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Definition of 'Group Life Insurance'
Life insurance offered by an employer or large-scale entity (i.e. association or labor organization) to its workers or members. Group life insurance is typically offered as a piece of a larger employer or membership benefit package.
By purchasing coverage through a provider on a "wholesale" basis for its members, the coverage costs each individual worker/member much less than if they had to purchase an individual policy. Those receiving coverage may not have to pay anything "out of pocket" for policy benefits or they may elect to have their portion of the premium payment deducted from their paycheck.
Top 10 Life Insurance Myths
Life insurance is not a simple product.
Even term life policies have many elements that must be considered carefully in
order to arrive at the proper type and amount of coverage. But the technical
aspects of life insurance are far less difficult for most people to deal with
than trying to get a handle on how much coverage they need and why. This
article will briefly examine the top 10 misconceptions surrounding life
insurance and the realities that they distort.
Myth #1: I'm Single and Don't Have
Dependents, so I Don't Need Coverage
Even single persons need at least enough
life insurance to cover the costs of personal debts, medical and funeral bills.
If you are uninsured, you may leave a legacy of unpaid expenses for your family
or executor to deal with. Plus, this can be a good way for low-income singles
to leave a legacy to a favorite charity or other cause.
Myth #2: My Life Insurance Coverage
Needs Only Be Twice My Annual Salary
The amount of life insurance each person
needs depends on each person's specific situation. There are many factors to
consider. In addition to medical and funeral bills, you may need to pay off
debts such as your mortgage and provide for your family for several years. A
cash flow analysis is usually necessary in order to determine the true amount
of insurance that must be purchased - the days of computing life coverage based
only on one's income-earning ability are long gone.
Myth #3: My Term Life Insurance Coverage
at Work Is Sufficient
Maybe, maybe not. For a single person of
modest means, employer-paid or provided term coverage may actually be enough.
But if you have a spouse or other dependents, or know that you will need
coverage upon your death to pay estate taxes, then additional coverage may be
necessary if the term policy does not meet the needs of the policyholder.
Myth #4: The Cost of My Premiums Will Be
Deductible
Afraid not, at least in most cases. The
cost of personal life insurance is never deductible unless the policyholder is
self-employed and the coverage is used as asset protection for the business
owner. Then the premiums are deductible on the Schedule C of the Form 1040.
Myth #5: I Absolutely MUST Have Life
Insurance at Any Cost
In many cases, this is probably true.
However, people with sizable assets and no debt or dependents may be better off
self-insuring. If you have medical and funeral costs covered, then life
insurance coverage may be optional.
Myth #6: I Should ALWAYS Buy Term and
Invest the Difference
Not necessarily. There are distinct
differences between term and permanent life insurance, and the cost of term
life coverage can become prohibitively high in later years. Therefore, those
who know for certain that they must be covered at death should consider
permanent coverage. The total premium outlay for a more expensive permanent
policy may be less than the ongoing premiums that could last for years longer
with a less expensive term policy.
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There is also the risk of non-insurability
to consider, which could be disastrous for those who may have estate tax issues
and need life insurance to pay them. But this risk can be avoided with
permanent coverage, which becomes paid up after a certain amount of premium has
been paid and then remains in force until death.
Myth #7: Variable Universal Life
Policies Are Always Superior to Straight Universal Life Policies Over the Long
Run
Many universal policies pay competitive
interest rates, and variable universal life (VUL) policies contain several
layers of fees relating to both the insurance and securities elements present
in the policy. Therefore, if the variable subaccounts within the policy do not
perform well, then the variable policyholder may well see a lower cash value
than someone with a straight universal life policy.
Poor market performance can even generate
substantial cash calls inside variable policies that require additional
premiums to be paid in order to keep the policy in force.
Myth #8: Only Breadwinners Need Life
Insurance Coverage
Nonsense. The cost of replacing the
services formerly provided by a deceased homemaker can be higher than you
think, and insuring against the loss of a homemaker may make more sense than
one might think, especially when it comes to cleaning and daycare costs.
Myth #9: I Should Always Purchase the
Return-of-Premium (ROP) Rider on Any Term Policy
There are usually different levels of ROP
riders available for policies that offer this feature. Many financial planners
will tell you that this rider is not cost-effective and should be avoided.
Whether you include this rider will depend on your risk tolerance and other
possible investment objectives.
A cash flow analysis will reveal whether
you could come out ahead by investing the additional amount of the rider
elsewhere versus including it in the policy.
Myth #10: I'm Better off Investing My
Money Than Buying Life Insurance of Any Kind
Hogwash. Until you reach the breakeven
point of asset accumulation, you need life coverage of some sort (barring the
exception discussed in Myth No.5.) Once you amass $1 million of liquid assets,
you can consider whether to discontinue (or at least reduce) your
million-dollar policy. But you take a big chance when you depend solely on your
investments in the early years of your life, especially if you have dependents.
If you die without coverage for them, there may be no other means of provision
after the depletion of your current assets.
The Bottom Line
These are just some of the more prevalent
misunderstandings concerning life insurance that the public faces today.
Therefore, there are many life insurance questions you should ask yourself. The
key concept to understand is that you shouldn't leave life insurance out of
your budget unless you have enough assets to cover expenses after you're gone.
For more information, consult your life insurance agent or financial advisor.
5 Life Insurance Questions You
Should Ask
If you're in the market for life insurance,
you might have been tempted by those ads claiming that "for just a few
dollars a day, you can protect your family with $1 million in life
insurance!" It sounds like a great deal, doesn't it? These ads typically
refer to term life insurance. As its name implies, term life insurance provides
protection for a limited amount of time - or a specific "term" of
years, such as 10, 20 or even 30 years.It's fairly simple; if you die while your policy is active, your family will receive a death benefit, but the many types of term insurance and options can be confusing. Is term life insurance likely to pay off for you? Start by asking yourself the following five questions.
1. What am I trying to accomplish?
Before you buy any kind of life insurance, think about why you're buying it. Are you protecting your family in case of an early death? Have you taken on additional debt that requires you to provide coverage? Are you looking to leave an inheritance to a charity?
Understand that in most cases, term insurance policies do not pay a claim - most people who buy term insurance "outlive" their policy's term. As a result, if you're shopping for insurance to protect financial obligations you may have for a very long time - possibly for the rest of your life - consider exploring another type of policy, called permanent insurance.
If you're in a cash crunch and have immediate obligations to your family, business partners, or lenders, term insurance can provide you with a quick, simple, short-term solution.
2. What's available?
Most people will have access to at least one of the two types of term insurance policies: group or individual.
- Group - Most companies offer their employees some form of term life insurance as an employee benefit. This is called group term insurance, because you're getting protection as part of a larger group. Usually it's deducted right from your paycheck and the only requirement for coverage is to complete a brief questionnaire with details of your health history. Here are some of the advantages of group term insurance:
- It's
easy - You can usually sign up for a policy
when you take a new job and enroll in your company's benefits program.
You may also have an opportunity to sign up during the annual enrollment
period at your company; when you may sign up for other benefits, such as
medical, dental, or an employer-sponsored retirement plan.
- No medical - Most group plans don't require a physical exam. A statement of good health, along with a medical history, is usually all that's required to secure coverage.
- Automatic
payments - Through payroll deduction, you'll
hardly feel the financial hit of paying premiums every month.
- Individual - As its name implies, an individual policy is one in which you apply for coverage on your own. You - or typically a family member - will own the actual policy. In order to obtain an individual policy, you'll probably have to undergo a medical exam of some sort, provide a detailed medical history, and give the insurance company permission to look into your medical records and perform a background check on any driving offenses and criminal activities. This might sound a little invasive, but there are some great benefits to owning an individual life insurance policy.
- It's portable - If you take a new job at a different company, you don't have to worry about losing your life insurance protection.
- Level premiums - Generally, individual policies can be structured to have level premiums for the duration of the policy; typically this is a 10-, 20- or 30-year period.
- Flexibility - If you ever want to upgrade or convert your term policy to
a permanent policy, you might have more options available with an
individual policy than you would with a group plan.
3. What if I don't die?
Ironically, some people who buy term life insurance get upset when they find out that if they don't die, they don't get anything back.
If this is a concern for you, it's important to get an understanding of what will happen to your policy as you near the end of the term.
Ironically, some people who buy term life insurance get upset when they find out that if they don't die, they don't get anything back.
If this is a concern for you, it's important to get an understanding of what will happen to your policy as you near the end of the term.
- Premiums go up - Many term policies offer level premiums for several years (10, 20 and even 30 years, for example). As you approach the end of that term, you may have the option of keeping your policy. If you do, you can expect a hefty jump in your premium.
- Might need a new policy - If you are still healthy at this time in your life and you want to keep the coverage, it may be best to apply for a new policy.
- Drop in coverage - Perhaps you only wanted your policy to cover you as long as you had a mortgage, or until your children's college education was paid for. If that's the case and you have no other obligations to protect, you might want to let the coverage expire.
- Upgrade
the policy - Most term policies come with a
"conversion privilege". This allows you to essentially trade in
your old term policy for a new permanent policy.
4. How can I upgrade
this policy?
As mentioned previously, most term policies allow you to convert from a term policy to a permanent one. This is a great feature that provides future flexibility but because some policies have limitations, you should familiarize yourself with the conversion rules of any policy you're considering. When can I convert?
The conversion privilege might have a time limitation on it, to age 70, for example. Some policies allow conversion during the entire term of the policy.
What can I convert to?
The most generous term policies allow you to convert to any type of permanent policy available, such as whole life, universal life, or variable universal life. Some term policies may force you to convert specifically to just one type, and some companies may not offer all types, which can also limit your options down the road.
5. Where do I buy a policy?
Chances are you'll probably hit the major internet search engines first when looking for information about buying a policy. A number of online distributors can provide you with a term insurance policy. These distributors typically focus on finding the lowest cost policy, given the personal information you provide.
For a more personalized experience, you might consider finding a professional. An insurance agent will help you understand all the different variations of insurance - both term and permanent - and should be able to answer any questions you might have. You can find one by visiting any of the major company websites or combing through your local phone books, but probably the best way to find a representative is to ask around for a referral from a friend or business associate.
Finally, for group coverage, you can check with your employer. If you're self-employed, you may have access to a group plan through a professional association, or you may even be able to put a group plan in place for yourself and your employees.
Million-Dollar Dreams
After going through these five questions, you will be able to decide for yourself if that million-dollar coverage ad is really what you need to provide for you and your family. If it's not, don't be afraid to pass it by - there are hundreds of policies waiting to provide you with the peace of mind you're looking for.
As mentioned previously, most term policies allow you to convert from a term policy to a permanent one. This is a great feature that provides future flexibility but because some policies have limitations, you should familiarize yourself with the conversion rules of any policy you're considering. When can I convert?
The conversion privilege might have a time limitation on it, to age 70, for example. Some policies allow conversion during the entire term of the policy.
What can I convert to?
The most generous term policies allow you to convert to any type of permanent policy available, such as whole life, universal life, or variable universal life. Some term policies may force you to convert specifically to just one type, and some companies may not offer all types, which can also limit your options down the road.
5. Where do I buy a policy?
Chances are you'll probably hit the major internet search engines first when looking for information about buying a policy. A number of online distributors can provide you with a term insurance policy. These distributors typically focus on finding the lowest cost policy, given the personal information you provide.
For a more personalized experience, you might consider finding a professional. An insurance agent will help you understand all the different variations of insurance - both term and permanent - and should be able to answer any questions you might have. You can find one by visiting any of the major company websites or combing through your local phone books, but probably the best way to find a representative is to ask around for a referral from a friend or business associate.
Finally, for group coverage, you can check with your employer. If you're self-employed, you may have access to a group plan through a professional association, or you may even be able to put a group plan in place for yourself and your employees.
Million-Dollar Dreams
After going through these five questions, you will be able to decide for yourself if that million-dollar coverage ad is really what you need to provide for you and your family. If it's not, don't be afraid to pass it by - there are hundreds of policies waiting to provide you with the peace of mind you're looking for.
How Much Life Insurance Should You Carry?
Very few people enjoy thinking about the
inevitability of death. Fewer yet take pleasure in the possibility of an
accidental death. If there are people who depend on you and your income,
however, it is one of those unpleasant things that you have to consider. In
this article, we'll approach the topic of life insurance in two ways: first, we
will point out some of the misconceptions about life
insurance and then we'll look at how to evaluate how
much and what type of life insurance you need.
Does Everyone Need Life Insurance?
Buying life insurance doesn't make sense for everyone. If you have no dependents and enough assets to cover your debts and the cost of dying (funeral, estate lawyer's fees, etc.), then insurance is an unnecessary cost for you. If you do have dependents and you have enough assets to provide for them after your death (investments, trusts, etc.), then you do not need life insurance.
However, if you have dependents (especially if you are the primary provider) or significant debts that outweigh your assets, then you likely will need insurance to ensure that your dependents are looked after if something happens to you.
Does Everyone Need Life Insurance?
Buying life insurance doesn't make sense for everyone. If you have no dependents and enough assets to cover your debts and the cost of dying (funeral, estate lawyer's fees, etc.), then insurance is an unnecessary cost for you. If you do have dependents and you have enough assets to provide for them after your death (investments, trusts, etc.), then you do not need life insurance.
However, if you have dependents (especially if you are the primary provider) or significant debts that outweigh your assets, then you likely will need insurance to ensure that your dependents are looked after if something happens to you.
Insurance and Age
One of the biggest myths that aggressive life insurance agents perpetuate is that, "insurance is harder to qualify for as you age, so you better get it while you are young." To put it bluntly, insurance companies make money by betting on how long you will live. When you are young, your premiums will be relatively cheap. If you die suddenly and the company has to pay out, you were a bad bet. Fortunately, many young people survive to old age, paying higher and higher premiums as they age (the increased risk of them dying makes the odds less attractive).
Insurance is cheaper when you are young, but it is no easier to qualify for. The simple fact is that insurance companies will want higher premiums to cover the odds on older people - it is a very rare that an insurance company will refuse coverage to someone who is willing to pay the premiums for their risk category. That said, get insurance if you need it and when you need it. Do not get insurance because you are scared of not qualifying later in life.
Is Life Insurance an Investment?
Many people see life insurance as an investment, but when compared to other investment vehicles, referring to insurance as an investment simply doesn't make sense. Certain types of life insurance are touted as vehicles for saving or investing money for retirement, commonly called cash-value policies. These are insurance policies in which you build up a pool of capital that gains interest. This interest accrues because the insurance company is investing that money for their benefit, much like banks, and are paying you a percentage for the use of your money.
However, if you were to take the money from
the forced savings program and invest it in an index
fund, you would likely see much better returns. For
people who lack the discipline to invest regularly, a cash-value insurance
policy may be beneficial. A disciplined investor, on the other hand, has no
need for scraps from an insurance company's table.
Cash Value vs. Term
Insurance companies love cash-value policies and promote them heavily by giving commissions to agents who sell these policies. If you try to surrender the policy (demand your savings portion back and cancel the insurance), an insurance company will often suggest that you take a loan from your own savings to continue paying the premiums. Although this may seem like a simple solution, this loan will cost you, as you will have to pay interest to the insurance company for borrowing your own money.
Term insurance is insurance pure and simple. You buy a policy that pays out a set amount if you die during the period to which the policy applies. If you don't die, you get nothing (don't be disappointed, you are alive after all). The purpose of this insurance is to hold you over until you can become self-insured by your assets.
Cash Value vs. Term
Insurance companies love cash-value policies and promote them heavily by giving commissions to agents who sell these policies. If you try to surrender the policy (demand your savings portion back and cancel the insurance), an insurance company will often suggest that you take a loan from your own savings to continue paying the premiums. Although this may seem like a simple solution, this loan will cost you, as you will have to pay interest to the insurance company for borrowing your own money.
Term insurance is insurance pure and simple. You buy a policy that pays out a set amount if you die during the period to which the policy applies. If you don't die, you get nothing (don't be disappointed, you are alive after all). The purpose of this insurance is to hold you over until you can become self-insured by your assets.
Unfortunately, not all term insurance is equally desirable. Regardless of the
specifics of a person's situation (lifestyle, income, debts), most people are
best served by renewable and convertible term insurance policies. They offer
just as much coverage and are cheaper than cash-value, and, with the advent of
internet comparisons driving down premiums for comparable policies, you can
purchase them at competitive rates.
The renewable clause in a term life insurance policy means that the insuring company will allow you to renew your policy at a set rate without undergoing a medical. This means that if an insured person is diagnosed with a fatal disease just as the term runs out, he or she will be able to renew the policy at a competitive rate despite the fact that the insurance company is certain to have to pay out.
The convertible insurance policy provides the option to change the face value of the policy into a cash-value policy offered by the insurer in case you reach 65 years of age and are not financially secure enough to go without insurance. Even though you will be planning in the hope of not having to use this option, it is better to be safe and the premium is usually quite inexpensive.)
Evaluating Your Insurance Needs
A large part of choosing a life insurance policy is determining how much money your dependents will need. Choosing the face value (the amount your policy pays if you die) depends on:
The renewable clause in a term life insurance policy means that the insuring company will allow you to renew your policy at a set rate without undergoing a medical. This means that if an insured person is diagnosed with a fatal disease just as the term runs out, he or she will be able to renew the policy at a competitive rate despite the fact that the insurance company is certain to have to pay out.
The convertible insurance policy provides the option to change the face value of the policy into a cash-value policy offered by the insurer in case you reach 65 years of age and are not financially secure enough to go without insurance. Even though you will be planning in the hope of not having to use this option, it is better to be safe and the premium is usually quite inexpensive.)
Evaluating Your Insurance Needs
A large part of choosing a life insurance policy is determining how much money your dependents will need. Choosing the face value (the amount your policy pays if you die) depends on:
- How much debt you have: All of your debts must be paid off in full, including car loans, mortgages, credit cards, loans, etc. If you have a $200,000 mortgage and a $4,000 car loan, you need at least $204,000 in your policy to cover you debts (and possibly a little more to take care of the interest as well).
- Income Replacement: One of the biggest factors for life insurance is for income replacement, which will be a major determinant of the size of your policy. If you are the only provider for your dependents and you bring in $40,000 a year, you will need a policy payout that is large enough to replace your income plus a little extra to guard against inflation. To err on the safe side, assume that the lump sum payout of your policy is invested at 8% (if you do not trust your dependents to invest, you can appoint trustees or chose a financial planner and calculate his or her cost as part of the payout). Just to replace your income, you will need a $500,000 policy. This is not a set rule, but adding your yearly income back into the policy (500,000 + 40,000 = 540,000 in this case) is a fairly good guard against inflation. Remember, you have to add this $540,000 to whatever your total debts add up to.
- Future Obligations: If you want to pay for your child's college tuition or have your spouse move to Hawaii when you are gone, you will have to estimate the costs of those obligations and add them to the amount of coverage you want. So, if a person has a yearly income of $40,000, a mortgage of $200,000, and wants to send his or her child to university (let's say this will cost $80,000), this person would probably want an $820,000 policy ($540,000 to replace yearly income + $200,000 for the mortgage expense + $80,000 university expense). Once you determine the required face value of your insurance company, you can start shopping around for the right policy (and a good deal). There are many online insurance estimators that can help you determine how much insurance you will need.
- Insuring
Others: Obviously there are other people
in your life who are important to you and you may wonder if you should
insure them. As a rule, you should only insure people whose death would
mean a financial loss to you. The death of a child, while emotionally
devastating, does not constitute a financial loss because children cost
money to raise. The death of an income-earning spouse, however, does
create a situation with both emotional and financial losses. In that case,
follow the income replacement trick we went through earlier (your spouse's
income/8% + inflation = how much you'll need to insure your spouse for).
This also goes for any business partners with which you have a financial
relationship (for example, shared responsibility for mortgage payments on
a co-owned property).
Alternatives to Life Insurance
If you are getting life insurance purely to cover debts and have no dependents, there is another way to go about it. Lending institutions have seen the profits of insurance companies and are getting in to the act. Credit card companies and banks offer insurance deductibles on your outstanding balances. Often this amounts to a few dollars a month and in the case of your death, the policy will pay that particular debt in full. If you opt for this coverage from a lending institution, make sure to subtract that debt from any calculations you are making for life insurance - being doubly insured is a needless cost.
Summary
If you need life insurance, it is important to know how much and what kind you need. Although generally renewable term insurance is sufficient for most people, you have to look at your own situation. If you choose to buy insurance through an agent, decide on what you'll need beforehand to avoid getting stuck with inadequate coverage or expensive coverage that you don't need. As with investing, educating yourself is essential to making the right choice.
If you are getting life insurance purely to cover debts and have no dependents, there is another way to go about it. Lending institutions have seen the profits of insurance companies and are getting in to the act. Credit card companies and banks offer insurance deductibles on your outstanding balances. Often this amounts to a few dollars a month and in the case of your death, the policy will pay that particular debt in full. If you opt for this coverage from a lending institution, make sure to subtract that debt from any calculations you are making for life insurance - being doubly insured is a needless cost.
Summary
If you need life insurance, it is important to know how much and what kind you need. Although generally renewable term insurance is sufficient for most people, you have to look at your own situation. If you choose to buy insurance through an agent, decide on what you'll need beforehand to avoid getting stuck with inadequate coverage or expensive coverage that you don't need. As with investing, educating yourself is essential to making the right choice.
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