1. Life Insurance Basics
Many of us buy life insurance because we want to make sure that our loved ones, especially
dependents, remain financially secure after we die. Income replacement is the No. 1 reason people
buy life insurance.
Non-earning caregivers also have an important - and often overlooked - economic value that should
be covered by life insurance.
Life insurance is also purchased by those interested in achieving specific business or estate-transfer
goals.
There are many types of life insurance policies depending on your goals, and there are huge price
differences among different companies offering identical coverage. Policies are available from
hundreds of life insurance companies in the United States. Most financial planners recommend that
each family income provider carry no less than 10 times their annual income in life insurance.
Here's an orderly way to go about shopping for life insurance:
• 1) Assess your needed life insurance amount..
• 2) Decide on the most appropriate policy type for your goals.
• 3) Choose possible companies by setting high standards for financial stability ratings.
• 4) Shop until you find the best price.
• 5) Look at ways to get the best possible life insurance rate.
Life insurance is a long-term proposition, so you should pay particular attention, at time of purchase
and throughout the life of the policy, to the financial stability ratings of your life insurance company.
Ratings indicate a company's ability to pay claims.
Assessing your life insurance needs
The first step in life insurance planning is to analyze your life insurance needs - meaning the
economic needs of dependents left behind. A great way to determine your coverage needs is to use
an online calculator like Insure.com's Life Insurance Needs Estimator Tool.
• Before purchasing a life insurance policy, consider your financial situation and the standard of living
you want to maintain for your dependents or survivors. For example, who will be responsible for
your final medical bills and funeral costs? Would your family have to relocate or otherwise change
their standard of living after losing your income? The assumption of immediate death is necessary to
determine the current life insurance needs for a family or individual.
• Add in the longer term financial needs of the remaining family members, such as: children's
expenses, income for the surviving spouse, mortgage and other debt payoffs, college education
funds and an additional emergency fund.
Because life insurance needs change over time, your life insurance amount should be reevaluated
periodically. We recommend a review at least once every five years or whenever you experience a
major life event such as a change in income or assets, marriage, divorce, the birth or adoption of a
child, or a major purchase such as a house or business.

2. In theory, you should have a declining need for life insurance as you age because fewer people
remain dependent upon you for income support. Exceptions would be protecting a business entity or
paying taxes on a large estate for heirs. If the purpose of buying life insurance is to pay estate taxes,
then you'll need permanent life insurance, which is in-force as long as you live and pay premiums.
Policy choices
Life insurance policies
[http://www.insure.com/quotesmith/controller?REF=99998&reqid=qstermindex&redirx=x] are divided
into two main types:
• Term life insurance, which provides only death protection without any side funds or "cash values"
(offering the least expensive cost per $1,000 of death coverage purchased).
• Permanent life insurance, which has "cash value" accounts in which a return-on-investment
component becomes an often complex and expensive part of the policy (most expensive cost per
$1,000 of coverage).
Term life insurance
The simplest of all life insurance to understand and the cheapest to buy: Term life insurance provides
death benefit protection without any savings, investment or "cash value" components for the term of
the coverage period.
Term life insurance is available for set periods of time such as 10, 15, 25 or 30 years. With "annual
renewable term life," your policy automatically renews each year and premiums increase as you get
older. Choose "level term insurance" if you want your premium to stay the same for the duration of
the policy. Also available is "decreasing term insurance," where premiums remain level but your
death benefit declines over time. This is good if you want to cover only a specific debt that decreases,
such as a mortgage or business loan.
As long as you pay your premiums, the company cannot cancel you.
Term life insurance is a popular choice because of the long rate-guarantee periods and because of
the ability to get a low cost life insurance policy. However, if you get to the end of your policy term and
still need life insurance, you'll need to shop for a new policy, which will then be priced based on your
older age and health status.
Choosing an initial rate-guarantee period is easy: Match the period of time your dependents need
your income to the available rate-guarantee periods. For example, if your children are young and you
have decades to go on your mortgage, try 30-year term life. If your children are leaving the nest and
your home is paid off or nearly paid off, 10-year term might fit the bill.
Other policy provisions that drive the popularity of term life insurance are guaranteed renewal and
guaranteed convertibility.
• Guaranteed Renewal. Before you buy a term life policy, ask the agent or company to confirm to you
that the policy contains a guaranteed renewable option, which grants you the right to continue
coverage beyond the initial rate-guarantee period without a medical exam. This feature, found in
most term life policies sold today, is extremely important should you become sick and uninsurable

3. toward the end of your rate-guarantee period.
For example, say that you've been paying $800 per year on a $500,000, 20-year level term life policy
and develop cancer near the end of the 20-year period, thus making you uninsurable. Assuming that
you want to continue the coverage, a guaranteed renewable clause would allow you to continue the
coverage beyond 20 years on an annual renewable basis without an exam, albeit at a much higher
annual premium of, say, $8,000 in year 21, $11,000 in year 22, and so on.
You may have sticker shock right now but these premiums don't look so high when you are very sick
and uninsurable but still in need of coverage.
• Guaranteed Convertible. Another built-in feature of most term life policies is the right to convert your
coverage to any cash value policy that the company might offer at current rates without having to
take another physical exam. This feature may be of use in the future if you decide you want cash
value life insurance.
If you'd like term insurance to cover you for a certain period of time but you're confident you'll outlive
the policy, consider a "return of premium" (ROP) term life insurance policy. Under this type of policy, if
no death benefit has been paid by the end of your insurance term, you receive all your premiums
back (tax-free). Return of premium term life insurance generally costs 50 to 150 percent more than a
comparable term policy but it provides a way to hedge your bets no matter what happens.
Term life insurance is widely available on the Internet, from direct-to-consumer life insurance
companies and from insurance agents and brokers.
Cash value life insurance
If you want more than a death benefit from your life insurance policy and like the idea of a long-term
savings account (not insured by any federal agency) or stock market investment, you might consider
cash value life insurance such as whole life, universal life or variable life. But be prepared to pay
much higher premiums per $1,000 of coverage precisely because you are now funding a cash value
account and paying fees and expenses.
In many cash value policies, the annual premium does not increase from year to year. Universal life
policies allow you to fluctuate or even skip premium payments, which in turn adjusts your death
benefit amounts.
Unlike term life insurance, which is easily compared online, cash value insurance is often marketed
by agents and brokers in a face-to-face setting, where needs and strategies can be discussed.
Because of the complexity and dizzying array of possible outcomes for permanent life insurance,
regulators insist that cash value insurance be sold using pre-approved illustration formats. These
illustrations can run to 15 or more pages. Cash value life insurance illustrations are divided into two
major sections: guaranteed values and projected or "illustrated, non-guaranteed" amounts.
Illustrations can be complex and hard to compare in an apples-to-apples way.
Pay particular attention to the guaranteed death benefit and premium-payment sections because
these columns contain the actual company promises. If you don't like what you see there, walk away.
Another caveat: Many cash value policies contain harsh penalties for surrendering the policies in the
early years. Changing your mind within the first few years is an expensive decision.

4. Whole life insurance
Ordinary whole life insurance offers "permanent protection" with a cash value account that grows over
time. Whole life provides a level death benefit and level premiums throughout your life and for as long
as you continue to pay the premiums. For example, a healthy 40 year-old female might pay $4,200
per year for a $500,000 whole life policy. The premium remains level at $4,200 per year for the rest of
her life and, in the event of death at any age, the policy will pay $500,000 to her beneficiary.
Whole life also contains a cash value account that builds over time, slowly at first and gaining steam
after several years. You can withdraw your cash value or take out a loan against it, but remember, if
you die before you pay back the loan, the death benefit paid to your beneficiaries will be reduced. For
example: Susan has a $500,000 whole life policy in force and, over the years, has borrowed
continually from the cash value. Her total loan amount and accrued interest totals $300,000. When
Susan dies, her beneficiary will receive $200,000 because the life insurance company will first pay
itself back from the death benefit.
Understand what your beneficiaries will receive upon your death. If you have a traditional whole life
policy, your beneficiaries receive only the death benefit no matter how much cash value you've built
up. Other payout options available for higher premiums are:
• Death benefit plus cash value
• Death benefit plus return of premium
Whole life policies can be issued as "participating" or "nonparticipating." Participating policies typically
cost more but may return annual dividends if the insurer has a good financial year. Dividends are
never guaranteed. Nonparticipating whole life insurance offers no dividends.
Buyers of whole life insurance like the certainty of fixed premiums with a known death benefit for life.
They also appreciate the "forced savings" component and watching their cash value account build up.
Universal life insurance
This kind of policy offers greater flexibility than whole or term life. Universal life has many moving
parts to understand before you buy.
After your initial premium payment, you can reduce or increase the amount of your death benefit.
Also, after your initial payment, you can pay premiums any time and in any amount, as long as you
don't miss a minimum payment level. In some cases, there are limits to how much extra you can pay
in advance. If you choose to increase your death benefit, you may have to provide medical proof that
your health has not deteriorated.
You will need to manage these policies to maintain sufficient funding, especially because the
insurance company can increase charges.
Some new universal life policies perform like term life insurance: They can be configured at the time
of purchase to provide both level death benefits and level premiums that are guaranteed for life as
long as you pay the scheduled premium.
Variable life insurance
Variable life offers a death benefit with a side fund that operates like an investment account. It shifts
the uncertainties of investment gains and losses to the policyholder.

5. The insurance company invests your premiums and offers you a choice of funds in which your money
will be invested. Returns are not guaranteed. The amount of money your beneficiaries will receive
and the cash value of your policy depend on how well the underlying accounts perform. Theoretically,
the cash value can go down to zero and, if so, the policy will terminate. Some variable life policies will
guarantee a minimum death benefit.
Other permanent life insurance considerations
When your cash value account grows large enough, it can be used by the insurer to pay your
premiums for the rest of your life. This is known as being "paid up." You can still withdraw your cash
value, but you'll have to resume premium payments to keep the policy in force or settle for a reduced
benefit that the remaining cash value can support. Your policy illustration will show you how long it
may take for your whole life policy to be "paid up."
If you no longer want your whole life policy, you can surrender it to receive the current cash surrender
value or convert it into an annuity, but keep in mind that cashing in a permanent policy after only a
couple of years is an expensive way to get insurance protection for a short time.
Riders add benefits
You can add riders to your life insurance policy that guard against a number of unpleasant situations.
Your insurer will have its own list of available riders, but here are a few:
• Accelerated death benefit rider (aka living benefits rider): Pays the benefit early if you become
terminally ill.
• Accidental death benefit rider: Pays an extra benefit if you die as the result of an accident.
• Long term care rider: Pays for long term care expenses should you not be able to do some of the
"activities of daily living," such as dressing or toileting.
• Waiver of premium rider: Waives premium payments should you become totally disabled.
How life insurance is priced
Your life insurance rate is based on your life expectancy, the face amount you request and the length
of the policy, whether it's the duration of your life (whole life) or a specific period (term life). Obtaining
a low cost life insurance policy depends, in large part, on your current and past health.
Because your current and past health conditions impact your life expectancy, insurers want to know
as much as possible about your health condition. Common conditions such as high blood pressure,
heart disease, obesity, cancer and depression can all raise your life insurance rate or even result in a
declination.
Based on your medical history, you'll be grouped into a category such as "preferred plus," "preferred,"
"standard" and "substandard." Your category ultimately determines your premiums.
Insurance buyers with severe health conditions or a combination of conditions can find it hard or
impossible to find life insurance. They are known as "impaired risks." Local agents may not be
experienced enough to find a company that specializes in insuring people with certain medical
conditions. Fortunately, impaired-risk specialists have expertise in knowing where to direct
applications for folks with medical conditions.

6. The life insurance buying process
The life insurance applications process is paper-intensive, can take weeks and often seems intrusive
for people who value their privacy. A face-to-face paramedical examination is generally required for
policies in excess of $100,000, which means, at minimum, giving of both blood and urine samples to
the paramedical professional.
Expect questions in detail regarding your lifestyle, intended foreign travel destinations, your family
health history and your personal health history. Do you intend to scuba dive? Have you had parents
or siblings with heart disease or cancer before age 60? Have you ever taken any medicine for anxiety
or depression? These, and more, are the kinds of questions to expect.
Sometimes multiple interviews are required in order to verify your information. The paramed examiner
typically asks these questions face-to-face and often insurance companies will conduct follow-up
telephone interviews so that you can verify the first set of answers. Regardless of the type of life
insurance you buy, most policies require you to meet certain guidelines regarding your lifestyle and
health history.
If it sounds tempting to shortcut this process by fudging on an answer or withholding information,
don't do it. It's a crime in all 50 states to lie about or conceal information on a life insurance
application. Besides, policies obtained through fraud can be voided at claim time.
Insurers will likely report your medical exam results (reported as numbered codes) to the Medical
Information Bureau (MIB), which maintains a database of those who have applied for life insurance in
the last seven years. If you've given different answers to medical questions in the past, it will raise a
red flag with the MIB. The goal of the MIB database is to reduce fraud.
All standard life insurance policies generally cover death by any cause at any time in any place,
except for death by suicide within the first two policy years (one year in some states).
If you don't care to go through the underwriting process, you have two other, more expensive,
options:
• Simplified issue life insurance can be purchased after answering only a few medical questions.
There is no medical exam required. However, if you report health problems, you will likely be
declined. Also, if you are healthy, or even if you have some negative medical history, an
underwritten policy is still going to be your least expensive.
• Guaranteed issue life insurance is sold to anyone who applies (up to an age limit) and is by far the
most expensive way to purchase life insurance. This should be considered only by those who are
declined for everything else but still need life insurance. These policies have graded death benefits,
meaning your beneficiaries won't receive the full death benefit until several years into the policy.
In naming a beneficiary, keep in mind that the life insurance company will want to see only the names
of those who are financially dependent upon you. An acquaintance, friend or relative, absent of a
financial relationship, will not do.
Working with an agent
After reviewing the various life insurance policies available, you might still be unsure about which best
meets your needs. The American Council of Life Insurers (ACLI) recommends consulting an

7. insurance agent. ACLI spokesman Jack Dolan says an agent can recommend policies that will meet
your needs. "Look at the recommended policy with care to be sure it fits your personal goals," Dolan
says.
Carefully study your agent's recommendations and ask for a point-by-point explanation. Make sure
the agent explains items you don't understand. Because your policy is a legal document, it is
important that you know what it provides.
Insure.com offers these recommendations for deciding which type of life insurance to
purchase:
If your agent recommends a term life policy, ask:
• What is the Standard & Poor's, A.M. Best, Fitch, Moody's and Weiss ratings of this insurance
company?
• What is the initial rate-guarantee period? Is this policy renewable past the initial rate-guarantee
period without a physical exam? If so, what are the premiums?
• Is this policy convertible to permanent insurance without a physical exam? If so, for what period of
time do I have the right to convert?
If your agent recommends a cash value policy, ask:
• What is the Standard & Poor's, A.M. Best, Fitch, Moody's and Weiss ratings of this insurance
company?
• Can you tell me, in writing, why you are recommending cash value insurance for me at this time?
• Why should I combine my life insurance protection needs with my investment objectives?
• Can you please prepare an analysis for me that shows the true cost of this cash value insurance
policy over 5, 10, 15, 20, 25 and 30 years vs. Buying term life and investing the difference in long
term bonds over those same time periods?
• How much is your first-year commission on this proposed cash value policy vs. Your commission on
an equivalent term life insurance policy?
• Are these proposed annual premiums within my budget?
• Why do you think that I can commit to paying these premiums over the long term, perhaps
decades?
• How much will I receive if I surrender the policy?
Additional Resources
• Consumer Federation of America's Insurance "Rate of Return" Service
• Insurance Information Institute: Learn about life insurance
• Your state's department of insurance may also have life insurance buying guides online
• For a free life insurance quote or more information on the types of life insurance available, please
visit Insure.com.
Over 50 life insurance