f life insurance.
|Term Life||Universal Life||Whole Life||Variable Whole Life||Variable Universal Life|
|Policy term||Stated in policy||Until age 95||Life||Life||Life|
|Type of death benefit||Determined||Variable||Determined||Variable||Variable and determined|
|Existence of cash value||No||Current rate, guaranteed minimum||Fixed rate, guaranteed||Variable rate, not guaranteed||Variable rate, not guaranteed|
|Ability to choose cash value investments||N/A||No||No||Yes||Yes|
|Regulatory agency||Insurance||Insurance||Insurance||Insurance and securities||Insurance and securities|
In order to be able to shop for the best premiums, it's a good idea to know how premiums are calculated by insurers. Bear in mind that premiums vary among insurance companies, and it is a good idea to ask several insurers for their rates.
Insurance companies place individuals into four risk groups: preferred, standard, substandard, or uninsurable. The premiums charged will be commensurate with the category you are placed in. Thus, a standard risk will pay an average premium for similarly situated insurers.
If you have a high risk job or hobby, you will be considered substandard, a high risk. A terminal illness at the time you apply for insurance will render you uninsurable. Having some type of chronic illness will place you in the substandard category. People with conditions such as diabetes or heart disease can be insured, but will pay higher premiums.
Tip: One company's category for you may not hold with another company. Thus, it still pays to shop for insurance with other companies even though one may have labeled you "substandard."
Tip: Once an insurance company approves you for coverage, you cannot be dropped unless you stop paying your premium.
In most states, there are rules, set by a group of state insurance regulators, requiring the agent to calculate two types of cost indexes that can help you to shop for a policy. You can use the indexes to compare policy costs.
One type of index, the net payment index, gauges the cost of carrying your policy for the next ten or twenty years. The lower the number is the less expensive the policy will be. This index is useful if you are most interested in the death benefit aspect of a policy, as opposed to the investment aspect. The other type of index, the surrender cost index, is useful to those who have a high level of concern about the cash value. This index may be a negative number. The lower the number, the less expensive the policy.
These two indexes apply to term and whole life policies. With universal life policies, focus on the cash value growth and the cash surrender value to make comparisons. Cash surrender value is the amount you receive if you cancel the policy. It is not the same as cash accumulation value. If you are shown two universal life policies, and they have the same premium, death benefit, and interest rate, then the one with the higher cash surrender value is generally the better policy.
Here are some questions to ask about policies:
How do cash values accumulate? An early, rapid build-up is generally preferable.
How has the policy's cash value performed in the past? You can get this information from a publication called Best Review, Life and Health. Determine how the policy performed in comparison with the company's projection and with other insurers.
Are any special features merely bells and whistles, or do they add value for you?
- What is the company's rating with Best, Standard & Poor's, and Moody's? You can find these publications in public libraries. The rankings should be in the top three to ensure that a company has financial stability.
- National Insurance Consumer Helpline
1001 Pennsylvania Avenue NW
Washington, DC 20004
Phone: (800) 942-4242