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INSURANCE FACTS
A Consumer’s
Guide to
Life Insurance
Buying Life Insurance
When you buy life insurance, you want coverage that fits your needs
and your budget.
Decide how much you need, for how long and what you can afford.
Examine what kinds of policies are available to meet your needs
and pick the one that best suits you.
Compare what different companies charge for the same kind of
policy and amount of insurance you want.
It makes good sense to ask a life insurance agent to help you select a
policy that best meets your needs and resources. An agent can review
your insurance needs and provide information about the kinds of
policies that are available. If one kind doesn’t fit your needs, ask about
others.
This guide provides basic information. Other resources include a life
insurance agent, broker, financial advisor, company or consumer
publications, or at your public library.
How much insurance do you need?
To decide how much life insurance you need, determine what financial
resources your dependents would have if you were to die now, and
what your dependents would actually need to maintain their current
standard of living. Your new policy should come as close to making up
the difference as you can afford.
Your calculations should consider your current insurance including any
employer group insurance, social security or veteran’s insurance. Add
other assets you have such as savings, investments, real estate and
personal property.
Then consider the income your dependents need for family living
expenses, educational costs and any other future needs. Also, determine
the cash needs for the expenses of a final illness, funeral, taxes,
mortgages or other debts.
Decide
Examine
Compare
Financial resources
Current insurance
Income
A Consumer’s Guide to Life Insurance Page 1
What is the right kind of insurance?
All life insurance policies stipulate an amount to be paid to your
beneficiaries when you die; however, not all policies are the same.
Some provide permanent coverage and others temporary coverage.
Some build cash values and others do not. Some policies combine
different kinds of insurance while others let you change from one kind of
insurance to another. Your choice should be based on your needs and
what you can afford.
A wide variety of plans are offered today. A brief description of the
basic kinds of life insurance follows:
Term Life insurance covers you for a set period (term) of one or more
years. It pays a death benefit only if you die during that term. Term
insurance generally provides the largest immediate death protection for
your premium dollar.
Most term insurance policies are renewable for one or more additional
terms even if your health status has changed. Each time you renew the
policy, premiums will be higher. Check the premiums at older ages and
how long the policy can be continued. Many term insurance policies can
be converted before the end of a certain period of time for a whole life
policy, even if you are not in good health. Premiums for the converted
policy will be higher than what you had been paying for the term
insurance.
Whole Life insurance protects you for as long as you live. With the
most common type, called straight life or ordinary life insurance, you
pay the same premium for as long as you live. The premium may be
several times higher than you would pay initially for the same amount of
term insurance. But whole life premiums are smaller than the term life
premiums you would eventually pay if you were to keep renewing a
term policy until your later years.
Some whole life policies let you pay premiums for a shorter period such
as 20 years, or until age 65. Premiums for these policies are higher than
ordinary life insurance premiums since the premium payments are
condensed into a shorter time period.
Whole life policies develop cash values. If you stop paying the
premiums, you can take the cash or you can use the cash value to buy
continuing insurance protection for a limited time or a reduced benefit.
You may borrow against the cash value by taking a policy loan. The
loan principle and any unpaid interest on the loan will be deducted from
the benefits if you die, or from the cash value if you stop paying
premiums.
Term Life
Whole Life
A Consumer’s Guide to Life Insurance Page 2
Combinations. You can combine different kinds of insurance. For
example, you can buy whole life insurance for lifetime coverage and add
term insurance for the period of your greatest insurance need. Usually
the term insurance covers your life, but it also can be bought for your
spouse or children.
Endowment insurance policies pay a sum or income to you if you live
to a certain age. If you die before the specified age, the death benefit is
paid to the person named as the beneficiary.
Universal Life insurance is a type of policy where the premiums you
pay, less expense charges, are deposited into a policy account that
earns interest. Charges for the insurance are deducted from the account.
Insurance continues as long as there is enough money in the account to
pay the charges for the insurance. The cash value depends on the
interest earnings which change with market rates. Flexible premium
universal life policies let you vary the death benefit and you can vary
your premium payments or skip payments if you wish.
Variable Life insurance is a kind of insurance where the death benefits
and cash values depend upon the performance of the investments, such
as stocks and bonds, underlying the policy. These policies are so
investment dependent, they only can be sold by an agent registered as a
securities dealer. Be sure to request the prospectus provided by the
company when buying this kind of policy. The method of cost
comparison outlined in this guide does not apply to variable life policies.
Finding a Low Cost Policy
After you decide which kind of life insurance is best for you, compare
similar policies from different companies to find which one is likely to
give you the best value for your money. A simple comparison of the
premiums is not enough. You also should ask:
Do premiums or benefits vary from year to year?
How much cash value builds under the policy?
Are premiums, benefits or interest rates guaranteed or subject
to change by the company?
What is the effect of interest on money paid and received at
different times on the policy?
You can find important cost differences between life insurance policies
by using cost comparison indexes. Surrender comparison index
numbers in most cases are automatically provided at the time of policy
delivery, unless you request an earlier delivery. A surrender comparison
index helps you compare costs over a 10- or 20-year period, assuming
you surrender your policy and take its cash value at the end of the
period. Other comparison numbers may be available from life insurance
agents or companies.
Combinations
Endowment
Universal Life
Variable Life
A Consumer’s Guide to Life Insurance Page 3
Guaranteed and Illustrated Figures
Compare index numbers only for similar policies, those which provide
essentially the same benefits, with premiums payable for the same length
of time. Make sure all are calculated for your age and the kind of policy
and amount you intend to buy. Remember, no one company offers the
lowest cost at all ages for all kinds and amounts of insurance. Also,
keep in mind that a policy with smaller index numbers generally is a
better buy than a similar policy with larger index numbers.
Small differences in index numbers should be disregarded, especially
where there are dividends or non-guaranteed premiums or benefits.
Also, small differences could easily be offset by other policy features or
differences in the quality of service from the agent or company. When
you find small differences in the indexes, your choice should be based
on something other than cost. Finally, keep in mind that index numbers
cannot tell the whole story. You also should consider:
••
••
• The pattern of policy benefits. Some policies have low cash
values in the early years that build rapidly later. Other policies
have a more consistent cash value build-up. The agent or
company will give you a disclosure statement that will show
cash values for selected years in the future.
••
••
• Special policy features that may specifically meet your
needs.
••
••
• The methods by which non-guaranteed elements are
calculated. For example, interest rates are an important factor
in determining policy dividends. In some companies, dividends
reflect the average interest earning on all policies whenever
issued. In others, the dividends for policies issued in a recent
year, or a group of years, reflect the interest earnings only on
those policies. In these cases, dividends are likely to change
more rapidly when interest rates change.
Some policies are sold only on a guaranteed or fixed cost basis. These
policies do not pay dividends; the premiums and benefits are fixed at the
time you buy the policy and will not change.
Many policies provide benefits on a more favorable basis than the
minimum guaranteed basis in the policy by paying dividends, or by
charging less than the maximum premium specified. Or, they may do this
in other ways such as providing higher cash values or death benefits
than the minimums guaranteed in the policy. For these types of policies,
the policy performance may be shown by using both guaranteed and
current performance — called currently illustrated basis cost
comparison indexes.
The currently illustrated basis shows the company’s current scale of
dividends, premiums or benefits. This scale can be changed after the
policy is issued, so that the actual dividends, premiums or benefits over
Use Cost Comparison Indexes
Differences in Index Numbers
Guaranteed or Fixed Cost Basis
Currently Illustrated Basis Cost
Comparison Indexes
Currently Illustrated Basis
A Consumer’s Guide to Life Insurance Page 4
the years can be higher or lower than those assumed in the indexes on
the currently illustrated basis.
Changing Policies
Before you change policies, you should realize that replacements are not
always beneficial. You should assess your needs and financial goals. If
you determine that your current policy does not fit your needs, then you
should carefully compare the benefits and costs of your current
insurance policy with other options. Before replacing your policy, check
to see if your existing policy can be altered to meet your needs. Ask
your insurance agent to provide you with a written list of advantages
and disadvantages of replacing your policy.
In most cases, an agent will show you illustrations (charts) outlining the
attractive growth potential of the new policy. Be sure that you
understand how many years it will take to reach the earnings potential in
the illustration. Remember, since illustrations are often based on non-
guaranteed assumptions, such as fluctuating interest rates, you should
focus on the guaranteed cash or account values of the new policy and
compare them with the values of your current policy.
Your old policy may have some provisions and benefits not found in the
new insurance policy. Make sure that you are aware of all the benefits
of both policies and review the premiums.
The cost for the same coverage on the new policy may be higher since
the premium is based on your current age and health. The new policy’s
cash values and dividends may initially be lower because of the costs of
issuing a new policy.
Your agent also should point out any tax implications. When your life
insurance policy is “cashed in” or replaced with another policy, your
gain may be subject to taxes.
During the first two years of a new policy (the contestable period), a
company may contest a claim on a policy because of material
misrepresentations. For example, the company could challenge a death
claim for possible misstatements in the new policy application. Question
your agent about the contestable period.
Steps and Precautions
in Replacing a Policy
If you decide to replace an existing policy, the agent is required
to give you a Notice Regarding Replacement of Life Insurance and
Annuities no later than the date the application is taken. This notice is
for your protection and you should read it carefully. It will alert you to
possible consequences of replacement.
A Consumer’s Guide to Life Insurance Page 5
The agent must include, as part of each application, a list of
existing life insurance policies and annuities to be replaced. You are best
protected when all policies are accurately listed.
When you purchase a new policy with funds from existing life
insurance, you should sign the appropriate form permitting the company
to transfer money from your old policy to the new one. Failure to do so
could result in adverse tax consequences to you.
Important Reminders
• Review your individual needs and circumstances. Choose the
kind of policy with benefits that most closely meet your needs.
Ask an agent or company representative to help you or obtain
information at the local library.
• Shop around and consult with several agents.
• Make sure your life insurance company is licensed to conduct
business in Pennsylvania. Owners of life insurance policies and
annuities issued by companies licensed in Pennsylvania are
covered against an insurer’s default, caused by financial
impairment or insolvency, through the Pennsylvania Life and
Health Insurance Guaranty Association (PLHIGA). The cash
surrender value of your policy up to $100,000, or death and
annuity benefits up to $300,000, are protected by PLHIGA.
• Be sure to answer the application questions fully and accurately.
Follow along with a blank application while the agent completes
the form. The insurance company uses this information to
underwrite the policy and determine the premium. Depending
on the company’s underwriting criteria, a medical examination
may be required.
• Discuss your purchase with your family members, financial or
legal advisors or other people you trust.
• Before signing the application, read it carefully because you are
responsible for all information contained in it. If there are
misstatements on the application your coverage could be
jeopardized. Do not buy a policy that you don’t understand.
• Don’t buy life insurance unless you intend to maintain the policy.
It can be very costly if you stop paying premiums during the
early years of the policy.
A Consumer’s Guide to Life Insurance Page 6
• Be sure that the premiums are within your ability to pay. Don’t
look only at the initial premium, but consider any later premium
increases. Your agent should disclose the premiums applicable
throughout the life of the policy.
• Make sure you receive a copy of all written communications
used in the presentation before your meeting with the agent
ends.
• Save disclosure statements and comparison indexes you
received from your agent.
• Obtain a receipt for any payment you give the agent. Never pay
cash and always make your check payable to the
insurance company.
• When you receive your new policy, review it carefully with the
agent to verify the terms. Question any differences or unclear
terms.
• Ask your agent or company about anything that is not clear to
you. Keep in mind that you have a “free look” period of at least
10 days after you receive the policy to determine whether or
not the policy is truly what you want to buy. The free look
period that applies is stated on the face of the policy and usually
is referred to as the “Right to Examine.”
• Obtain the agent’s signature and date on the policy to document
the delivery date, or write the receipt date on the envelope if it
was mailed to you. The dated signature or date on the envelope
is proof of the beginning of the minimum 10-day free look
period. If you decide within the free-look period that you do
not want the policy, Pennsylvania law requires that you be given
a full refund.
• Review your life insurance program with your agent or company
every few years to keep abreast of changes in your income and
your needs.
A Consumer’s Guide to Life Insurance Page 7
Important Reminders
A Consumer’s Guide to Life Insurance
A consumer service initiative of the
Pennsylvania Insurance Department
1-877-881-6388
www.insurance.pa.gov
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