Encyclopedia of Life Insurance
Life insurance is usually not a particularly popular subject to discuss. Images of pushy salesmen waving the policy that "you absolutely must have" instantly come into your mind. However, if purchased wisely, life insurance can be used to meet many different needs of the policy holders.Life insurance is unique. No investment or asset can provide the purchaser with suc
extraordinary leverage and the ability to create liquidity when, in many cases, it is most needed. A young professional looking to create an estate in order to replace future income lost to the family in the event of a premature death cannot make a better purchase. But not everyone falls into this category.
extraordinary leverage and the ability to create liquidity when, in many cases, it is most needed. A young professional looking to create an estate in order to replace future income lost to the family in the event of a premature death cannot make a better purchase. But not everyone falls into this category.
Obviously, most people purchase life insurance solely for the ultimate payout upon the death of the insured in order to provide for their dependents. However, life insurance can also be used to pay death taxes and estate settlement costs, to shift wealth from one generation to another or to benefit selected charities. Certain types of life insurance also have an investment feature in which funds accumulate while the policy is in place and may be used to pay future premiums. In a business context, life insurance can be used to fund all or a portion of a buy-sell agreement between partners or co-shareholders.
Life insurance policies are typically divided into two major types: term insurance and permanent insurance. From these two basic policies, the insurance industry has developed a number of products using the same essential principals.
Determining Your Need
There are a number of factors to consider when evaluating life insurance products. The most important of these factors is to determine the amount of insurance needed. The insurance need is usually the greatest when there are young children in the family, only one breadwinner, or there is not enough saved to support the survivors for any length of time. For example, a family with only one spouse working and two small children may face several obstacles if that spouse should die, e.g., funding education for the children and providing for the surviving spouse at a lifestyle to which they have grown accustomed.
The type and amount of insurance which is being considered must also be predicated on the affordability of the premiums. A policy which is too expensive to carry may result in an early termination. The insured would then need to reapply, usually at higher costs, and potentially subject him or herself to a physical examination to determine overall health.
At the same time, the duration of the need must be determined. If an individual knows that the need will exist for only the next 10 years or so, a different insurance policy is likely to be selected than if the need is expected to exist for "life".
Evaluating the Policies
Term policies from different companies can usually be compared relatively easily. You are paying a certain amount for a defined death benefit for a specified number of years. As long as the features which are included in the policies are identical, a true premium comparison will provide you with the most cost efficient life insurance policy.
On the other hand, whole life policies which are exactly identical in premium, stated death benefits and other options could be substantially different in many other ways. Insurance companies must use certain assumptions, guarantees and projections in valuing their policies. These variables could greatly affect the cost and level of coverage for the policy and include:
• Surrender charges.
The amount the company will charge if the policy is terminated.
• Cash value projections.
Shows whether the cash value will be sufficient to keep the policy in force in later years. These projections are based upon a guaranteed rate of return and a projected (higher) rate of return. It is essential that these rates be reasonable.
• Policy loans.
Do the illustrations use policy loans to fund premiums in some years?
• Dividends.
Ensure that the dividends which the company is projecting are in line with what the company has typically paid in the past.
• Mortality assumptions.
Each insurance company uses its own statistical analyses to determine the risk of an individual dying at a point in time while the policy is in place. For this reason, some insurance companies are willing to price their product differently than others by assuming a more aggressive mortality factor.
The insurance company and their stability should be considered in evaluating any policy. A life insurance company whose financial stability is in question may need to price policies below that of their competitors. Several independent companies provide life insurance company ratings. The most well known rating companies are A.M. Best Company, Moody’s Investors Service and Standard and Poor’s Corporation.
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