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What is life
insurance?
It is a disciplined financial program which combines both
investment and protection to enable one to prepare for
life’s contingencies such as death, disability, sickness or
old age. Life insurance is also an effective means of
preparing for such major life events as a child’s education,
one’s retirement or the start of a business.
Who should buy life insurance?
Anyone who wants to prepare for his/her future, or for that of
his/her child. Hence, everyone (for as long as he/she is
eligible) should buy life insurance.
Why should I buy life insurance?
Three reasons: (1) it provides guaranteed protection that
other financial programs do not and cannot, (2) it is
virtually risk-free and (3) its returns are immediate and
adequate the moment you need it.
What kind of life insurance do I need?
That depends on your purpose for buying life insurance,
whether it is for financial protection, investment, education,
estate preservation, etc.
Which company should I buy from?
You should go by a company’s financial strength and
stability, and the assurance that it will be there to fulfill
its promises to you.
How do I buy life insurance?
Through a dialogue with a knowledgeable agent.
How do I select my agent?
use the following criteria: (1) credentials, (2) availability
and (3) company represented.
If I already have an existing insurance, do I need to
buy more?
Over time (due to inflation or current devaluation), the value
of your life insurance drops. One way of making sure that your
coverage always remains adequate for the protection of your
family is to upgrade your life insurance coverage every few
years.
How much life insurance should an individual own?
Rough "rules of thumb" suggest an amount of
life insurance equal to 6 to 8 times annual earnings. However,
many factors should be taken into account in determining a
more precise estimate of the amount of life insurance needed.
Important factors include income sources (and amounts) other
than salary/earnings; whether or not the individual is married
and, if so, what is the spouse's earning capacity; the number
of individuals who are financially dependent on the insured;
the amount of death benefits payable from Social Security and
from an employer-sponsored life insurance plan, whether any
special life insurance needs exist (e.g., mortgage repayment,
education fund, estate planning need), etc. It is recommended
that a person's insurance adviser be contacted for a precise
calculation of how much life insurance is needed.
How much life insurance do I need?
It depends on how much you are worth, in terms of assets and
financial strength, to your family/loved ones. It also depends
on your savings goals for a college education, retirement or
others.
What about purchasing life insurance on a spouse and
on children?
In certain circumstances, it may be advisable to purchase life
insurance on children; generally, 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, if possible, through
the purchase of the required amount of life insurance before
contemplating the purchase of life insurance on children or on
a non-wage earning spouse. In a dual-earning household, it is
important to protect the income earning capacity of both
spouses. Life insurance on a non-wage earning spouse is often
recommended for the purpose of paying for household services
lost at this individual's death.
Should term insurance or cash value life insurance be
purchased?
Although a difficult question--one whose answer will vary
depending on circumstances--several principles should be
followed in addressing this issue. It must first be recognized
that in any life insurance purchasing decision, there are at
least two basic questions that must be answered: (a) "How
much life insurance should I buy?" and (b) "What
type of life insurance policy should I buy?" The question
contained in (a) involves an "insurance" decision
and the question contained in (b) requires a
"financial" decision. The "insurance"
question should always be resolved first. For example, the
amount of life insurance that you need may be so large that
the only way in which this needed amount of insurance can be
afforded is through the purchase of term insurance with its
lower premium. If your ability (and willingness) to pay life
insurance premiums is such that you can afford the desired
amount of life insurance under either type of policy, it is
then appropriate to consider the "financial"
decision--which type of policy to buy. Important factors
affecting the "financial" decision include your
income tax bracket, whether the need for life insurance is
short-term or long-term (e.g., 20 years or longer), and the
rate of return on alternative investments possessing similar
risk.
How does mortgage protection term insurance
differ from other types of term life insurance?
The face amount under mortgage protection term insurance
decreases over time, consistent with the projected annual
decreases in the outstanding balance of a mortgage loan.
Mortgage protection policies are generally available to cover
a range of mortgage repayment periods, e.g., 15, 20, 25 or 30
years. Although the face amount decreases over time, the
premium is usually level in amount. Further, the premium
payment period often is shorter than the maximum period of
insurance coverage--for example, a 20-year mortgage protection
policy might require that level premiums be paid over the
first 17 years.
Can an existing life insurance policy be used to
provide for the repayment of an outstanding mortgage loan?
Yes; the purchase of a new mortgage protection term insurance
policy is usually not required by the lender. An existing
policy, either term or cash-value life insurance, can be used
for many purposes, including paying off an outstanding
mortgage loan balance in the event of the insured's death.
What is participating whole life insurance?
Participating (par) whole life insurance has been marketed
for many years in the U.S. The participating feature allows
for the payment of dividends to policyowners when
actual experience justifies such payment. Substantial amounts
of participating whole life insurance is still sold today,
principally by the large mutuals.
Which type of cash value life insurance policy, universal
life (UL) or participating whole life (WL) , is a
"better buy" financially?
There is no simple answer to this question. The best
performing product (from a financial perspective), whether UL,
WL or some other type of cash value life insurance, will
likely be the one offered by the insurer that enjoys the best
future experience as it relates to interest earnings, actual
expenses and mortality costs. Insurers earning the highest
investment income, and who also incur the lowest expenses and
the lowest mortality costs, are in the best position to offer
life insurance at the lowest cost. This is true whether the
cash value life insurance product being offered is UL or WL.
Thus, it will be necessary for prospective insureds and their
advisers to carefully examine the financial aspects of each
product under consideration, irrespective of whether the
product is UL or WL.
What is variable life (VL) insurance, and how is it
different from universal life (UL) and participating whole
life (WL)?
Variable life insurance is a type of fixed-premium whole life
insurance policy where changes in the policy's cash values and
death benefits are directly related to the investment
performance of an underlying pool of assets. Policyowners
typically can choose among several investment options as to
where the assets backing the policy's cash values will be
invested. The various investment options offered in the
contract generally possess different risk/return relationships
and frequently include a money market fund, a bond fund, and
one or more common stock funds. Although the policy's death
benefit is directly related to the actual performance of the
invested assets, the policy prescribes that the death benefit
will not fall below a minimum amount (usually the initial face
amount) even if the invested assets depreciate in value by a
substantial amount. Because the policyowner assumes all of the
investment risk, there is no similar "floor" below
which cash values may fall. In recent years variable
universal life (VUL) insurance has become a more popular
product than VL. VUL combines features of both UL and VL and,
in essence, is the flexible premium version of VL.
What is term life insurance?
Term life is usually the least expensive and most immediate
way of providing your financial dependents with a cash payout
at your death. If you are a first time insurance buyer,
purchasing a term policy and then converting to a permanent
policy a few years later may be an attractive option.
What are the most common uses of term life insurance?
Most frequently, term life insurance is purchased:
- to provide short-term protection,
either to pay off a loan or provide a death benefit during
peak earning years while children are young;
- by individuals or families who
can't afford a permanent policy now, but need temporary
protection until it is possible to convert to a permanent
plan;
- to add a large amount of coverage
to complement an existing permanent policy at the lowest
possible cost;
- by those willing to pay premiums
that may increase if coverage is extended past the initial
term period.
What are the advantages of term
life insurance?
Term life insurance pays a death benefit to the beneficiary
you name that will:
- cover your final funeral expenses,
and;
- provide a lump sum that can be
invested to meet your dependents' on-going needs. You are
covered for the full amount of life insurance that you
choose for a specified period of time. The insurance can
be both convertible and renewable, depending on the
policy.
Term insurance traditionally works well to meet temporary
insurance needs. Because the initial premiums are generally
lower than those for universal life insurance, you can buy
higher levels of coverage at a younger age when the need for
protection often is greatest. Term insurance is also an
excellent way to cover specific needs that will disappear in
time, such as mortgages or car loans.
What are the disadvantages of term life insurance?
Term life insurance premiums gradually increase as you grow
older. Coverage may terminate at the end of the term or may
become too expensive to continue. Generally, the policy
doesn't help you accumulate money for use at some later point
in your life. As its name implies, term insurance only
provides you with life insurance protection for a specified
period of time.
What is universal life insurance?
The purpose of universal life insurance is to provide a death
benefit to help pay off your debts, funeral expenses, and to
help maintain the lifestyle and financial goals of your loved
ones -- no matter when you die. This type of insurance allows
you to accumulate cash (generally tax-deferred) that you can
borrow against or withdraw in the future should an emergency
or opportunity arise. Universal life is highly flexible,
allowing its coverage to grow to meet your changing needs.
I have heard a lot about universal life
insurance. How is this type of life insurance different from traditional
whole life insurance?
Both traditional whole life (WL) and universal life (UL)
products are examples of cash-value life insurance. However,
there are several important differences between these two
products. While WL policies contemplate the payment of fixed,
level premiums and provide for level death benefits, UL
policies offer adjustable death benefits and flexible premiums
that can be varied according to changing circumstances. This
is a rather simplistic comparison, however, since policyowner
dividends under participating WL insurance contracts can be
used to offset a portion of the premium payment otherwise
required; in addition, dividends can be used to increase the
policy's death benefit. Because of these and other possible
uses of policyowner dividends, an argument can be made that
participating WL insurance possesses some (but not all) of the
same flexibility/adjustability that is possessed by UL
policies.
Another important difference between WL and UL relates to product
transparency. In UL policies, it is easy for policyowners
to look at the internal operations of the policy and to
examine the relationships among various policy elements
(premiums, cash values, interest credits, mortality charges,
and expenses) and how they interact with each other.
What are universal life insurance's most common uses?
Universal life insurance provides protection for fairly
conservative clients looking for long-term financial security.
Common uses included are estate planning, final funeral
expenses, and supplemental cash accumulation
What are the advantages of universal life insurance?
This type of life insurance is characterized by moderate and
flexible premiums and a higher accumulation potential than
other kinds of programs. Coverage extends over the insured's
lifetime. At the time of the insured's death, universal life
insurance provides tax-free income to the beneficiaries.
What are the disadvantages of universal life insurance?
With universal life insurance, the required premium levels may
make it difficult to buy adequate protection, particularly
over the short term. Also, your coverage lapses if you stop
paying your premiums.
By weighing the advantages and disadvantages of both universal
and term life insurance, and taking into account the financial
needs of you and your family, you can best decide on the type
of policy to purchase. Our Countrywide Insurance Services,
Inc. representatives will be happy to discuss your needs and
offer professional advice.
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