 |
Q1. Do I need life insurance? |
|
|
If you can afford it, there are several reasons why you may need life insurance. The most important reason is to have enough money to provide for dependents such as young children, non-working spouses or elderly parents, should you die and be no longer able to provide for them.
Also, your survivors may need funds to pay for extra expenses that may arise due to your death, such as funeral expenses, or other expenses to pay off bills and debts.
If you have no dependents or have adequate financial resources, you may not have an actual need to purchase life insurance. However, some people who do not “need” life insurance still purchase it anyway. This can be a means to leave money to a beneficiary or beneficiaries while minimizing tax consequences.
Another category of people who might want life insurance are business owners or people with substantial estates. Since these people have needs that require more planning, they should usually consult with professionals or specialists in insurance-related law, accounting or estate planning because legal business agreements or trust documents may need to be dran-up.
If you are someone in this last category, you should contact the appropriate professionals if you need their advice.
|
| |
|
|
|
Q2. Why buy life insurance? |
|
|
Some reasons to buy life insurance are:
1. Income Replacement
2. Funeral Expenses
3. Pay Off Debts
4. Pay Off Medical Bills
5. Mortgage life insurance
|
| |
|
|
|
Q3. How is cost determined? |
|
|
The cost of life insurance is determined by the insurance company’s actuaries who take the following into consideration:
1. Mortality cost, or the cost of paying claims to the beneficiaries of insured people. Mortality costs for most insurance companies have declined in recent years because people in the United States have been living longer. This means there is a longer period to collect premiums and death claims are being paid out later than originally anticipated. Still companies must be careful to select new policyholders who are basically healthy, and they should charge rates which reflect the actual mortality risks of those people who have serious health problems or who engage in potentially dangerous activities. Otherwise, they might have higher than expected costs for death claims, which could cause financial difficulties for them.
2. Operations cost, the cost of operating the insurance company and selling its products. These costs includes marketing costs (commissions; costs of operating sales offices; advertising expenses; etc.), and non-marketing costs (the cost of constructing and maintaining company buildings; salaries of officers and staff; etc.).
3. The return on investments. Insurance companies invest money until they need it to pay claims or expenses. If they can earn good investment returns, this will help to pay some of their expenses and reduce the cost of insurance. They will then be able to sell policies at lower premiums and compete more effectively against other companies.
The overall effect of all these factors determines how much the company needs to charge in order to provide life coverage while making a profit and paying dividends to its policyholders, if it is a mutual insurance company. Several large mutual insurance companies have recently changed to stockholder owned companies through a process called demutualization. In stockholder owned companies, dividends are paid to the stockholders.
A company that feels it needs to become competitive, can
1. cut marketing costs by reducing marketing staffs; trimming commissions; selling directly to customers by phone, mail, or over the Internet;
2. cut non-marketing costs by having fewer workers and managers; moving to a smaller building; lowering pay scales for new workers; cutting raises and bonuses for existing employees;
3. increase return on investment by making different investments.
Customers could benefit if the costs are cut and the cuts are then passed on to them.
|
| |
|
|
|
Q4. Should I buy life insurance for other members of my family such as my spouse or children? |
|
|
The members of the family who provide the family income are the ones who may need life insurance coverage the most. The first priority is to have adequate coverage on them because the loss of income due to their deaths would have an adverse affect on the surviving members of the family. After this is taken care of, then consideration can be given to whether there is any reason to provide coverage on other family members.
It is sometimes prudent to have life insurance when a family budget is very tight or there is only one member of the family who provides all of the family income. The proceeds from life insurance in the event of the death of this person may help to pay for expenses that might not be covered otherwise.
Buying life insurance for children with an option to buy more insurance at a later age sometimes makes sense. This could provide protection should a child require additional insurance later on, or become uninsurable due to some unforeseen event. These needs would be best served by buying low-cost term insurance for the appropriate number of years.
|
| |
|
|
|
Q5. What is cash value life insurance? |
|
|
In addition to providing a death benefit, cash value life insurance also accumulates a fund that can be used to pay future premiums or serve as a form of savings. |
| |
|
|
|
Q6. How do I protect my family from losing our house if I die while still having a mortgage to pay? |
|
|
The preferred way to cover this need is to purchase what may be described as a “decreasing term insurance policy”. Most insurance companies offer a variety of such policies including ones that are specifically tailored to match the declining principal balance of your particular mortgage. Mortgage companies also frequently have agreements with insurers to provide mortgage insurance.
|
| |
|
|
|
Q7. What is the importance of age/sex/health? |
|
|
Increasing age increases the cost of life insurance, because the older you get, the greater your chances of dying.
Being male costs more, because females live longer on average.
Poor health raises the rates for life because it decreases the number of years you are likely to pay premiums and reduces the time before the company may have to pay a claim.
Health is often the most important factor, followed by age and sex. Someone in poor health will have to pay a very high premium, or even be uninsurable.
|
| |
|
|
|
Q8. How might my smoking affect my ability to buy life insurance? |
|
|
If you are a smoker, you should expect to pay a little more for your life insurance than a non-smoker of a similar age and health.
Of course, if you also have a smoking-related medical condition, then the life insurance company would take that into consideration when deciding whether to sell you life insurance and what rate you should be charged.
|
| |
|
