NAIC Model reprinted by Massachusetts Mutual Life Insurance Company.
This guide can help you shop for life insurance. It discusses how to:
- Find a policy that meets your needs and fits your budget
- Decide how much insurance you need Make informed decisions when you buy a policy.
- Prepared by the National Association of Insurance Commissioners.
The National Association of Insurance Commissioners is an association of state insurance regulatory officials. This association helps the various insurance departments to coordinate insurance laws for the benefit of all consumers.
©2006 National Association of Insurance Commissioners
This guide does not endorse any company or policy.
Important things to consider
- Review your own insurance needs and circumstances. Choose the kind of policy that has benefits that most closely fit your needs. Ask an agent or company to help you.
- Be sure that you can handle premium payments. Can you afford the initial premium? If the premium increases later and you still need insurance, can you still afford it?
- Don’t sign an insurance application until you review it carefully to be sure all the answers are complete and accurate.
- Don’t buy life insurance unless you intend to stick with your plan. It may be very costly if you quit during the early years of the policy.
- Don’t drop one policy and buy another without a thorough study of the new policy and the one you have now. Replacing your insurance may be costly.
- Read your policy carefully. Ask your agent or company about anything that is not clear to you.
- Review your life insurance program with your agent or company every few years to keep up with changes in your income and your needs.
Buying life insurance
When you buy life insurance, you want coverage that fits your needs.
First, decide how much you need and for how long – and what you can afford to pay. Keep in mind the major reason you buy life insurance is to cover the financial effects of unexpected or untimely death. Life insurance can also be one of many ways you plan for the future.
Next, learn what kinds of policies will meet your needs and pick the one that best suits you.
Then, choose the combination of policy premium and benefits that emphasizes protection in case of early death, or benefits in case of long life, or a combination of both.
It makes good sense to ask a life insurance agent or company to help you. An agent can help you review your insurance needs and give you information about the available policies. If one kind of policy doesn’t seem to fit your needs, ask about others.
This guide provides only basic information. You can get more facts from a life insurance agent or company or from your public library.
What about the policy you have now?
- If you are thinking about dropping a life insurance policy, here are some things you should consider:
- If you decide to replace your policy, don’t cancel your old policy until you have received the new one. You then have a minimum period to review your new policy and decide if it is what you wanted.
- It may be costly to replace a policy. Much of what you paid in the early years of the policy you have now, paid for the company’s cost of selling and issuing the policy. You may pay this type of cost again if you buy a new policy.
- Ask your tax advisor if dropping your policy could affect your income taxes.
- If you are older or your health has changed, premiums for the new policy will often be higher. You will not be able to buy a new policy if you are not insurable.
- You may have valuable rights and benefits in the policy you now have that are not in the new one.
- If the policy you have now no longer meets your needs, you may not have to replace it. You might be able to change your policy or add to it to get the coverage or benefits you now want.
- At least in the beginning, a policy may pay no benefits for some causes of death covered in the policy you have now.
In every situation, if you are considering purchasing a new policy, consult with the agent or company that provided your current one. When you originally acquired your previous policy, you might have received a visual representation of the advantages that came with it. Before you decide to swap out your existing policy, request an updated illustration from your agent or company. It’s important to review how the policy has been performing and what future returns you can anticipate, considering the payments the company is presently making.
How much coverage do I require?
Here are several questions to reflect on:
- What portion of the family’s income do I contribute? If I were to pass away unexpectedly, how would my dependents, particularly my kids, manage? Is there anyone else who relies on my financial support, like a parent, grandparent, or siblings?
- Do I have children for whom I want to save funds for their education if I were to die?
- How will my family handle final costs and settle debts in my absence?
- Are there family members or organizations that I wish to leave an inheritance for?
- Will estate taxes arise after I’m gone?
- How will inflation impact future needs?
As you assess how to address these requirements, include the life insurance you currently hold, which encompasses any group policies from your job or veteran’s insurance. Remember to account for Social Security benefits and pension plan survivor benefits as well. Take into consideration other assets you possess: savings accounts, investments, real estate, and personal belongings. Which assets might your family liquidate to cover expenses following your passing?
What type of life insurance is suitable for me?
Not all insurance policies are identical. Some offer lifelong coverage, while others are valid for a specific timeframe. Some accumulate cash value, while others do not.
Certain policies merge various insurance types, and some allow you to switch between different forms of coverage. Some plans might provide additional benefits while you are still alive. Your selection should depend on your individual needs and financial capabilities.
There are two primary categories of life insurance: term insurance and cash value insurance. Term insurance typically has lower premiums initially but does not accumulate cash value that can be accessed later. You can pair cash value insurance with term insurance during the periods when you need the most coverage to replace lost income.
Term insurance is effective for a set duration of one or more years. It pays out a death benefit solely if you pass away during that time. Generally, term insurance delivers the most extensive coverage for the price you pay in premiums. However, it usually does not accumulate cash value.
You can extend the duration of many term insurance policies for additional terms even if your health status has changed. With each renewal for a new term, the premiums might increase. Inquire about the premium rates if you decide to keep renewing the policy. Additionally, find out if you will be unable to renew the policy once you reach a certain age. Some insurers will allow you to maintain the policy at the same annual rate for a specified time in exchange for a higher premium. After this period, you may have to undergo a medical exam to maintain your coverage, and premiums might go up.
It might be possible to convert various term insurance policies into cash value policies during specific conversion periods, regardless of your health condition. The premiums for the new type of policy will typically be higher than what you paid for the term insurance.
Cash value life insurance represents a form of coverage where the initial premiums are steeper compared to what you would pay for an equivalent term policy. The portion of the premium that doesn’t go toward insurance costs is invested by the insurer, accumulating cash value that can be utilized in different ways. You have the option to take a policy loan against the cash value. If you fail to repay the loan and its interest, the outstanding balance will be deducted from your benefits upon your passing, or from the cash value if you decide to stop paying premiums and withdraw the remaining cash value. Furthermore, the cash value can be used to maintain your insurance for a limited duration or to purchase a smaller amount of insurance without incurring additional premiums. It can also augment your retirement income or assist with expenses like a child’s education without terminating the policy. However, to accumulate this cash value, you need to pay higher premiums during the initial years of the policy. Cash value life insurance can include various types, such as whole life, universal life, and variable life insurance.
Whole life insurance provides coverage for your entire lifetime, provided you keep up with your premium payments. Typically, you will pay a consistent premium amount throughout your life. Initially, the premiums may be significantly more than what you would pay for the same level of term insurance. However, these premiums are generally lower than what you would face if you continually renewed a term policy as you age.
Certain whole life policies allow you to pay premiums over a shorter timeframe, such as 20 years or until you reach age 65. Because the premium payments are condensed into a shorter duration, the premiums for these options tend to be higher.
Universal life insurance offers a flexible approach, allowing you to modify your premium payments as needed. You can also change the amount of coverage you have. If you seek to increase your death benefit, you may need to provide evidence that you are eligible for the higher amount. The premiums you pay, minus any expense fees, are deposited into a policy account that accrues interest. Fees are taken out of this account. If the total of your annual premiums and the interest earned falls short of the fees, the value of your account will decrease. Should this decline persist, your coverage may eventually terminate. To avoid this outcome, you might need to resume making premium payments, increase the amounts you pay, or decrease your death benefits. Even if your account has enough funds to cover the premiums, paying them yourself allows you to accumulate more cash value.
Variable life insurance is a type of coverage in which the benefits paid upon death and the cash value fluctuate based on the performance of one or more designated investment accounts, which could include mutual funds or other investment types permitted by the policy. It is important to obtain the prospectus from the insurance provider when purchasing this type of policy and review it thoroughly. If the investments perform well, you will benefit from increased death benefits and cash values. Conversely, if the investments underperform, your benefits and cash value might decrease or even be eliminated. You might also opt to pay an additional premium for a guaranteed death benefit.
Life insurance illustrations
If you are considering a policy where cash values, death benefits, dividends, or premiums may change due to factors that are not guaranteed by the company (such as shifts in interest rates), the agent or the company can provide you with an illustration that outlines the policy’s functionality. This illustration will indicate how the non-guaranteed benefits are likely to fluctuate with changes in interest rates and other elements. It will clarify what the company does guarantee and what potential future scenarios could look like. Keep in mind that the future remains uncertain, and you should be prepared to modify your financial strategies if the cash value does not grow at the rate depicted in the illustration. You will need to sign a document acknowledging that you comprehend that some figures in the illustration are not assured.
Finding a good value in life insurance
Once you have determined the type of life insurance that suits you best, compare equivalent policies from various providers to identify which one offers the most value for your investment. Simply looking at the premiums is insufficient. There are additional factors to evaluate. For instance:
- Do the premiums or benefits change each year?
- How significantly do the benefits accumulate within the policy?
- Which portions of the premiums or benefits lack guarantees?
- What impact does timing have on the interest of amounts paid and received within the policy?
- Keep in mind that no single company has the lowest rates for all ages across every type and amount of insurance.
You should also take into account other considerations:
- How swiftly does the cash value increase? Some policies start with lower cash values that grow substantially in later years, while others provide a more consistent growth of cash value. A detailed year-by-year breakdown of values and benefits can be very insightful. (The agent or company can provide you with a policy summary or illustration showing benefits and premiums for selected years. )
- Are there any specific features of the policy that cater directly to your requirements?
- How are non-guaranteed values determined? For instance, interest rates play a crucial role in figuring out policy returns. In a number of firms, increases mirror the average interest gains across all their policies, no matter when they were issued. In other cases, the returns for policies released in a recent year or a specific set of years depend on the interest earnings from that particular set of policies; in such situations, the payments are expected to fluctuate more quickly with changes in interest rates.