Your Top
Life Insurance Questions
Answered in Plain English
10
1-800-662-0747
www.amicalife.com/quote
This booklet is designed to help you build a better understanding of what life insurance can do for you and your family.
It answers typical questions we receive from customers about life insurance coverage. It also attempts to anticipate and address other issues you might have concerning life insurance in general. Keep in mind, though, that life insurance and related financial matters can be complex, and each situation should be evaluated on an individual basis. For this reason, we recommend strongly that you contact an Amica Life representative to seek professional assistance in determining your particular needs and the solutions to such needs.
2
1-800-662-0747
www.amicalife.com/quote
Answers to Commonly Asked Questions About Life Insurance
10
1. What is life insurance?
The classic definition of life insurance is that it is “a contract between a person (or other legal entity) and a life insurance company that provides for a guaranteed sum of money to be paid to a designated beneficiary upon the death of the insured.”
1
Today, the concept of life insurance has expanded far beyond its historical purpose of simply paying a death benefit. Just as important today are the “living benefits” life insurance can provide — fulfilling a wide range of diverse financial goals.
1
Brownlie, William D., The Life Insurance Buyer’s Guide, Chapter 1
2. Why do I need life insurance?
In practice, life insurance creates an “instant estate” for you. That is, when you die, cash can be paid to your beneficiary that can be used for any purpose — and, in most cases, this payment is received income tax-free! Normally, this asset is used to provide an income to your spouse and children or to fulfill some other obligation or desire that you have — such as paying off a mortgage or a business loan, financing children’s education, or protecting your assets from the diminishing effects of federal and estate taxes. In addition to benefits paid at death, cash value life insurance (as compared with term insurance) has benefits while you live. Living benefits include the buildup of a cash fund that can be borrowed from in the case of an unexpected financial need. If withdrawals from the cash fund are not paid back, however, the death benefit will be reduced by the amount withdrawn (plus unpaid accrued interest). Another living benefit that is becoming increasingly important today is that life insurance can provide a supplemental income at retirement or help pay the cost of long-term care. In certain instances, life insurance can ease the financial burden of terminal illness on families by allowing policyowners to collect a portion of the death benefits early — before dying — to cover such extraordinary expenses. This option is not 3
1-800-662-0747
www.amicalife.com/quote
intended to replace health insurance or long-term care insurance, but it can provide assistance for special medical needs that result from terminal illness. In fact, life insurance — unlike most other financial products on the market today — guarantees that money will be paid to the individuals you select at exactly the time it is needed most.
3. What are the different types of life insurance?
Today, there are literally thousands of different life insurance policies available from hundreds of companies, with a variety of combinations, options, and benefits that can be tailored to fit your individual needs. However, most policies fall into one of two basic groups: term life and whole life (also called permanent or straight life). Term Life, as its name implies, provides protection for a specific, limited amount of time — such as for 10, 15, 20, or 30 years. In the vast majority of policies, the cost of term life insurance covers only death benefits and policy expenses. As such, it is the least expensive type of life insurance in regard to premium payments. Term life policies may also be set up to increase or decrease during the term period. Term policies may be renewable without evidence of insurability (medical exams, etc.) and generally are convertible to a whole life policy — an important option for younger couples with the potential of earning higher incomes as they age. Keep in mind, though, the premiums for most term life policies increase with age. The older the insured, the higher the annual premium for this type of coverage. Whole Life is designed to stay in force for as long as you live. The main advantages of whole life are that generally premiums remain unchanged as you grow older, and the policy accumulates a cash fund that can be accessed in emergencies. When you retire, whole life can provide you with a guaranteed income for the rest of your life. Permanent insurance — such as whole life — also has many other variations that are typically centered around how the cash fund is handled within the policy. These include Universal Life, under which a policyholder 4
1-800-662-0747
www.amicalife.com/quote
may pay premiums on a flexible basis — at any time and in any amount, subject to certain minimums. Universal life is an excellent choice if you want to have a high degree of flexibility in structuring your policy. Variable Life is similar to universal life except that death benefits and cash values are driven by the performance of stock and bond funds selected by the policyowner and managed by the insurance company — rather than based on the insurance company’s “General Investment Account” used for whole life and universal life policies. In operation, variable life is a type of investment with built-in life insurance protection guarantees. Since it is classified as a security, it is offered through a prospectus only and can only be sold by an insurer and agent who both must be specially licensed for such products.
4. How do I determine how much life insurance I need?
Before addressing this question, you might be interested in this snapshot of the life insurance marketplace, gleaned from a study done by LIMRA International, a leading research organization for the insurance industry. According to LIMRA: • One-third of U.S. adults have no personal life insurance coverage • One-third of people with annual incomes over $100,000 feel they are underinsured • Many people in the LIMRA study did not know that group life insurance provided by their employer ends when they no longer are employed • 48 million households say they do not have enough life insurance • One of every four households feel they will add life insurance coverage within the next year. 5
1-800-662-0747
www.amicalife.com/quote
If the LIMRA study is reflective of your own situation, you likely need more life insurance . . . but how much? Financial planners suggest an amount of life insurance that is equal to six to eight times your annual income. However, this is just a “rule of thumb,” and many other factors should be considered before determining the amount of life insurance you need. These include other sources of income — such as any existing life insurance coverages, investments, pension plans, or other assets that might be accessed. Also, if you are married, your spouse’s earning capacity and the number of individuals who are financially dependent on you (and for how long) could significantly impact the amount of coverage you may need. This might include money for your children’s education and paying off any other liabilities, such as a mortgage or loans. The process of determining how much insurance you need should not be approached lightly. Keep in mind that it is very useful to prepare a conceptual budget of what your family’s financial needs will be should you die prematurely. Your budget should include everyday living costs (food, utilities, insurance, taxes, etc.) and the need for future cash for items such as children’s education, paying off a mortgage, relocation expenses, and the like. Many companies, including Amica Life, offer free needs-analysis worksheets and checklists that can help you organize the “needs determination” process and make it easier to develop minimum and optimal budget estimates.
6
1-800-662-0747
www.amicalife.com/quote
5. Should my spouse and children be insured as well?
In a dual income household, it is vitally important to protect the incomeearning capacity of both spouses. Life insurance on an “at home” spouse is recommended for the purpose of paying for household services and child care that may be otherwise unavailable when the surviving spouse returns to work. In some cases, it may be advisable to have life insurance on children. However, insuring children should not be done if it reduces purchasing appropriate amounts of life insurance on the family’s main income earner. Most insurers offer some type of inexpensive “children’s insurance benefit” rider that provides a small, but usually adequate, amount of life insurance coverage to pay for funeral and other final expenses.
6. How do I choose a good, reliable company?
In general, state laws regulate all life insurance companies. Each state insurance department keeps close tabs on the life insurance operations within its borders, with the goal of assuring consumers that companies are managed in an acceptable fashion and have the financial reserves to pay their contractual obligations when the time comes. Beyond that, there are important differences among companies. Some are large multi-line companies that offer both casualty (e.g., home and auto) and life insurance, and some concentrate only on life insurance and annuities. Some are focused on specific markets such as small businesses or seniors — or “niche” products, such as variable life. There are approximately 1,600 companies providing life insurance in the U.S., according to LIMRA. Another way to distinguish life insurance companies is how they distribute their products. Many are involved in some type of national or regional general agency system, where the general agent is authorized to retain and train agents who sell the company’s lines. A growing number of companies, like Amica Life, sell their products on a “direct basis” to consumers and businesses using direct marketing and regional offices. Several organizations rate insurance companies; among them are A.M. Best Company (“Best”), Moody’s Investor Services, Inc., and The Insurance Forum 7
1-800-662-0747
www.amicalife.com/quote
(a publication). Arguably, the best-known and most highly regarded life insurance rating service is Best. Best rates companies according to the following designations: A+ and A++ A and AB+ and B++ B and BSuperior Excellent Very good Fair C+ and C++ Marginal C and CD E Weak Poor Under regulatory supervision
In choosing your company, you should concentrate only on companies that have achieved an A++, A+, or A rating over a long period of time. Amica Life has an A+ rating. More information on Best’s ratings can be found at its Web site — www.ambest.com.
7. Should I purchase term or permanent life insurance?
The first step is to determine how much life insurance you need. The second step — on your own or with the help of an Amica Life representative or a financial advisor — is to gather policy information from companies you select. Look for a company that is reputable, service-oriented, and financially strong. As discussed earlier, a number of insurance rating services rate the financial strength of companies. This information can be obtained through your Amica representative or financial advisor, via the Internet, or at libraries. Most companies will mail you information packets on their products, but start by specifying that you would like to review policy illustrations and summaries on the products and face amounts that you feel would work best in your situation, both term and permanent. This is an efficient way to compare benefits and narrow down your choices. It’s likely that the level of coverage you need and its cost will drive your final decision to purchase either a term or permanent policy. If you can’t afford permanent, you’ll have the option of going with low-cost term coverage — which, in most cases, may be converted to a permanent plan later on. 8
1-800-662-0747
www.amicalife.com/quote
Other important factors affecting your choice are your individual financial goals. For example, if your need for insurance is for less than 20 years, your best bet may be term. If, on the other hand, you are interested in building a cash fund with income benefits at retirement, and you want premiums that most likely will not change, you should opt for a permanent policy. Keep in mind, though, that as you grow older and your financial needs change, you’ll always have the option of adding to or amending your coverage — provided that you can meet the insurer’s health and age prerequisites.
8. What is “Preferred” vs. “Standard” underwriting?
When you complete your application for life insurance, you enter the process of “underwriting” within the company. The underwriting process is simply assessing the degree of risk that the insured will die prematurely, focusing primarily on age, health, and occupational considerations. Those people who qualify for a preferred policy are presumed to be at less risk than people in the standard category. Insureds in the preferred class pay somewhat lower premiums than those in the standard class. It is important to understand that many initial premium quotes for life insurance are based on preliminary information that you provide about your health and other risk factors. Final premium rates can only be issued after all information is taken into consideration.
9. What about group life insurance?
Many life insurance companies offer employers and various organizations the fringe benefit of life insurance for their employees or members through group life insurance policies. But, in most cases, when employment or membership ends, so does the life insurance. Although group life policies typically provide only term coverage, most states require that departing employees be given the option to convert to permanent insurance and pay premiums directly to the insurer. Smaller employers tend to offer insurance programs under which employees pay most or all of the policy cost and retain coverage on their own after leaving the company. 9
1-800-662-0747
www.amicalife.com/quote
10. What is a policy rider?
Additional benefits can be added to your base life insurance policy with riders that enable you to design your life insurance coverage so that it fits your individual needs. Because riders entail additional risks and/or financial commitments by the issuing company, there is a cost for each rider. Common riders include: • Accidental Death Benefit. An accidental death benefit rider adds an additional death benefit to your policy if the insured dies from an accident. The accidental death benefit rider amount typically cannot exceed the face amount of the base policy. • Waiver of Premium. With this rider, the insurance company will waive the requirement that you pay premiums and will continue your coverage should you become disabled for a time, usually six months. After six months, the company refunds your premiums back to the date of disability, and all future premiums are waived until you recover. • Purchase Option Rider. A valuable benefit for younger insureds, this rider allows the purchase of additional insurance without answering any health questions, having a medical exam, or otherwise having to show proof of insurability at some time in the future. • Cost of Living Rider (COLA). A COLA rider enables you to increase the face amount of your insurance based on increases in the Consumer Price Index. COLA is a great way to systematically keep your coverage in step with inflation over time. Your company may not make it available on all policies or in all states.
10
1-800-662-0747
www.amicalife.com/quote
About Amica Life Insurance Company
Amica Life Insurance Company was incorporated in Rhode Island in 1968 as a wholly owned subsidiary of Amica Mutual Insurance Company (founded in 1907) for the purpose of offering our policyholders an expanding range of value-focused financial services. Today, individuals and families everywhere have access to practical solutions from Amica Life and Amica General Agency. Our customers also receive the exceptional service that has defined Amica from its earliest days. We treat others the way we would expect to be treated. Amica Life and Amica General Agency now provide these financial services: Life Insurance — Level Term Life1, Annual Term, Whole Life2, Universal Life3, and Second-to-Die Life4 Retirement Planning — Traditional IRA Annuities, Roth IRA Annuities, and Tax-Deferred Annuities Health Insurance4 — Long-Term Care, Disability Income, and Individual and Family Medical Insurance Through the years, Amica Life has maintained a conservative investment strategy without sacrificing the goal of securing highly competitive returns on assets. The majority of Amica Life’s assets are invested in high-rated, investment grade bonds. As a result, Amica Life has been able to offer policyholders the security and peace of mind that comes from the confidence that they are putting their trust into a financially strong, stable company.
Policy name and product features differ in FL, LA, MA, MD, NJ, NY, and TX. Some features may not be available in all states. Standard form numbers CLT01-01 and FGCLT01-01 in most states. In MI, known as Indeterminate Premium Life. May not be available in all states. 3 In VA, known as Flexible Premium Adjustable Life. Not available in NY. 4 Offered through Amica General Agency, Inc. (Amica General Insurance Agency in CA). Products may not be available in all states.
1 2
11
1-800-662-0747
www.amicalife.com/quote
Amica understands. It’s not just how you’re covered, It’s how you’re treated.
Call us for assistance in fulfilling your needs for life insurance, retirement planning, and health insurance. Experience our exceptional customer service for yourself.
Call 1-800-662-0747 or visit www.amicalife.com/quote
Amica Life Insurance Company
100 Amica Way, Lincoln, Rhode Island 02865-1156 1-800-662-0747 ~ www.amicalife.com
A3
L915-1
8180
1-800-662-0747
www.amicalife.com/quote