Life Insurance
The basic purpose of life insurance is to protect the people who depend on your income—your spouse and children or other family members. If you die, the insurance replaces your lost income. Life insurance may also be used as an investment vehicle with the goal of building cash value and as a part of estate planning with the goal of passing something of value along to your heirs.
What types of life insurance are there? | Who needs life insurance? How much life insurance is enough?
What types of life insurance are there?
There are two basic types of life insurance policies: term and permanent. Each type has variations.
- Term life insurance provides protection for a particular amount of time. It's the simplest form of life insurance because the death benefit is paid only if the insured dies within the covered time period and it doesn't have any additional cash value. Variations include renewable term, convertible term, level term, and decreasing term.
- Renewable term — coverage can be renewed at the end of the term without having to submit medical information. Premium rate will usually increase with each renewal.
- Convertible term — can convert term coverage into permanent coverage without needing to provide proof of insurability.
- Level term — premium remains fixed for the life of the policy—up to 30 years. (Depending on age at issue.)
- Decreasing term — death benefit decreases over the term. The premium varies over the term of the policy. (Decreasing term life is very seldom sold except in the form of credit life insurance that may be sold with a loan to guarantee loan payments.)
- Permanent life insurance provides lifelong protection. As long as the premiums are paid, the death benefit will be paid and future insurability is guaranteed (you can't be dropped for age or health, for instance). Most of these policies provide a cash value (also called a cash surrender value). The cash value is different from the face amount — which is the death benefit. Whole life, universal life, and variable life are types of permanent insurance.
- Whole or ordinary life offers a death benefit and an investment component. Your premium is divided into two parts: one pays for the insurance coverage, the other is the investments component that earns interest (or dividends).
- Universal or adjustable life offers a death benefit and an interest component that generally earns a fixed rate of interest. This type of policy is more flexible in allowing you to make changes to the policy such as using the money that has accumulated in the investments component to pay or reduce your premiums for the insurance component.
- Variable life offers a death benefit and an investment component that is invested in a portfolio of managed accounts with varying degrees of stock and bond market exposure. This type of policy is more risky due to the investment component. Poor investment performance could cause the death benefit to decrease. Good perfomance could cause benefits to increase. Some policies may have a minimum death benefit that the policy value may not fall below.
- Variable-universal life combines the features of variable and universal.
Who needs life insurance? How much life insurance is enough?
Before you start looking at life insurance policies you should define your needs. That is, what expenses need to be covered if the insured dies? Typical needs may include:
- support for dependent children and surviving spouse
- college funding for the children
- payoff of loans: mortgage, auto, credit cards, etc.
- additional expenses: childcare, household services, etc.
- special needs: care of aging parents, special needs child
- estate taxes
Use your needs list to determine the dollar amount of insurance that you may need. Consulting a qualified, experienced life insurance or financial planning professional may be very helpful at this stage.
What if you are single and childless? Do you need life insurance? Again, you must look at your needs and goals. Although you might not have a spouse and family you need to provide for in the event of your unexpected or far-in-the-future death, you may have other needs or goals best answered by life insurance.
Only after you have determined your reasons for having life insurance can you decide which type of life insurance policy is appropriate.
How much does life insurance cost?
There's no simple answer to this question because the cost varies widely depending on the type of policy, the insurance amount, and your age, gender, health, driving history, and dangerous activities. In general because it provides only a death benefit for a specific period of time, term life insurance provides a greater death benefit face value for a smaller premium than any of the permanent life insurance products.
The next section outlines some of the potential advantages and disadvantages of each type of life insurance. This table can help you identify life insurance products you may wish to explore further.
Is a health exam required to obtain life insurance?
Most applications for individual life insurance policies, unlike most group policies, require at a minimum that you answer questions or a questionnaire about your medical history or certain aspects of it. The older you are and the larger the face value of the policy you desire, then the more extensive the medical information required. Typical tests required are blood work, urine exam, basic physical exam, electrocardiogram (ECG) and X-rays. For some policies, a treadmill stress ECG may also be required. Typically the insurance company will have you use labs and medical service providers (often independent contractor paramedics) they designate. The insurance company's examination is directed at learning any physical conditions, such as high cholesterol, obesity, high blood pressure or diabetes, that may affect your life expectancy.
Always complete medical and health history questions as completely and truthfully as you can. Think you won't mention you're a smoker or have some chronic condition? Not only is that fraud that could void your policy, but insurance companies usually require your permission to access the national Medical Information Bureau, a clearinghouse database of medical information insurers share. Finding out that you've been less than forthright on your application could lead a company to turn down your application.
If, on the other hand, you feel you have been denied life insurance coverage on the basis of inaccurate information or testing, you can appeal. Ask your agent for help. Often you can ask to resubmit blood work and the like if the insurance company's exam yielded results that differed from your usual results.
Potential Advantages and Disadvantages of Types of Life Insurance
As you use the following table, remember that your particular needs and goals for life insurance have a major impact in determining whether a particular type policy may be advantageous or disadvantageous for you and your family.
| Type of Insurance | Advantages | Disadvantages |
| Term Life Insurance |
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| Whole Life Insurance |
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| Universal Life Insurance |
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| Variable Life Insurance |
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| Variable-Universal Life Insurance |
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A Word about Annuities
Annuities are financial contracts with an insurance company designed to be a source of retirement income. They can be purchased with a single lump-sum premium (single-premium) or with a series of regular payments over time (flexible-payment). Annuities are also categorized by several other factors:
- Fixed annuities earn a guaranteed rate of interest for a specific time period. The security of the annuity is tied to the financial health of the insurance company that issues it.
- Variable annuities usually have a range of funding options—such as stocks, bonds, and money market accounts. Your principal and the rate of return are not guaranteed—they can go up or down. Some variable annuities have a fixed account that guarantees both the principal and the interest—giving you the option of dividing your money between the low-risk fixed account and the higher-risk options.
- Deferred annuity—payments to the beneficiary are delayed until sometime in the future. The earnings grow untaxed until you receive payments. They can be purchased with either a single-premium or flexible-payments.
- Immediate annuity—payments to the beneficiary begin immediately. They are purchased with a single-premium payment.
Accidental Death & Dismemberment Insurance
Accidental death & dismemberment (AD&D) insurance pays only if you are killed or physically dismembered as a result of injuries in an accident that is covered by the policy. In fact, reading what is covered can be rather gruesome. There are specific dollar benefits set for loss of one or both eyes, fingers, hands, legs, and arms. Death from natural causes or illness is not covered. These types of policies are very limited in the circumstances in which they pay. For example, many policies state that the accident in which you die or are injured must occur on a commercial vehicle; so if you're in a private passenger vehicle, no benefits apply. Airplane accidents are typically not covered if you work on or pilot a plane.
Stand-alone AD&D insurance marketing offers, such as those that frequently come from credit card companies, often sound attractive: Just eight bucks a month buys a million dollars in coverage. But insurance experts advise taking a close look at your situation and the actual benefits offered by the policy. If you feel that you need to buy AD&D insurance then you may be telling yourself that you aren't comfortable with the amount of life (and possibly health) insurance you currently have. The majority of financial planning experts recommend that instead of buying AD&D (and other piecemeal insurance) policies, that you review your life and health insurance and increase coverage in those policies.
If you decide you want to buy AD&D, then you may purchase a stand-alone AD&D policy, add it as a rider to your heath insurance policy, or add it to another life insurance policy. Riders added to an existing policy typically cost less than stand alone policies for equal or better coverage.
DCU offers Accidental Death & Dismemberment insurance. DCU provides $1,000 in coverage for all members at no cost to the member, subject to insurance company age limitations, for all members that sign up. Higher amounts may be purchased.
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Digital Federal Credit Union 220 Donald Lynch Boulevard PO Box 9130 Marlborough, MA 01752-9130 508.263.6700 • 800.328.8797 |
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