What You Should Know About Buying Life Insurance

LIFE INSURANCE: THE FOUNDATION OF FINANCIAL SECURITY

BUYING LIFE INSURANCE

Buying life insurance is not like any other purchase you will

make. When you pay your premiums, you're buying the future

financial security for your family that only life insurance can

provide. Among its many uses, life insurance helps ensure that,

when you die, your dependents will have the financial resources

needed to protect their home and the income needed to run a

household.

Choosing a life insurance product is an important decision, but

it often can be complicated. As with any major purchase, it is

important that you understand your needs and the options

available to you.

That's where this booklet comes in; read it thoroughly. It takes

you through the basics, step-by-step, as you prepare for this

significant purchase. Most important, it will help you know what

questions to ask when you're buying life insurance.

Life insurance also can be used to help with other financial

goals, such as funding retirement or education expenses. However,

it is important to remember that the main purpose of life

insurance is financial protection. If your primary goals are

something other than protection, you should consider what other

financial products are available to meet those goals.

LEARNING THE BASICS

The best way to make an informed decision about buying life

insurance is to become familiar with the basics.

Why do I need life insurance? Life insurance is an essential part

of financial planning. One reason most people buy life insurance

is to replace income that would be lost with the death of a wage

earner. The cash provided by life insurance also can help ensure

that your dependents are not burdened with significant debt when

you die. Life insurance proceeds could mean your dependents won't

have to sell assets to pay outstanding bills or taxes. An

important feature of life insurance is that no income tax is

payable on proceeds paid to beneficiaries.

How much life insurance do I need? Before buying life insurance,

you should assemble personal financial information and review

your family's needs. There are a number of factors to consider

when determining how much protection you should have.

These include: any immediate needs at the time of death, such as

final illness expenses, funeral costs and estate taxes; funds for

a readjustment period, to finance a move or to provide time for

family members to find a job; and ongoing financial needs, such

as monthly bills and expenses, day-care costs, college tuition or

retirement. Although there is no substitute for a careful

evaluation of the amount of coverage needed to meet your needs,

one rule of thumb is to buy life insurance that is equal to five

to seven times your annual gross income.

What is term insurance? Term insurance provides protection for a

specific period of time. It pays a benefit only if you die during

the term. Some term insurance policies can be renewed when you

reach the end of a specific period which can be from one to 20

years. The premium rates increase at each renewal date. Many

policies require that evidence of insurability be furnished at

renewal for you to qualify for the lowest available rates.

What is permanent insurance? Permanent insurance provides

lifelong protection and is known by a variety of names, described

later. As long as you pay the necessary premiums, the death

benefit always will be there. These policies are designed and

priced for you to keep over a long period of time. If you don't

intend to keep the policy for the long term, it could be the

wrong type of insurance for you.

Most permanent policies including whole, ordinary, universal,

adjustable and variable life have a feature known as "cash value"

or "cash surrender value". This feature, which is not found in

most term insurance policies, provides you with some options:

You can cancel or "surrender" the policy "in total or in part"

and receive the cash value as a lump sum of money. If you

surrender your policy in the early years, there may be little or

no cash value. If you need to stop paying premiums, you can use

the cash value to continue your current insurance protection for

a specific period of time or to provide a lesser amount of

protection to cover you for as long as you live. Usually, you may

borrow from the insurance company, using the cash value in your

life insurance as collateral. Unlike loans from most financial

institutions, the loan is not dependent on credit checks or other

restrictions. You ultimately must repay any loan with interest or

your beneficiaries will receive a reduced death benefit.

The cash values of many life insurance policies may be affected

by your company's future experience, including mortality rates,

expenses and investment earnings. Keep in mind that with all

types of permanent policies, the cash value of a policy is

different from the policy face amount. Cash value is the amount

available when you surrender a policy before its maturity or your

death. The face amount is the money that will be paid at death or

at policy maturity.

What are the types of permanent insurance? There are many

different types of permanent insurance. The major ones are

described below:

Whole Life or Ordinary Life: This is the most common type of

permanent insurance. The premiums for a whole life policy must be

paid periodically in the amount indicated in the policy. These

premium amounts generally remain constant over the life of the

policy.

Universal Life or Adjustable Life: This variation of permanent

insurance allows you, after your initial payment, to pay premiums

at any time, in virtually any amount, subject to certain minimums

and maximums. You also can reduce or increase the amount of the

death benefit more easily than under a traditional whole life

policy. (To increase your death benefit, you usually will be

required to furnish the insurance company with satisfactory

evidence of your continued good health.)

Variable Life: This type of permanent policy provides death

benefits and cash values that vary with the performance of an

underlying portfolio of investments. You can choose to allocate

your premiums among a variety of investments which offer varying

degrees of risk and reward stocks, bonds, combinations of both,

or accounts that provide for guarantees of interest and

principal. You will receive a prospectus in conjunction with the

sale of a variable product.

The cash value of a variable life policy is not guaranteed, and

the policyholder bears that risk. However, by choosing among the

available fund options, the policyholder can create an asset

allocation that meets his or her objectives and risk tolerance.

Good investment performance will lead to higher cash values and

death benefits. On the other hand, poor investment performance

will lead to reduced cash values and death benefits.

Some policies guarantee that death benefits cannot fall below a

minimum level. There are both universal life and whole life

versions of variable life.

WHAT ARE THE ADVANTAGES AND DISADVANTAGES OF TERM AND PERMANENT

INSURANCE?

Term Insurance

Advantages Initially, premiums are generally lower than those for

permanent insurance, allowing you to buy higher levels of

coverage at a younger age when the need for protection often is

greatest. It's good for covering specific needs that will

disappear in time, such as mortgages or car loans.

Disadvantages Premiums increase as you grow older. Coverage may

terminate at the end of the term or may become too expensive to

continue. Generally, the policy doesn't offer cash value or paid-

up insurance.

Permanent Insurance

Advantages: As long as the necessary premiums are paid,

protection is guaranteed for your entire life. Premium costs can

be fixed or flexible to meet personal financial needs. Policy

accumulates a cash value that you can borrow against. (Loans must

be paid back with interest or your beneficiaries will receive a

reduced death benefit.) You can borrow against the policy's cash

value to pay premiums or use the cash value to provide paid-up

insurance. The policy's cash value can be surrendered' in total

or in part ' for cash or converted into an annuity. (An annuity

is an insurance product that provides an income for a person's

life-time or for a specific period of time.) A provision or

"rider" can be added to a policy that gives you the option to

purchase additional insurance without taking a medical exam or

having to furnish evidence of insurability. (For more information

on riders, see below.)

Disadvantages: Required premium levels may make it hard to buy

enough protection. It may be more costly than term insurance if

you don't keep it long enough.