Here are some basic features of the different types of annuities and life insurance plans to consider before investing:
Term Life Insurance
- Purchased to provide income for dependent in the event of death.
- Usually purchased from individuals 25-50 years old.
- It does not accumulate money tax deferred.
- Pays out when you die typically in one lump sum.
Whole Life Insurance
- Purchased to provide income for dependents in the event of death as well as to provide financial planning needs.
- Usually purchased from individuals 30-60 years old.
- Accumulates tax deferred.
- Pays out in three different ways depending on circumstances: death, borrow against the policy, or surrender the policy.
Deferred Annuities
- Purchased to invest and contribute tax deferred.
- Buyers typically 40-65 years old.
- Accumulates tax deferred.
- Death benefit pay out can be a single sum or monthly withdrawals to give a steady cash flow.
Immediate Annuities
- Purchased to give coverage against outliving retirement income.
- Buyers typically 55-80.
- Accumulates tax deferred but only if you have early payout.
- Pay out is for a period of time but it stops when the annuitant expires, however payments will continue at death if the annuity has an option of "guaranteed period" and it hasn't expired when the annuitant expires.
People often ask what Final Expense Insurance is and do they need it. Final Expense is simply another name for a
whole life insurance product generally marketed to people ages 50 -85. Final Expense Insurance generally has
death benefits between $5000 and $50,000. Because of the lower death benefits, companies are able to offer these products with limited or no underwriting at all. This means two things. Easier to get the insurance but, higher prices for the coverage.
With many people losing their jobs and consequently their life insurance benefits, there is certainly a big market for Final Expense Coverage. The best advice: If your health is good look into a fully underwritten whole life policy first. You may have to answer a few more questions and maybe even take a physical, but you could save big dollars on your yearly costs. If your health is questionable or you just need a small policy for burial, than Final Expense Coverage may suit your needs.
Bottom line is when buying a life insurance policy compare pricing for similar products, evaluate what you are buying it for and take your time to make the right decision.
Whole life insurance is permanent life insurance protection for your entire
life. A whole life policy is guaranteed not to expire, provided that you pay
sufficient premiums each year to keep the policy in force. Besides permanent
lifetime insurance protection,
whole life insurance features a savings option that allows you to build cash
value that won’t be taxed until it is taking from an account. A portion of the
premiums you pay build up the savings option of the policy and are invested by
the company. The money they make off the investment is added to your savings
portion of the policy, building your cash value, means that your beneficiaries
will receive more money when the policy is paid off. This allows the policy
holder to better prepare their beneficiaries after their death.
Pros:
Whole Life Insurance has a savings
element (cash value) which grows tax-deferred. If the contract is set up
properly in advance, you might build up enough cash value to stop paying
premiums by a certain age, or to borrow from the cash value (take a policy
loan) during your lifetime on a tax-advantaged basis. Unlike Term Life
Insurance, whose premiums eventually rise after the initial guarantee period,
Whole Life Insurance premiums will not increase during your lifetime (as long
as you pay the planned amount and repay any policy loans).
Cons:
You are not allowed to choose separate investment accounts, i.e., money
market, stock or bond funds; the insurance company controls how and where your
premium dollars are invested. Whole Life Insurance offers no premium
flexibility or face amount flexibility; the plan you buy today remains fixed
for life. It is therefore important to plan carefully, because Whole Life
Insurance is not very good at adapting to insurance and/or retirement plans
that change significantly.
Subject to the relative rights of the assignee and the
beneficiary, the policyholder of a
life insurance policy or
annuity contract has the unrestricted right to designate an irrevocable beneficiary or change the beneficiary if not irrevocable.
The policyholder may, at any time, make an irrevocable designation of the beneficiary effective at once or at some time in the future. If the designation of the beneficiary is not explicitly irrevocable, the policyholder may change the beneficiary without the consent or knowledge of the previously designated beneficiary.
Subject to statutory requirements as to changing the beneficiary by will of the
policyholder, any act of the policyholder that unequivocally indicates an intention to make the change in beneficiaries is sufficient to effect it.
An insurer may prescribe formalities to be complied with for the change of beneficiaries which may be only for its own protection. The insurer discharges its obligation under the insurance policy if it pays a properly designated beneficiary, unless it has actual notice of either the assignment or an unequivocal act by the policyholder which indicates an intention to change beneficiaries. The insurer has actual notice if the policyholder has complied with its prescribed formalities.
Examples:
A holder of an individual
whole life insurance policy in
Wisconsin originally named his daughter as beneficiary. The policy contained no explicit restrictions on the right to change the beneficiary. After the policy had been in effect for six months, the policyholder decided to change the beneficiary to his oldest son. After the policyholder’s death, his daughter told the insurance company that she was entitled to receive the death benefits as the first beneficiary instead of the son. Is the daughter entitled to the benefits?
No. Under s. 632.48 (1) (b), Wis. Stat., if the designation of beneficiary is not explicitly irrevocable, the policyholder may change the beneficiary without the consent of the previously designated beneficiary. Assuming that the insured did not make a valid assignment of the right to the death benefits to the daughter after changing beneficiaries, the son is entitled to the benefits and not the daughter.
• A holder of an individual
term life insurance policy changed the beneficiary by replacingvthe name of his mother with his daughter’s name. The policyholder failed to notify the insurance company of the change as required by the policy. After the policyholder died, the insurance company paid the benefits to the mother who was the original beneficiary. The daughter claimed that the insurance company should have made payment to her under the policy. Was the insurance company correct in making payment to the original beneficiary?
Yes. Although the policyholder is free to change beneficiaries, under s. 632.48, Wis. Stat., the insurance company may require the policyholder to properly notify the company of any change of beneficiary. Since the policyholder failed to provide adequate notification under the terms of the policy, the insurance company discharged its obligation under the contract when it paid the properly designated beneficiary.
Accumulation phase - The period of time prior to annuitization.
Annuitant - A person who receives benefit payments from an annuity.
Annuitize - A method of receiving annuity benefits through a series of income payments for life or some other defined period of time.
Annuity - A contract with a life insurance company which guarantees an income for life or some other defined period in exchange for premiums you pay.
Back-end load - Company expenses that are charged at the time benefits begin.
Beneficiary - When provided in a contract, the person who receives benefit payments if the annuitant dies.
Contractholder - A person who pays premiums for an annuity. Often the same person as the annuitant.
Death benefit - A provision in certain annuity contracts that pays the beneficiary when the annuitant dies before the payout phase begins.
Deferred annuity - A contract that begins the payout phase at some future date.
Equity-indexed annuity - A contract that combines a guaranteed minimum interest rate with earnings linked to the performance of an external stock or bond index.
Fixed rate annuity - A contract that specifies your funds will earn a specified interest rate and guarantees a return on your premium.
Flexible premium annuity - A contract in which the amount of each premium payment you make can vary.
Front-end load - Company expenses that are charged at the beginning of a premium payment period.
Free look - A period specified in the contract (such as 10 days) during which you can decide whether to keep an annuity or return it for a full refund of your premium. Your free-look period is 20 days when you buy an annuity contract to replace one you already had.
Guaranteed interest rate - A minimum rate of interest specified in a fixed annuity. The actual rate the insurance company credits your contract at any given time may be higher but can never be lower.
Immediate annuity - A contract that begins the payout phase within one year after you pay the single premium.
Level premium annuity - A contract in which the amount of each premium payment you make stays the same.
Loan provision - A feature in certain annuity contracts that allows you to borrow up to a specified percentage of the value. Contract loans are usually subject to taxes.
Morality Tables - Statistics that project ones life expectancy based on many variables.
Payout phase (also called the annuity phase) - The period of time when benefit payments are being made to the annuitant.
Premium - The money you pay to fund an annuity contract.
Refund Annuity - Refunds part or all of the premiums paid if the insured dies before the start of the liquidation period.
Surrender charge - A fee the insurance company will charge you if you cash in (surrender) an annuity before the payout phase begins, or if you make a withdrawal larger than specified in the contract.
Variable annuity - Traditionally, a contract with no minimum guarantee (some newer products do include guarantees). Because the benefit amount depends on the insurance company's investment gains or losses, you share some part of the investment risk with the insurer.
Withdrawal privilege - A provision in many annuity contracts that allows you to withdraw an amount less than the surrender value, without paying a surrender charge. Any withdrawal may be subject to taxes and penalties.
Life insurance provides money typically to beneficiaries after a loved-one who has life insurance dies. Coverage is often provided by employers but can also be purchased separately through an insurance agent. The Ohio Department of Insurance urges consumers to regularly review their need to secure life insurance as part of their financial and estate planning.
Life Insurance Can Help:
- Replace your income with non-taxable death benefit
- Reduce the financial burden on your family of having to continue without you
- Put the kids through school
- Pay the mortgage, car note, and other debts you leave behind
- Pay your funeral expenses
- Pay your estate taxes
Types of Life Insurance:
- Term Life: Generally less expensive than other life insurance products and is designated for a certain time period or to a certain age. Term is named for the contracts limited length or "term" and is pure life insurance. Term policies generally last for 1, 5, 10, 15, or 20 years, or to some specified age such as age 65 or age 100.
- Whole Life: Lifetime coverage at a premium that does not increase with your age after you buy.
- Universal Life: Premium amount and death benefit are both flexible. Able to change the amount of your premium payments and/or death benefit after you buy the policy. Increasing your premium payments as you age is important to maintaining your universal life policy.
Who Can Take Out a Policy on My Life?
- Only someone who has an "insurable interest”, such as someone in your immediate family. A stranger cannot buy a policy to insure your life.
How Much Life Insurance Should Someone Get?
- Your life insurance plan should be structured to meet your life circumstances.
- How much life insurance a person should get depends on their life situation. Some people have life insurance through their employer, which sometimes use 1x salary or 2x salary as a coverage limit and may allow the employee to purchase additional term insurance.
Life Insurance Shopping Tips:
- Your life insurance plan should be structured to meet your life circumstances (for example, a single person may need less life insurance than a couple or a couple with children).
- Life insurance is complicated. Utilize the services of trained insurance professionals.
- An agent is not allowed to be the beneficiary of a life insurance policy the agent has sold you – unless the agent is a family member or a funeral director. Nor is the agent allowed to misrepresent any aspect of the policy being sold or a policy you already own or encourage you to put incorrect information on your application.
- Decide what type of life insurance policy you want: term, whole life, universal life or a combination of these policies. Make sure you calculate your total premiums for the life of the policy. It is possible to pay more in premiums than the face amount of the policy.
- Some policies have an accelerated benefits feature, which is a policy provision that lets the policyholder, under certain conditions, collect part of the death benefit before he/she dies.
- Be alert to any promise that you will never have to pay premiums again (the vanishing premium pitch). Also, make sure you are aware of any surrender penalties.
- Don’t sign any life insurance application that has not been completely and accurately filled in and dated, and make a copy for your files.
- Immediately study the policy once you receive it and make sure it’s exactly what you ordered: many life companies will offer a “free-look” (or “right to review”) provision. Take advantage of it.
- The policy owner is the only person who can cancel the policy. If premium payments are not being made the insurer will generally send a payment notice before cancellation.
- Make your premium payment check to the insurance company, not the agent.
- A failure to pay your premium will cause your policy to lapse or it could be terminated.
- Review your policy periodically. Your insurance needs change during different periods of your life.
There's a good chance you will need to undergo a
medical exam if you are buying
life insurance, whether it's
term life or
whole life. Typically, insurance medical exams are done by paramedical, who are licensed health professionals. Paramedical are often independent contractors hired by the insurance company who come to your home.
There are medical questions on Part I (some insurers call it Part A) of a life insurance application that are usually completed by your agent in your presence, or online by you. Part II (or Part B) is the medical form that is completed by a paramedical or a physician.
After receiving your application for life insurance, your agent or life insurer will call one of several paramedical services that specialize in mobile exams. They'll give the paramedical service information on you, the amount of insurance you're applying for, and the name of the insurance company. Most paramedical professionals stay current on insurers' underwriting requirements.
Health insurance is designed to protect you against having to pay large medical bills by offering coverage for a range of medical procedures and treatments. By contrast,
life insurance is principally designed to pay out a lump sum in the event of your death.
Life insurance is typically purchased in one of two forms.
The simplest form of life insurance, and also the least expensive, is
term life insurance which pays out only on your death. You can normally purchase term life insurance for as little as one year or for up to 30 years and the policy will only pay out if you die before the policy reaches its end date. You might consider purchasing term life insurance later in life or when you feel that your life is likely to be at greater risk over a short period of time for some reason.
The second form of life insurance is
whole life insurance which is a combination of both a term life insurance policy and an investment plan. Your monthly (or annual) premiums are divided between the two parts of the policy, with one part of the premium providing you with insurance cover should you die during the period of the policy and the remainder being paid into an investment vehicle, such as a mutual fund or stocks and bonds. Whole life insurance is a popular choice as it provides you with both protection for your family and a savings vehicle, possibly to meet college tuition fees or to add to retirement funds. These policies are however normally heavily loaded with both fees and commissions and, if you are looking at a whole life policy principally as an investment vehicle, then there are certainly better options available to you.
The cost of both a life insurance policy and a health insurance policy depend to a large extent upon your age and health and the younger and healthier you are the cheaper they will be.
Perhaps the most important thing to understand is that life insurance and health insurance are designed to cover two very different situations and it is not a case of choosing one or the other, as many people think, but is a case of deciding as two separate issues whether you need either or both.
1.
Buying term insurance and investing the difference may be a dumb move.
If you are in it for the long haul, buying term life insurance and investing the difference can be a dumb move for many reasons. The primary reason is that few people have the discipline to invest the difference. Most likely, this money will be spent just staying afloat. Even if you do "invest the difference," how will you do it? The data indicates that Americans are terrible investors.
2. You may not need long term care insurance.
Don't get me wrong. Many people do need long-term care insurance. But before you grab the phone to call your insurance agent, consider whether you really need this insurance. It provides assistance with daily tasks for those who need some help in order to remain independent. The primary benefit of long-term care is that it may permit you to receive care in your home, so be sure your policy covers home care and not just nursing home care.
3. The type of policy you buy may be as important as determining the amount of coverage you need.
The focus of the insurance industry has been to persuade people that they need to purchase more life insurance. An even more critical issue may relate to the kind of policy you buy. Your need for life insurance generally decreases with age. This is significant because term insurance is relatively inexpensive when you are young. Permanent life insurance has much higher premiums because it contains a significant savings element.
4. Blending term and whole life coverage into one policy is the secret your agent doesn't want you to know.
A blended policy combines term and whole life insurance coverage into a single policy. Over time, the term portion of the policy is replaced with whole life. The bottom line is that a blended policy can result in lower premiums, higher cash values and higher death benefits because of lower sales costs. The bad news is that your agent probably won't tell you about it because it may clobber her commissions.
5. Insurance for singles and children can be a smart buy.
I know it sounds counter-intuitive. Children don't earn income and singles typically have no dependents. Since the primary purpose of life insurance is to replace lost income, why would you insure the lives of children or singles? Insurance on the lives of children is not generally necessary. But there are circumstances where it might be a good idea. First, insurance at a young age is very inexpensive.
6. Choosing the right health care plan is a critical decision.
You have many options for selecting health insurance. The one you pick may be your most important financial decision. If you are covered at work, you may be able to select from various options. Check out the coverage's and costs carefully. My advice generally is to focus on big ticket items. It may not be worth the additional premium to cover smaller costs.
7. Your auto insurance should cover replacement with original parts.
Your insurance should cover the cost of repairing your car with original equipment manufacturer (OEM) parts. Most insurance permits the use of aftermarket parts. Why should you care? There is much debate about whether aftermarket parts really are of the same quality as OEM. They are significantly less expensive, but the real issue is whether using them returns your vehicle to its "pre-accident condition."
8. Your agent does not have to act in your best interest.
The issue is whether or not your agent has a "fiduciary" obligation to you. If so, he accepts the highest duty of loyalty and care. He cannot have any interests that conflict with yours. In most states, however, insurance agents are not fiduciaries. They have no obligation to place your interests above their own or above those of the insurance companies they represent.
9. Disability insurance may be the most overlooked part of your financial plan.
If you knew the data, you would take a hard look at disability insurance. Now is the right time since you probably don't have any disability coverage. There is about a 40% probability that you will have at least one disability that lasts three months or longer before you reach age 65.
10. Company ratings are not the most important factor when buying cash-value insurance.
Ratings are often bandied about as the standard by which you should select an insurance company for cash-value insurance. However, ratings tell only part of the story. You want an insurance company that has relatively strong investment performance, relatively low mortality rates, relatively low expenses and has demonstrated a willingness to treat both new and existing policyholders fairly.