LIFE INSURANCE Buyer’s Guide

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LIFE INSURANCEBuyer’s Guide

Prepared by the National Association ofInsurance CommissionersAs part of our state-based system of insurance regulation in the United States,the National Association of Insurance Commissioners (NAIC) provides expertise,data, and analysis for insurance commissioners to effectively regulate the industryand protect consumers. The U.S. standard-setting organization is governed by thechief insurance regulators from the 50 states, the District of Columbia and five U.S.territories. Through the NAIC, state insurance regulators establish standards andbest practices, conduct peer reviews, and coordinate regulatory oversight. NAICstaff supports these efforts and represents the collective views of state regulatorsdomestically and internationally. For more information, visit www.naic.org.National Association of Insurance Commissioners1100 Walnut Street, Suite 1500Kansas City, MO 64106-2197(816) 842-3600 2018 NATIONAL ASSOCIATION OF INSURANCE CO MM I S S I O N ERS

Before youbuy lifeinsurance.UNDERSTAND WHAT LIFE INSURANCE ISLife insurance pays a death benefit if you die while the policy is in effect, in exchangefor premiums you pay before your death. You can use the death benefit to protectagainst financial hardships such as loss of your income, funeral expenses, medical ornursing care expenses, debt repayments, and child care costs after your death. Youcan get information from www.naic.org/consumer/life insurance.IF YOU NEED LIFE INSURANCE, DECIDE HOW MUCHCOVERAGE TO BUYHow much life insurance to buy depends on the financial needs that will continueafter your death. Examples include supporting your family, paying for child(ren)’seducation, and paying off a mortgage. Some questions you may want to ask aboutyour own needs include:LIFE INSURANCE BUYER’S GUIDE3

Does anyone depend on me financially?How much of the family income do I provide?How will my family pay my final expenses and repay debts after my death?Do I want to leave money to charity or family?If I have life insurance through my employer, is it enough to meet my financialobligations?The answers to these questions can help you decide how much coverage you need.An insurance agent, financial advisor, or insurance company representative canhelp you evaluate your insurance needs and give you information about availablepolicies.IF YOU ALREADY HAVE LIFE INSURANCE, ASSESS YOURCURRENT LIFE INSURANCE POLICYIt’s important to compare your current policy with any new policy you might buy.Keep in mind that you may be able to change your current policy to get benefits youwant. Also, know that any changes in your health may impact your ability to get anew policy or the premium you’ll pay. Don’t cancel your current policy until you getthe new one.Also, while you may have free or low-cost life insurance through your employer, thedeath benefit usually is less than you need. And if you leave the employer, you maynot be able to take this coverage with you.LIFE INSURANCE BUYER’S GUIDE4

COMPARE THE DIFFERENTTYPES OF INSURANCEPOLICIESpolicy can’t be continued. You’ll have toapply for a new policy if you still wantcoverage.There are many types of life insurancepolicies. You should choose a policy withfeatures that fit your individual needs.Some things to consider are:WHOLE LIFE VS. UNIVERSAL LIFE:Whole life and universal life insuranceare two types of cash value insurance.A key difference between the two ishow you pay for the coverage. Youtypically pay premiums for whole lifeinsurance according to a set schedule.In a universal life policy, you can choosea flexible premium payment pattern aslong as you pay enough to keep yourpolicy in force.TERM VS. CASH VALUE: Terminsurance is intended to provide lowercost coverage for a specific period oftime (“a term”). If you want coverage fora longer period of time, such as for yourlifetime, cash value insurance may bemore cost effective. Most term policiesdon’t build up cash values that you canuse in the future.RENEWABLE TERM VS.NONRENEWABLE TERM: Most term lifeinsurance coverage can be continued(“renewed”) at the end of the term, evenif your health has changed. If you renewa term policy, the new premiums arehigher. Ask what the premiums will bebefore you renew the policy. Also ask ifyou’ll lose the right to renew the policyat a certain age. A nonrenewable termLIFE INSURANCE BUYER’S GUIDEVARIABLE LIFE VS. NON-VARIABLELIFE: The investments you will choose(such as stock and bond funds) in avariable life policy directly impact yourcash value. These policies have thegreatest potential to build cash valuebut also the greatest risk of losing cashvalue. Non-variable life policies oftenhave guaranteed minimums for somefeatures (interest or cash value, forexample) but not all. Non-variable lifepolicies also have less potential to buildcash value than variable life policies.5

BE SURE YOU CAN AFFORDTHE PREMIUMBefore you buy a life insurance policy,be sure you can pay the premiums.Can you afford the initial premium? Ifthe premium increases later, will youstill be able to afford it? The premiumsfor many life insurance policies aresensitive to changes in the company’sinvestment earnings, claims costs, andother expenses. If those are worse thanexpected, you may have to pay a muchhigher premium. Ask what might be thehighest premium you’d have to pay tokeep your coverage.UNDERSTAND THEAPPLICATION PROCESSYou can apply for life insurance throughlife insurance agents, the mail, andonline. In addition to basic information,such as your name, address, employer,job title, and date of birth, you’ll beasked for more personal information.Depending on the type of policy, theinsurer may require you to see a doctor,answer health-related questions, orLIFE INSURANCE BUYER’S GUIDEhave a medical professional come toyour home or office to assess yourhealth. Usually a policy that doesn’trequire detailed health information willcost more and provide less coveragethan one that does.It’s important to tell the truth on theapplication. The insurance companywill check your answers so reviewthe application before you sign. If theinsurance company discovers falsestatements on your application afterit issues your policy, it could reduce orcancel your coverage.EVALUATE THE FUTURE OFYOUR POLICYDoes your policy have a cash value? Insome cash value policies, the valuesare low in the early years but build lateron. In other policies the values buildup gradually over the years. Most termpolicies have no cash value. Ask yourinsurance agent, financial advisor, or aninsurance company representative foran illustration showing future values andbenefits.CHOOSE A BENEFICIARYA beneficiary is the person(s) ororganization(s) you name to receive yourlife insurance policy’s death benefit.You’ll need to know the Social Securityor tax identification number for allbeneficiaries. Experts advise you notto name a minor child as a beneficiary.Insurance companies won’t pay a minor.Instead, consider leaving the money toyour estate or trust.6

After youbuy lifeinsurance.READ YOUR POLICY CAREFULLYAfter you carefully read your policy, you should be able to answer the followingimportant questions: Is your personal information correct? Do premiums or policy values vary from year to year? What part of the premium or policy value isn’t guaranteed? How will the timing of money paid and received affect any interest the policymight earn?Your insurance agent, financial advisor, or an insurance company representative canhelp you understand anything that isn’t clear.If you’re not satisfied with your new policy, you can return it for a full refund withina certain period, usually 10 days after you receive it. The review period usually isstated on the first page of the policy.LIFE INSURANCE BUYER’S GUIDE7

REVIEW YOUR LIFEINSURANCE POLICY EVERYFEW YEARSNotes.Review your policy with your insuranceagent, financial advisor, or an insurancecompany representative every few yearsto keep up with changes in your policyand your needs. Have the premiums or benefitschanged since your policy wasissued?Do the death benefits still meet yourneeds?Do you need more or less coverageafter life events, such as birth,adoption, marriage, job change,death, or divorce?The insurance company can providepolicy statements and illustrationsto help with this review. As the policyowner, you can change beneficiariesat no cost. Be sure to review yourbeneficiaries every few years, especiallyafter major life events that affect yourlife insurance needs.LIFE INSURANCE BUYER’S GUIDE8

WHOLE LIFE VS. UNIVERSAL LIFE: Whole life and universal life insurance are two types of cash value insurance. A key difference between the two is how you pay for the coverage. You typically pay premiums for whole life insurance according to a set schedule. In a universal life pol

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