Life Insurance

Life insurance is purchased for a number of reasons, but the most important is that life insurance provides financial protection to the person receiving your insurance proceeds, following your death.

When buying life insurance, it is important that you understand what your life insurance needs are, such as to provide your family with the amount of cash they will need immediately following your death to give them some time to adjust to the change in the family’s financial circumstances. The amount of life insurance you buy will depend upon your financial resources and situation.

The basic life insurance include:

• Term insurance, which provides coverage for a specified period of time and pays your beneficiary only if you should die during the term of the policy.
• Whole life insurance, which provides insurance coverage for your entire life. Whole life policies also may have a savings element in the cash value account. If you find that there is no longer a critical need for the insurance, the policy may be surrendered or canceled and the amount in the cash value account may be returned to you to use for other purposes.
• Endowment insurance, which pays you, the insured, a designated amount of money if you are still living after a specified number of years. If you should die before that time, your beneficiary will receive the proceeds of the endowment policy.
• Universal life insurance, which provides coverages for your lifetime. Premiums and death benefits are flexible according to the terms of the policy. There is also a provision for cash value accumulation on the policy.
• Variable life insurance, which also provides lifetime coverage. Premiums may be fixed or flexible according to the terms of the policy. There is an element of investment in the cash value account of the policy and separate accounts under stocks, bonds, money markets or other funds may be established. Death benefits and cash value accounts may differ according to the performance of the invested funds.

Here are some tips on buying life insurance:

• Buy your life insurance from a company that is licensed in Hawaii. Shop around and compare different policies and their costs.
• Don’t be talked into buying more insurance than you need or can realistically afford.
• Read your policy carefully after you receive it. If there are any points you do not understand ask the insurance agent to explain. If you change your mind after purchasing a life insurance policy, you may return the policy within ten days of receiving it, for a full refund of the premium paid.
• Let your beneficiaries know what kinds of insurance you own and the amount in the policies, as well as where the policies are kept.
• Re-evaluate your insurance needs from time to time to determine whether your life insurance coverage is adequate.

Q. What determines my life insurance premium?

• A . An insurance company bases your premium on the type and amount of insurance you buy and your chance of death while the policy is in effect. Other factors include the company’s agent commissions, overhead, and expenses of doing business.
• A company determines risk of death primarily by reviewing your age, gender, smoking habits, and medical condition. Companies usually classify individuals as “preferred” (below-average risk of early death), “standard” (average risk of death), or “substandard” (insurable, but with an above-average risk of death). Companies classify a small percentage as “uninsurable” (a high probability of early death). Find out the company’s rates and what you must do to qualify for a preferred rate.
• If a company determines that you are in a substandard class, it will rate your policy, which means your premiums will be above the standard premium. Shop around before paying a higher rate. Other companies may classify you differently. Some companies will remove a rated premium if you maintain good health for a specified period, give evidence that your health has improved, or change to a less-hazardous occupation. Companies often offer lower rates to nonsmokers.

Q. How much coverage is enough?

• A. There is no precise formula to determine how much coverage you need. Some consumer groups recommend five times your annual income with family responsibilities. Under this formula, a family with an income of $40,000 might need at least $200,000 worth of life insurance protection. Some insurance industry organizations recommend a policy that would pay 10 times your yearly income.

Q. How can I get the most coverage for the least cost?

• A. Term life insurance usually gives you the most coverage for the least cost. Also, you may save money, particularly in the purchase of cash value policies, by buying a policy with low administrative fees. A small number of companies sell these “low load” policies by mail or telephone.

Q. How else can I save money on life insurance?

• A. Group policies, available through your employer, may be cheaper than individual ones. If you enroll during the eligibility period or if coverage is guaranteed issue, you don’t have to take a medical exam, nor do you have to answer health questions to qualify. Group insurance also may be available through professional, civic, or religious associations. These coverages generally terminate or reduce the death benefit to 50% at age 65.

Q. Can agents offer student loans along with life insurance?

• A. Some agents refer to student loans in their presentations. While agents may provide information about student loans, they cannot offer loans as an inducement to buy insurance.

Q. Is it a good idea to replace a term life policy with a new one?

• A. Price competition and new product development make it worthwhile to periodically review the price and coverage of your term life policy. Sometimes your policies will provide for a restart at lower rates with a medical exam. Remember that if you change policies, the two-year contestable period starts again.

Q. Will I need life insurance when I retire?

• A. If you are close to retirement, be sure to review your coverage and needs. With fewer responsibilities, you may want to reduce or even eliminate some of your policies.
• Social Security and some retirement plans provide a continuing income for dependents after a retiree’s death. For retirement income, many financial advisers suggest investing in IRAs, qualified tax deferred annuities, Keoghs, and deferred-compensation plans, which allow you to reduce taxable income and defer income taxes until you withdraw the money.

Q. What are the tax consequences of life insurance?

• A. Interest and dividends paid on a life insurance policy accumulate tax deferred. Life insurance policy withdrawals (cash surrenders) normally are nontaxable until the total amount withdrawn exceeds the total amount of premiums paid into the policy. Also, proceeds from loans made against the policy are normally not taxable. However, if the policy lapses, amounts borrowed in excess of premiums paid are taxable.
• Death benefit proceeds are usually exempt from federal income tax but may be subject to estate taxes under certain conditions.
• You should consult an accountant or tax attorney for more information about the tax consequences of life insurance.

Life insurance is a critical part of a broader financial plan. There are many options available.

Life insurance is a critical part of a broader financial plan. There are many options available. Seek advice from different financial advisers to find the option best suited to your needs.

A life settlement is the sale of your life insurance policy to a third party for a cash amount that is less than the full death benefit. The buyer becomes the new owner and/or the beneficiary of the life insurance policy, pays all future premiums and collects the entire death benefit when you die.

Before you sell your life insurance, ask:

• Do I still need my insurance?
• Have I discussed all my choices with my financial adviser and/or your insurance company or agent? For example: Do I have cash value in my policy that I can use to pay premiums or an accelerated death benefit? Can I get a loan to pay premiums, or will my beneficiaries help with making premium payments to protect their interest?
• Will this limit my ability to buy additional life insurance in the future?
• If I sell my policy, how much cash will I get?
• Is my life insurance provided by an employer or other group policy? Can I sell my policy? Am I really the owner or just a certificate holder in a group policy?
• If I sell my policy, who will be the legal owner? Will the policy be resold?
• If my policy is resold, what personal or medical information can be shared with the purchaser (s)? How often will they request my medical information? Will I be required to sign releases allowing them to contact my medical providers or family members for my health information?
• Is the broker or company I plan to work with licensed to do business in Hawaii?

If you sell your life insurance, know that:

• You may have to pay state/federal income taxes on some or all of your settlement money. It is important to consult a tax professional.
• Creditors may be able to make claims on the proceeds from your life settlement.
• A cash settlement may affect your eligibility for some government programs, such as food stamps or Medicaid.
• Your policy could be resold multiple times and future owners may have the ability to track your health.

How do life settlements work?

• You can contact life settlement companies directly or choose a broker to help you shop for the highest cash settlement.
• You complete an application and sign a release allowing the potential buyer to use your medical records to evaluate your life expectancy.
• You select the best offer.
• Once you accept an offer, an escrow account is set up. The account holds the purchaser’s money and your life insurance policy until the documents that change ownership of the policy and the beneficiary have been received and processed by the insurance company. This protects you and the buyer of your life insurance.
• You will get your cash within three business days after the life settlement company gets written proof that the changes in policy ownership and beneficiary have been processed by the life insurance company.
• You can change your mind about the settlement within 60 days from the date of the life settlement contract or 30 days after you are paid, whichever is earlier. If you cancel the settlement, you must return the cash settlement plus any premiums the buyer paid. If you die within this period, the life settlement sale is off. Your beneficiaries receive the death benefit. They must return any cash settlement funds received plus any premiums the buyer paid.
• Your contract may require you to allow future owners of your policy to regularly contact you to check your health status.

Tips if you sell your policy

• Decide whether to sell your policy directly to a life settlement provider or go through a life settlement broker who will shop for you. If you don’t use a life settlement broker, you should contact more than one company.
• You do not have to accept any life settlement offer. It is your contract. You decide what to do with it; it may be worth more if sold when you are older.
• If you learn that you are terminally ill, your estate (instead of investors) could benefit from the tax-free death benefit provided by life insurance. This benefit would not be available under a life settlement contract. Proceeds from the life settlement sales are taxable. Contact your tax advisor for details.
• If you do sell your policy, check all application forms for accuracy, especially personal and medical information that you provide. Answer all questions truthfully.

Warning about loans to buy life insurance

• Be wary of offers to loan you money to buy life insurance. For example, someone may offer you “free life insurance” for five years. Find out what strings are attached. What happens after the five years?
• Will you have to repay the loan with interest to keep the policy for your beneficiary? Are there tax consequences if the loan is pardoned?
• If you can’t pay back the loan, will someone else own your life insurance and get the death benefit? Can you cancel the policy? Will you still have to pay back the loan payments?
• Will the lender have rights to part of the death benefit as collateral for the loan?

The National Association of Insurance Commissioners’ (NAIC) Life Insurance Policy Locator provides nationwide access for assistance with finding life insurance policies and annuities. Before you start your search, collect necessary documents and information. An old copy of the policy will be most helpful. You’ll need some personal details of the insured individual including the full name (maiden name for a married individual), Social Security number and the state where the policy was purchased. To claim the benefit you’ll also need a copy of the death certificate. See Frequently Asked Questions.