Many people spend substantial sums of money each year on life insurance premiums with very little idea of what they are getting for their money. Often buyers don’t realize that there are major differences in the types of life insurance they can buy and the sources for such coverage.
The information presented here aims to familiarize you with basic life insurance terms, describe the major life insurance policies and annuities that are available, and provide important shopping tips to help you make the right choice when purchasing life insurance or annuities.
Before You Buy Insurance
The purchase of life insurance is an important decision for both you and your family. There are many reasons why life insurance is purchased, but these reasons should be based upon your needs or wants. Your marital status, number of dependents, family size, income, and wealth all play a role in determining the amount of life insurance that is right for you. The first step is to determine your current need for life insurance and how much you can afford to spend. It is a good idea to consider future needs too, because unlike most purchases, you can’t always buy life insurance when you need it; you have to be in reasonably good health to purchase most types of life insurance products.
Remember if one kind of life insurance does not seem to fit your needs, ask about other plans. Be sure to read your new policy carefully, and ask the agent or company for an explanation of anything you do not understand. Take full advantage of the free look provisions that are provided on the policy cover page. New York requires a minimum free look period of 10 days and a maximum of 30 days. A 30-day free look period is required for any policy offered through the mail. "Free look" provisions allow you to cancel a policy without penalty within a set time period. Whatever you decide, it is important to review your life insurance program every few years to keep up with your changing financial and family circumstances and responsibilities.
The Purpose Of Life Insurance
Your need for life insurance will vary with your age and responsibilities. The amount of insurance you buy should depend on the standard of living you wish to assure your dependents. You should consider the amount of assets and sources of income available to your dependents when you pass away. Social security benefits, available cash and other sources of income and investments may not provide the standard of living you have in mind. Life insurance helps bridge the gap between the financial needs of your dependents and the amount available from other sources, is the amount to be provided by life insurance. Your agent or other financial advisor can help you with these calculations. The Internet, as well as many financial magazines, books and articles are available to help you as well.
Analyze Your Need For Life Insurance
One approach to determine how much life insurance one should carry is to analyze the various needs of the family in the event of the death of a wage earner. Life insurance satisfies a number of these needs by providing a fund that can be used to:
- Pay off an individual’s last debts such as medical bills and funeral expenses
- Meet estate taxes and other expenses in settling an estate
- Provide life income for the spouse
- Pay off a mortgage
- Pay for the children’s education
- Provide funds for retirement
- Provide an income for the policyholder’s spouse to give the family time to readjust to a new standard of living
- Draw interest to provide funds for some special purpose
- Provide a monthly income until the children are grown and out of school
How The Cost Of Life Insurance Is Determined
The premium rate for a life insurance policy is based on two underlying concepts: mortality and interest. A third variable is the expense factor which is the amount the company adds to the cost of the policy to cover operating costs of selling insurance, investing the premiums, and paying claims.
Mortality – Life insurance is based on the sharing of the risk of death by a large group of people. The amount at risk must be known to predict the cost to each member of the group. Mortality tables are used to give the company a basic estimate of how much money it will need to pay for death claims each year. By using a mortality table a life insurer can determine the average life expectancy for each age group.
Interest – The second factor used in calculating the premium is interest earnings. Companies invest your premiums in bonds, stocks, mortgages, real estate, etc., and assume they will earn a certain rate of interest on these invested funds.
Expense – The third consideration is the expenses of operating the company. The company estimates such expenses as salaries, agents’ compensation, rent, legal fees, postage, etc. The amount charged to cover each policy’s share of expenses of operation is called the expense loading. This is a cost area that can vary from company to company based on its operations and efficiency.