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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 com-plicated. 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.

The information in this brochure has been compiled by the

American Council of Life Insurance, a trade association of more

than 600 life insurance companies. Collectively, these companies

provide about 90 percent of the life insurance in force in the

United States.

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, burial costs and estate taxes;l 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.l 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.l

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.l Coverage may

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

continue.l 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.l Premium costs can be fixed or

flexible to meet personal financial needs.l 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.)l 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

page 19.)

Disadvantages

Required premium levels may make it hard to buy enough

protection.l It may be more costly than term insurance if you

don't keep it long enough.

GETTING STARTED

After you have thought about your financial needs and have become

familiar with the basic types of life insurance, you will need to

choose a company and agent.

How do I choose a company?

More than 2,000 companies in the United States sell life

insurance. While some consumers prefer to buy policies directly

from a company, most people buy life insurance through agents or

brokers. Much of the information provided here will be helpful

whichever way you decide to buy life insurance.

Before purchasing a policy, check the company's financial

condition. You can do this by asking the agent or requesting

information from your state's insurance department. A number of

insurance rating services rate the financial strength of

companies. These ratings can be found in large public or business

libraries, or can be obtained directly from the rating service.

There may be a fee forthat information.

Also check with the state insurance department to be sure the

company is licensed in your state.

How do I choose an agent?

Collect the names of several agents through recommendations from

friends, family and other sources. The following are some

questions you may want to ask a potential agent:

Is the agent licensed in your state?

All states require that agents be licensed to sell life

insurance. In addition, agents who sell variable products must be

regis-tered with the National Association of Securities Dealers

and have additional state licenses.

What company or companies does the agent represent?

Does the agent have any professional designations?Professional

designations include Chartered Life Underwriter (CLU) and Life

Underwriting Training Council Fellow (LUTCF). Agents who also are

financial planners may have designations, such as Chartered

Financial Consultant (ChFC), Certified Financial Planner (CFP) or

Member of The Registry of Financial Planning Practitioners.

Is he or she a member of a professional association?

The major association for agents is The National Association of

Life Underwriters (NALU). Through NALU's local associations,

agents can attend educational seminars and can stay on top of

trends in the business. Similar training and services are

provided to financial planners through the American Society of

CLU & ChFC, the Institute of Certified Financial Planners (ICFP),

and the International Association for Financial Planning (IAFP).

What can I expect an agent to do for me?

An agent should be willing and able to explain various policies

and other insurance-related matters. Let your agent know what you

expect from him or her. You should feel satisfied that the agent

is listening to you and looking for ways to get you the right

type and amount of insurance at an affordable price. If you are

not comfortable with the agent, or you aren't convinced he or she

is providing the service you want, find another agent.

THE AGENT VISIT

Now that you have reviewed the basics of life insurance and

thought about your personal financial needs, you can shop for a

life insurance policy with more confidence and knowledge.

What can I expect during an agent visit?

The agent you have selected will meet with you to discuss

your life insurance needs. He or she will ask questions about

family income and your net worth. Using the information you

already have assembled about your financial situation, you should

be prepared to discuss your insurance options.

Will the agent ask questions about my health?

In this initial meeting, be prepared to answer questions about

your health (for example, age, medical condition, medical

history, family history, personal habits). It is important that

you answer these questions carefully and truthfully; this

information helps a company charge a fair premium for your

coverage. For instance, you may pay a lower premium if you don't

smoke. On the other hand, if you have a chronic illness, you may

be charged a higher premium.

Also, in the event of a claim, accurate and truthful answers

enable your beneficiary to receive prompt payment. Inaccurate or

untruthful answers, however, may cause delay or even denial of a

claim.

When you apply for life insurance, you may be asked to have a

medical exam. Often, a licensed medical professional will make a

personal visit.

YOUR AGENT'S RECOMMENDATION

Once you have discussed your financial needs and objectives with

your agent, he or she will recommend the type of life insurance

policy that will best suit your purposes. Often, the agent

will provide a "policy illustration" that will show how your

policy will work. (See page 16.)

Carefully study your agent's recommendation and ask for a

point-by-point explanation if there are items you don't

understand. Because your policy is a legal document, it's

important that you know what it provides.

Here are some other questions you should ask:

Does this policy truly meet my needs?

If your agent recommends a term policy, consider the following:l

How long can I keep this policy?

If you want the option to renew the policy for a specific number

of years or until a certain age, ask your agent about the terms

of renewal of the contract.l When will my premiums increase?

Annually? Or after a longer period of time, such as five or 10

years?l Can I convert to a permanent policy? Some policies allow

you to convert the policy to permanent insurance without a

medical exam, regardless of your physical condition at the time

of the conversion. These policies are known as "convertible

term."

If your agent recommends a permanent policy, consider the

following:

Are the premiums within my budget? Be sure you want to spend the

money for this type of long-term coverage.l Can I commit to

these premiums over the long term?l Make sure you know the amount

you would receive if you surrender your policy.Keep in mind that

permanent insurance is designed to provide protection for

your entire life. If you don't plan to keep the product

for many years, consider another type of policy. Cashing in a

permanent policy after only a couple of years can be a costly way

toget insurance protection for a short term.

What does my policy illustration show? An illustration shows

policy premiums, death benefits, cash values and information

about other items that can affect your cost of obtaining

insurance. Some of the items listed in the illustration are used

by the insurance company to reduce your costs if its future

financial results are favorable. Your policy may provide for

dividends to be paid to you as either cash or paid-up insurance.

Or it could provide for interest credits that could increase your

cash value and death benefit or reduce your premium. These items

are not guaranteed. Your costs or benefits could be higher or

lower than those illustrated, because they depend on the future

financial results of the insurance company. With variable life,

your values will depend on the results of the underlying

portfolio of investments.

Ask your agent for an explanation of the illustration; some

figures are guaranteed and some are not. Remember that the

insurance company will honor the guaranteed figures regardless of

its future financial experience.

If your policy is a variable life policy, be sure that the

interest rate assumed is reasonable for the underlying investment

accounts to which you choose to allocate your premiums. For

example, some investment advisors suggest that a higher interest

rate assumption may be warrant-ed if you plan to allocate your

premium to a stock account, while a lower rate should be assumed

for more conservative alternatives.

It is important to keep in mind that an illustration is not a

legal document. Legal obligations are spelled out in the policy

itself.

Here are additional questions to ask about the policy

illustration:

Is the illustration up to date? Is it based on current

experience?l Is the classification shown in the illustration

appropriate for me (i.e., smoker/non-smoker, male/female)?l When

are premiums due annually, monthly or otherwise?l Which figures

are guaranteed and which are not?l Will I be notified if the

non-guaranteed amounts change? Does the policy have a guaranteed

death benefit, or could the death benefit change depending on

interest rates or other factors?l Does the policy pay dividends

or provide for interest credits? Are those figures incorporated

into the illustration?l Will my premiums always be the same? Is

it possible that the premium will increase significantly if

future interest rates are lower than the illustration assumes?l

If the illustration shows that, after a certain period of time, I

will not have to make premium payments, is there a chance I could

have to begin making payments again in the future?l Is the

premium level illustrated sufficient to guarantee protection for

my entire life?

What happens if I fail to make the required premium payments?

If you miss a premium payment, you typically have a 30- or 31-day

grace period during which you can pay the premium with no

interest charged. After that, the company can with your

authorization draw from a permanent policy's cash value to keep

that policy inforce. In some flexible premium policies, premiums

may be reduced or skipped as long as sufficient cash values

remain in the policy. However, this will result in lower cash

values.

What happens if I become disabled and can't pay the premiums on

my policy?

Provisions or riders that provide additional benefits can be

added to a policy. One such rider is a waiver of premium for

disability. With this rider, if you become totally disabled for

aspecified period of time, you do not have to pay premiums for

the duration of the disability.

Are other riders available?

Another rider, called an "accidental death benefit", provides for

an additional benefit in case of death as a result of an

accident.

A relatively new rider offered by some companies provides

"accelerated benefits," also known as "living benefits." This

rider allows you, under certain circumstances, to receive the

proceeds of your life insurance policy before you die. Such

circumstances include terminal or catastrophic illness, the need

for long-term care or confinement to a nursing home.

Ask your agent for information about these

and other policy riders.

When will the policy be in effect?If you decide to purchase the

policy, find out when the insurance becomes effective. This could

be different from the date the company issues the policy.

Is a "Buyer's Guide" available?

Most state insurance departments require companies to provide

consumers with a buyer's guide to help them understand life

insurance terms, benefits and costs.

Ask your agent for a copy.

FINAL TIPS

Here are a few tips to keep in mind about your life insurance

purchase:Take your time. On the other hand, don't put off an

important decision that would protect your family. Make sure you

fully understand any policy you are considering and that you are

comfortable with the company, agent and product. Don't rush into

a decision just because you are feeling pressured.When you

purchase a policy, make your check payable to the insurance

company, not to the agent. Be sure you are given a receipt.After

you have purchased an insurance policy, keep in mind that you may

have a "free-look" period usually 10 days after you receive the

policy during which you can change your mind. During that period,

read your policy carefully. If you decide not to keep the policy,

the company will cancel the policy and give you an appropriate

refund. Ask your agent.Review the copy of your application

contained in your policy. Promptly notify your agent or company

of any errors or missing information.If an agent or company

contacts you and wants you to cancel your current policy to buy a

new one, contact your original agent or company before making any

decisions. Surrendering your policy to buy another could be very

costly to you.

If you have a complaint about your insurance agent or company,

contact the customer service division of your insurance company.

If you still are dissatisfied, contact your state insurance

department. Most departments have a consumer affairs division

that can offer help.Review your policy periodically or when your

situation changes to be sure your coverage is adequate.

OTHER RESOURCES

Where else can I get information about insurance?Your personal

insurance agent and company are good sources of general

information about insurance.Contact the National Insurance

Consumer Helpline (NICH) at 1-800-942-4242. NICH is a toll-free

consumer information telephone service sponsored by insurance

industry trade associations. Look in your local library for

magazines or books on insurance or personal finance.The consumer

affairs division of your state insurance department can provide

useful information. Some departments have toll-free numbers to

respond to consumer questions.



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