial discipline. Fixed premium amount. Cash value accumulation. Buyer can take loan against policy. More flexibility. Takes advantage of current interest rates. Offers the possibility of improved mortality rates (increased life expectancy because of advancements in medicine, which may lower policy costs).
DISADVANTAGES TO BUYER Premium increases with age. No cash value. Costly if you surrender early. Usually no cash value for at least three to five years. Does not meet short-term needs. Same as whole life and buyer assumes greater risks due to program flexibility. Low interest rates can affect cash value and premiums
OPTIONS May be renewable or convertible to a whole life policy. May pay dividends. May provide a reduced paid-up policy. Partial cash surrenders permitted. Minimum death benefit. Partial cash surrenders permitted.

Other Life Coverages
Variable Life

A variable life policy allows the owner to invest the policy values in a selection of separate accounts similar to mutual funds. Separate accounts could include money market funds and mutual funds invested in stocks and bonds. A variable life policy presents a higher risk to the owner because the cash value varies based on the investment performance of the separate account. (See "Guaranty Associations.")

Group Life

A group life policy provides coverage to a group of people under one contract. Most group life contracts are sold to businesses to cover their employees. Associations buy group life policies to cover their members. Lending institutions buy the policies to cover their debtor loans. Most group life policies are for term insurance.

Generally, an insurance company issues a master policy, and each person in the group receives a certificate of insurance.

If you terminate your employment, you may convert to an individual policy and keep your coverage. An insurance company may not apply a new contestable period if your group life policy has been in force for two years and the insurance amount is the same or less than your original policy. If you convert your policy before the two-year contestable period ends, an insurance company may continue the contestable period until you reach the time limit under the original group policy. If you increase the amount of coverage in the converted policy, a company may apply a new contestable or suicide period only to the increased amount of coverage.

A group life policy isnt always a low-cost policy. Compare the cost of your coverage under a group policy to the cost of an individual policy and shop around for the best deal. Employers should compare prices and coverages to get the best group policy for their employees.

Credit Life

People buy credit life insurance to pay off loans or charge account balances if they die. Some lenders or sellers may require credit life insurance before they will approve a loan. Sellers or lenders that require credit life insurance cannot require borrowers to purchase the coverage from them or a particular insurance company. If you have an existing life policy, the creditor must accept an assignment of benefits under your existing policy instead of requiring you to purchase credit life insurance.

The Texas Department of Insurance (TDI) regulates premium rates for credit life insurance on loans of 10 years or less. Loans longer than 10 years are not regulated.

Credit life insurance raises the amount you pay on a loan because creditors add the premium to the total loan amount on which you pay interest. You may not need credit life insurance if you already have enough life insurance or if you are able to purchase a life insurance policy. If you bought a credit life policy without realizing that you could use your existing life insurance policy, you can usually stop the credit life payment and receive a refund for any premium paid in advance.

Home Service Life

Home service refers to a method of selling and servicing insurance, generally life and health insurance. Some companies that market on a home service basis sell "industrial life insurance," which is frequently a low-death-benefit policy that accumulates cash value at a very low rate. The relative cost of an industrial life policy is extremely high compared to some other cash value and term life policies.

Accelerated Death Benefits

If your policy has an accelerated death benefit provision, under certain conditions it will pay you the policys death benefit while you are still alive. If your life insurance policy contains this type of benefit, you can receive an early benefit payment based on your need for long-term care services, with the same benefit eligibility requirements as a long-term care policy. It also can be paid for a specified disease (a disease or condition likely to cause permanent disability or premature death, such as AIDS or cancer) or a terminal illness (life expectancy of two years or less). The accelerated death benefit can be part of the policy or attached as a rider.

An accelerated death benefit may be either tax qualified or non-tax qualified. To be tax qualified, benefits must be paid for a terminal illness when your life expectancy is two years or less or for a "qualified long-term care illness."

To have a qualified long-term care illness, you must meet the following benefit eligibility requirements:

be diagnosed as "chronically ill"
receive long-term care services through a "plan of care" prescribed by a licensed health care practitioner.
You will be considered "chronically ill" if you meet one of the following standards:

Due to disability or age, you are expected to be unable to do at least two of six Activities of Daily Living (ADLs) without substantial help from another person for at least 90 days. ADLs are bathing, dressing, toileting, transferring (mobility), eating, and continence.
You need substantial supervision to protect your health and safety because you are cognitively impaired.
Your qualified long-term care illness must have been diagnosed by a licensed health care practitioner within the 12 months prior to approval of your request for the accelerated benefit.

By law, an accelerated death benefit must contain clear disclosures regarding possible adverse tax consequences and the effect of an accelerated death benefit on eligibility for Medicaid or other government benefits.