What is a Beneficiary?

A beneficiary is the person or entity you designate to receive the proceeds (death benefit) from your life insurance policy. You can name a single beneficiary or multiple beneficiaries: one person, two or more people, a business, a trustee, a charity or your estate. Should you elect to have multiple beneficiaries, you can decide how the proceeds will be split between them.

When naming beneficiaries, you should identify them as clearly as possible and include their social security numbers. This will make it easier for the life insurance company to find them and make it less likely that disputes will arise.

There are two kinds of beneficiaries: “primary” and “contingent.” The primary beneficiary receives the death benefit if he or she can be found after your death. Contingent beneficiaries receive the death benefit if the primary beneficiary is deceased or cannot be found.

If no primary or contingent beneficiaries can be found, the death benefit will be paid to your estate. In this case, probate proceedings could delay distribution of the benefit, and the resultant costs could diminish the amount available to your heirs. It is therefore advisable to specify how the benefits are to be handled if one or more beneficiaries have died or cannot be located.

As your life situation changes, so could your choice of beneficiary. Marriage, divorce or the birth or adoption of a child are all events that could cause you to change your initial selection. It is a good idea to regularly review your beneficiary designation in order to make sure your choice is still appropriate.

This article adapted from information provided by the Insurance Information Institute.

How Should I Choose a Life Insurance Agent?

Buying life insurance can be complicated and confusing. The key to buying the right amount and the right type of policy at a good rate is a good agent or broker. You should choose one who:

• Works with a reputable firm that has a strong financial rating

• Understands your financial situation, including your attitudes about risk, your income and estate tax brackets, your other financial assets and obligations, as well as your personal situation (age, marital status, dependents, etc.)

• Explains – in terms you can easily understand – issues, options and planned use(s) of life insurance in your financial program

• Provides you with a personalized written recommendation that

records the facts of your current financial and personal situation.

describes the features of the life insurance policy and how it fits into your situation.

• Does not pressure you into a decision, but works with you until you’re ready and convinced that you are doing what is best for you

• Is prepared to review with you periodically—perhaps every three years or so—whether the product continues to be suitable for your needs and circumstances

• Is licensed by your state insurance department

• Has not been disciplined by your state insurance department or any other professional body to which they might belong

Another indicator of expertise is professional designations. It takes several years to complete them, and they can help identify agents who are committed to their profession and held to a high standard of ethical conduct. Designations you might see include the following:

• CLU: Chartered Life Underwriter

• ChFC: Chartered Financial Consultant

• CFP: Certified Financial Planner

• RR: Registered Representative

• RP: Registered Principal
  
  

If you don’t have an agent or broker who fits this description, ask for a referral. Your lawyer, accountant, friends, relatives and business associates might be able to provide you with names of insurance agents or brokers with an excellent reputation.

You can also use this link: http://www.life-line.org/find_agent.html to connect with the nearly 70,000 members of the National Association of Insurance and Financial Advisors (NAIFA), who subscribe to the organization’s Code of Ethics (http://www.naifa.org/about/ethics.cfm).

The Compensation Issue

Most agents and brokers are paid by commission, but some work on a fee basis. Typically, the largest part of the compensation is paid at the time you purchase the policy, since most of the agent’s or broker’s work occurs at that time or just before it.

As with any professional service, you should understand how your agent or broker will be compensated and how that might affect the purchase recommendation.

How Much Life Insurance Do I Need?

The amount of life insurance you decide to purchase depends on your anticipated final expenses and your family's projected monetary needs in the future.

In most cases, if you have no dependents and enough money to pay your final expenses, you do not need any life insurance.

However, once you have dependents you should buy enough life insurance so that, when combined with other sources of income, it will replace the income you now generate for them, plus enough to offset any additional expenses they will incur replacing services you currently provide (for example, if you do the taxes for your family, the survivors might have to hire a professional tax preparer).

Your family might also need extra money to make some changes after you die. For example, they might want to relocate, or your spouse might need to go back to school to be in a better position to help support the family.

Most families have some sources of post-death income besides life insurance. The most common source is Social Security survivors' benefits. Many also have life insurance through an employer plan, and some from other affiliations, such as an association they belong to or a credit card. Although these sources might provide a significant income, it is rarely enough.

A multiple of salary?

Some experts recommend buying term life insurance or whole life insurance equal to 20 times your salary before taxes. If the benefit is invested in bonds that pay 5 percent interest, it would produce an amount equal to your salary at death, so the survivors could live off the interest and would not have to "invade" the principal.

While this formula is a useful starting point, it does not take inflation into account. It also assumes that one could assemble a bond portfolio that, after expenses, would provide a 5 percent interest stream every year. But assuming inflation is 3 percent per year, the purchasing power of a gross income of $50,000 would drop to about $38,300 in the 10th year. To avoid this income drop-off, the survivors would have to tap into the principal each year. And if they did, they would run out of money in the 16th year.

The "multiple of salary" approach also ignores other sources of income, such as Social Security survivors' benefits. These benefits can be substantial. For example, for a person who had been earning a $36,000 salary at death ($3000 a month), maximum Social Security survivors' monthly income benefits for a spouse and two children under age 18 could be about $2,300 per month, and this amount would increase each year to match inflation.

In this example, the survivors would need life insurance to replace only $700 per month (adjusted for inflation) of lost income; Social Security would provide the rest. These survivors would need life insurance to replace about $1,150 per month (adjusted for inflation) once the non-working surviving spouse has only one child under 18 in her care, and the surviving nonworking spouse would have to replace the entire $3,000 (adjusted for inflation) when the youngest child turns 18.

Bottom line: the amount of life insurance you need varies according to your financial, family and marital circumstances, but once you have dependents, you definitely need insurance coverage. It is probably best to seek the advice of a qualified insurance agent when you are ready to ask about getting a life insurance quote.

This article adapted from information provided by the Insurance Information Institute .

How Do I Pick a Life Insurance Company?

Many people choose their insurance company simply based on the competitiveness of their life insurance quotes. While price is undeniably important, there is a host of other factors to weigh when making this vital decision. Here are the main points to keep in mind:

• Financial Solidity - This is probably the most crucial factor in selecting a life insurance company. No matter how good a company's products, you need to be assured that your provider is financially secure enough to pay your claim(s). There is no guarantee for life insurance policyholders similar to that provided for bank accounts by the Federal Deposit Insurance Corporation (FDIC), so select a company that is likely to be financially sound for many years, by using ratings from independent rating agencies.

• Product - Most companies offer a broad range of policies and features, so choose a company that offers the product(s) and features that meet your needs.

• Customer Service - For many people life insurance is a complicated subject, so it helps to deal with a representative whom you can trust, who understands and is attentive to your needs, and with whom you can communicate easily.

• Claims and Market Ethics - Your state insurance department can tell you if the insurance company you are considering doing business with had many consumer complaints about its service level relative to the number of policies it sold.
  
  Similarly, it makes sense to do business with a company that has high ethical standards. Some life insurance companies subscribe to the principles and codes of conduct of the Insurance Marketplace Standards Association, a nonprofit organization that promotes ethical conduct in life insurance marketing.
  
  The better a company's rating in these two vital areas, the better your chances of being treated fairly, efficiently, and courteously.

• Premium and Cost - The premium is the amount you pay the company for the life insurance policy. Even for a given death benefit and type of insurance (e.g., term life), the premium can vary widely among companies, either because some companies' policies have features that others don ot or because some charge more than others for the same coverage. So the first step in comparing policies is to make sure you compare similar insurance plans, based on
1. Your age
2. The type of policy and policy features
3. The amount of insurance you are purchasing

Bear in mind, however, that the premium for the policy is not the same as the cost of the protection portion of the policy. One policy might have a higher premium but also offer more benefits (for example, it might pay policy dividends) than another. Or both might promise dividends, but in different amounts at different points in time. In each case, the higher-premium policy might have a lower cost of protection. How can you tell what a policy's cost is? Companies should tell you a policy's Net Payment Cost Index and its Surrender Cost Index. Use the Surrender Cost Index if you are thinking of keeping the insurance only for a specific period of time; use the Net Payment Cost Index if you expect to keep the policy indefinitely. Generally, the lower the cost index, the better.

One last important point to keep in mind when selecting a life insurance company:

• Licensing - Not every group of insurance companies licensed to operate in each state. As a general rule, you should buy from a company licensed in your state, because then you can rely on your state insurance department to help if there is a problem. If the insurance company becomes insolvent, your state's life insurance guaranty fund will help only policyholders of companies it has licensed. To find out which companies are licensed in any state, contact that state's state insurance department.

This article adapted from information provided by the Insurance Information Institute.

How Do I Assess the Financial Strength of an Insurance Company?

When choosing a life insurance company, one of your primary considerations should be their degree of financial strength. A company with the lowest premiums is not necessarily the best choice—you should choose your insurer based on their ability to pay the contracted benefits and settle claims.

The simplest way to verify an insurance company’s financial solidity is to check their financial strength ratings.


Five independent agencies—A.M. Best, Fitch, Moody’s, Standard & Poor’s, and Weiss—rate the financial strength of insurance companies. Each has its own rating scale, its own rating standards, its own population of rated companies and its own ratings for that population of companies. Each agency uses numbers or plusses and minuses to indicate minor variations in rating from another rating class.


You should consider a company’s rating from two or more agencies before judging whether to buy or keep a policy from that company. Moreover, agencies will announce changes of ratings on any day. It’s probably prudent to check annually on the ratings of any company in which you’re interested.

Some points to consider when reviewing a company’s financial strength:

* Don’t rely only on what the insurance companies say about their ratings from these agencies. Companies are likely to highlight a higher rating from one agency and ignore a lower one from another agency, or to select the most favorable comments from a rating agency’s report.

* To use the ratings from more than one independent agency, you need to understand that each agency’s rating code is different from the others. For example, an A+ from A.M. Best is the next-to-top rating of its 15 categories, but an A+ from Fitch or S&P is their 5th-highest rating (out of 24 categories for Fitch, and out of 19 categories for S&P). Moreover, Moody’s doesn’t have an A+ rating.

* Many insurance companies market their products under a brand or marketing name. Be sure you know the names of the underwriting companies that market under that brand name when looking up a company’s ratings. For example, AIG markets life insurance in the United States under the marketing name “AIG American General,” but several companies underwrite products under that name, including American General Life Insurance Company and AIG Life Insurance Company. Check the company’s Web site for a complete list of the underwriting companies for that brand name.

Why Should I Buy Life Insurance?

Many financial experts consider a term life insurance or whole life insurance policy to be the cornerstone of sound financial planning. A solid life insurance policy can be used to:

1. Help replace your income and provide financial security for your dependents.
If you are the primary earner in your household and people depend on your income, life insurance can help replace that income if you die. The most commonly recognized case of this is parents with young children. However, it can also apply to couples in which the survivor would be financially stricken by the income lost through the death of a partner, and to dependent adults, such as parents, disabled relatives, siblings or adult children who continue to rely on you financially.

2. Help pay final expenses such as your funeral and burial costs, probate and other estate administration costs, debts, and medical expenses not covered by health insurance.

3. Create an inheritance for your heirs by buying a life insurance policy and naming them as beneficiaries.

4. Help pay federal and state inheritance and estate taxes. These are generally due within nine months of death and could absorb nearly half of your assets before a single dollar goes to your heirs. Life insurance benefits can pay estate taxes and settlement costs so that your heirs will not have to liquidate other assets or take a smaller inheritance. You can be secure in the knowledge that your loved ones will receive the legacy you have spent a lifetime creating, not just a piece of it.

5. Make significant charitable contributions. By making a charity the beneficiary of your life insurance, you can make a much larger contribution than if you donated the cash equivalent of the policy's premiums.

6. Create a source of savings. Some types of life insurance create a cash value that, if not paid out as a death benefit, can be borrowed or withdrawn on the owner's request. Since most people make paying their life insurance policy premiums a high priority, buying a cash-value type policy can create a kind of "forced" savings plan. Furthermore, the interest credited is tax deferred (and tax exempt if the money is paid as a death claim).

This article adapted from information provided by the Insurance Information Institute .

Tips for buying life insurance

10 Tips: How to find the policy that is right for you and your family


By Laura T. Coffey
MSNBC contributor

Updated: 6:46 p.m. ET May 29, 2007

Let’s face it: Life insurance isn’t the most fun subject to dwell on at length or think about during your time away from work.

In fact, most of us don’t want to think about this subject at all. According to the Insurance Information Institute, one-third of all U.S. families with a new baby at home don’t update their life insurance coverage.


For one thing, having the right kind of coverage can give you incredible peace of mind. Another detail to consider: Prices have been dropping significantly. The Insurance Information Institute notes that premiums have plummeted 50 percent for standard-risk term insurance since 1994, and they’re expected to drop by another 4 percent this year.

Honestly, how often do you hear about rates dropping for anything these days? The following tips can help you secure good coverage without spending too much.

1. Figure out your needs. You can use online calculators to get a rough idea of how much money it would take to cover your surviving spouse’s expenses until retirement, and/or your children’s expenses until they reach adulthood or finish college. The Life and Health Insurance Foundation for Education offers this calculator. MSN Money offers this one as well.

2. Opt for term life. A term-life policy is the best and simplest option for most Americans ranging in age from about 20 to about 50. Cash-value life insurance can make sense for wealthy people over the age of 60 – but for most people, term insurance is the way to go.

3. Get quotes online. Web sites such as Accuquote.com, FindMyInsurance.com, LifeInsure.com and InsWeb can give you plenty of pricing information fast – although all of it will be subject to a more detailed application process and a medical exam.

4. Get in shape. To improve your risk class, you can take steps such as quitting smoking, losing weight and reducing your cholesterol and blood pressure if they’re high. You also can get that exam before you apply for insurance so you’re not hit with any surprises. In some cases, the changes you make can save you tens of thousands of dollars over the life of a policy.

5. Decide how to buy. You can go it alone and buy insurance directly from the company, seek guidance from a fee-only financial planner, buy it through a commission-based financial planner, or buy it through an insurance agent.

6. Understand how these folks get paid. Insurance agents and commission-only financial planners don’t make money unless they sell you insurance products. Fee-plus-commission (or fee-based) planners charge both a fee and a commission on products. Fee-only planners charge a fee for their guidance but don’t sell products; you would buy the insurance coverage on your own.

7. Do your homework. Whether you decide to buy a policy on your own or hire a professional to help you, you should bone up on life insurance on the sites mentioned in Tip No. 3. This will help you feel more confident and informed.

8. Buy from a financially strong company. The insurance company should have an “A” rating or higher from rating agencies such as A.M. Best, Standard & Poor’s, Duff & Phelps, Weiss, Moody’s and Fitch Ratings.

9. Be alert for red flags. Avoid advisers who say they’re more knowledgeable about the insurance company than the rating agencies, or who claim the ratings are unimportant or unavailable. If you have a complaint, contact the adviser’s customer service department and speak up. You also can file a complaint with your state’s insurance department or attorney general’s office. To start the process of finding the correct contact information for your state, click here.

10. Make adjustments as needed. Your life insurance needs will change over the years – most notably when you marry, divorce, have a child or start caring for an aging parent. At a certain point – once your kids are all grown up, and once you know you’ve saved enough for retirement – you can decide to stop paying for life insurance entirely.