When purchasing life insurance, consider your individual circumstances and the standard of living you want for your dependents. In most cases, you need life insurance only if someone depends on you for support. The following guidelines can help you decide if life insurance is right for you:

• Single adults usually have little need for life insurance, unless they are single parents or support someone such as an elderly parent.
  
• Working couples without children or dependent parents usually do not need life insurance, particularly if the surviving spouse would make enough money to meet expenses and pay debts without exhausting savings.
• Families (including single-parent households) usually need life insurance because the children depend on the parents´ income. The younger the children, the greater the need for life insurance.
• Older people whose children are grown and independent are less likely to need life insurance. A well-planned savings program should decrease the family´s need for life insurance as wage earners approach retirement age.

  Although life insurance is sometimes used to pay for pre-paid funeral arrangements, it may not be the best funding source. Make sure you fully review your needs and other available options to pay for funeral expenses.

All life insurance policies are either "term" or "cash value" plans or a combination of the two.

Term life policies cover you only for a specific period of time - usually for one, five, 10, 15, or 20 years - or until a specified age, such as 65. Most term life policies provide only a one-time payment to your beneficiary for the amount of the policy if you die. This payment is called a death benefit.

Because they usually have no savings feature, term life policies generally are less expensive and easier to understand than cash value life policies. Except for people past middle age, term life policies usually offer the best value for your money by giving you the biggest death benefit for your premium dollar. The price of a term life policy increases as you grow older. At the same time, your insurance needs may decrease as children grow up and savings and investments increase in value.

Since term life policies expire at the end of the term, you should look for a renewable policy. A renewable policy allows you to continue your insurance for additional terms regardless of your health and without having to pass a medical exam. This is an important advantage because it may be harder for you to pass a physical exam as you grow older or if you become ill.

It´s important to remember that you will have a new contestable period each time your policy renews. During the contestable period, a company can deny payment of a claim because of suicide or material misrepresentation on the application. Most term insurance policies are convertible. This means that as your insurance needs change, you can exchange your term life policy for a cash value policy without taking a medical exam or answering health questions. You may choose to convert your term life policy if your health declines and it becomes difficult to qualify for a new term policy at standard rates. You also may convert your term life policy if you decide to use insurance as a way of accumulating funds instead of providing only death benefits. Insurance companies usually allow conversion until age 65.

• Annually renewable term (ART) - You may renew most ART policies up to age 100. However, ART premiums are extremely high for middle aged and older consumers. If you´re paying high premiums, you may want to shop around for a better value. An ART provides a fixed premium and death benefit for one year. When the term ends, you may renew your policy, but the premium will probably increase. To avoid yearly increases, some people look for five-, 10-, or 20-year renewable term policies.
• Decreasing term - This policy provides death benefits that decrease each year. Mortgage insurance and credit life insurance are examples of decreasing term policies. If you die, the insurance benefits pay off or reduce your balance on these types of loans. The initial death benefit may equal or approximate the amount of your loan, with the benefit decreasing as you pay down the balance.

• PREMIUM Lower Initially. Increases with each renewal.
  POLICY BENEFITS Death benefits only.
  
• ADVANTAGE TO BUYER Low outlay. Initially buyer can purchase a larger amount of coverage for a lower premium. Buyer could consider developing outside investment program.
• DISADVANTAGES TO BUYER Premium increases with age. No cash value.

• Higher initially than term. Normally doesn´t increase.
• Flexible premiums. PROTECTS FOR A specified period. Entire life if you keep the policy. A flexible time period.
• Flexible Death benefits and eventually a cash and loan value.
• Helps buyer with financial discipline.
• Fixed premium amount.
• Cash value accumulation.
• Buyer can take loan against policy.
• More flexibility. Takes advantage of current interest rates.
• Offers the possibility of improved mortality rates (increased life expectancy because of advancements in medicine, which may lower policy costs).
• DISADVANTAGES TO BUYER Costly if you surrender early. Usually no cash value for at least three to five years.
• Does not meet short-term needs

OPTIONS May be renewable or convertible to a whole life policy. May pay dividends. May provide a reduced paid-up policy. Partial cash surrenders permitted. Minimum death benefit. Partial cash surrenders permitted.

• Variable LifeA variable life policy allows the owner to invest the policy values in a selection of separate accounts similar to mutual funds. Separate accounts could include money market funds and mutual funds invested in stocks and bonds. A variable life policy presents a higher risk to the owner because the cash value varies based on the investment performance of the separate account.
• Group Life A group life policy provides coverage to a group of people under one contract. Most group life contracts are sold to businesses to cover their employees. Associations buy group life policies to cover their members. Lending institutions buy the policies to cover their debtor loans. Most group life policies are for term insurance.

An insurance company may not apply a new contestable period if your group life policy has been in force for two years and the insurance amount is the same or less than your original policy. If you convert your policy before the two-year contestable period ends, an insurance company may continue the contestable period until you reach the time limit under the original group policy. If you increase the amount of coverage in the converted policy, a company may apply a new contestable or suicide period only to the increased amount of coverage.

• A group life policy isn´t always a low-cost policy. Compare the cost of your coverage under a group policy to the cost of an individual policy and shop around for the best deal. Employers should compare prices and coverages to get the best group policy for their employees.
• Credit Life People buy credit life insurance to pay off loans or charge account balances if they die. Some lenders or sellers may require credit life insurance before they will approve a loan. Sellers or lenders that require credit life insurance cannot require borrowers to purchase the coverage from them or a particular insurance company. If you have an existing life policy, the creditor must accept an assignment of benefits under your existing policy instead of requiring you to purchase credit life insurance.

• Home Service Life Home service refers to a method of selling and servicing insurance, generally life and health insurance. Some companies that market on a home service basis sell "industrial life insurance," which is frequently a low death-benefit policy that accumulates cash value at a very low rate. The relative cost of an industrial life policy is extremely high compared to some other cash value and term life policies.
• Accelerated Death BenefitsIf your policy has an accelerated death benefit provision, under certain conditions it will pay you the policy´s death benefit while you are still alive. If your life insurance policy contains this type of benefit, you can receive an early benefit payment based on your need for long-term care services, with the same benefit eligibility requirements as a long-term care policy.

  It also can be paid for a specified disease or a terminal illness (life expectancy of two years or less). The accelerated death benefit can be part of the policy or attached as a rider. An accelerated death benefit may be either tax qualified or non-tax qualified. To be tax qualified, benefits must be paid for a terminal illness when your life expectancy is two years or less or for a "qualified long-term care illness."

  To have a qualified long-term care illness, you must be diagnosed as "chronically ill" or receive long-term care services through a "plan of care" prescribed by a licensed health care practitioner. You are considered "chronically ill" if you meet one of the following standards:

• Due to disability or age, you are expected to be unable to perform at least two of six Activities of Daily Living (ADLs) without substantial help from another person for at least 90 days.
• ADLs are bathing, dressing, toileting, transferring (mobility), eating, and continence. You need substantial supervision to protect your health and safety because you are cognitively impaired. Your qualified long-term care illness must have been diagnosed by a licensed health care practitioner within the 12 months prior to approval of your request for the accelerated benefit.

  By law, an accelerated death benefit must contain clear disclosures regarding possible adverse tax consequences and the effect of an accelerated death benefit on eligibility for Medicaid or other government benefits.

• Viatical/Life Settlement A viatical settlement is the sale of a life insurance policy of a person with a catastrophic or life-threatening illness or condition. A life settlement is the sale of a life insurance policy of a person who does not have a life-threatening or terminal illness.

  The policy is sold to a viatical/life settlement company in return for a cash payment. The cash payment is a percentage of the policy´s death benefit. For example, a viatical/life settlement company might pay $80,000 to buy a life insurance policy that will pay a $100,000 death benefit. The company may pay the policy owner directly or place the payment in an escrow or trust fund. The policy owner may spend the money from the sale of the policy as he or she chooses. The sale price is negotiable. Policy owners should seek offers from several companies to get the best price for their policy.

• To determine the sales price of the policy, the viatical/life settlement company will consider several factors, including
• the projected life expectancy of the policyholder
• current investment interest rates
• the period of time the policy has been in force
• premium obligations under the policy.

The sales price for policies sold within the contestable period is substantially less because the policy could be rescinded based on a material misstatement in the application for insurance. Thus, some viatical/life settlement companies will not buy a life insurance policy while it is still in the contestable period. After a policy is sold, the viatical/life settlement company becomes the policy´s owner and beneficiary.

To protect its investment, the viatical company will pay the premiums for the policy as they become due. If you sell a life insurance policy to a viatical/life settlement company, the payment you receive may affect your eligibility for Medicaid or other government benefits. A viatical/life settlement may not be exempt from bankruptcy or creditor proceedings. Persons interested in entering into a viatical/life settlement should consult an attorney, financial advisor, or social services agency regarding potential consequences. Before signing a viatical/life settlement contract, investigate possible alternatives to ensure that you obtain the maximum amount possible from your life insurance policy. Alternatives include accelerated death benefits offered by the insurance company issuing your policy, loans secured by the policy, or surrender of the policy for cash value.

• Viatical/life settlement companies and viatical/life settlement brokers (agents who represent policy owners to negotiate viatical/life settlement transactions) are required to register with TDI. Be aware that some brokers are "captive brokers." This means they only do business with one company, so they can only offer you the best deal that company offers.

  TDI maintains a list of all viatical/life settlement companies and brokers registered in Texas. For a copy of the list, call our Consumer Help Line or visit our Web site

• 1-800-252-3439
• www.tdi.state.tx.us
• For technical assistance about viatical/life settlements, call TDI´s Life, Annuity, and Credit Division
• 512-322-3406
• Insurance and Prepaid Funeral Contracts Some funeral homes use a life insurance or deferred annuity policy to fund prepayment and prearrangement of funeral services or merchandise. People often buy prepaid funeral contracts to lock in the price of their funerals at today´s cost rather than the cost at the time of need.

  However, if you die before paying all of your required premiums, the policy might not pay all of your funeral expenses. Be sure you and your relatives understand that there may be additional payments. Also, be aware that if you have a prepaid funeral contract funded by an annuity, your estate may owe income tax after your death.

  If you wish to change the funeral home and your prepaid contract is funded by insurance, you may be able to cancel the contract and keep the insurance policy. The new funeral home does not have to accept your existing policy as funding for the new prepaid contract. Be sure to read the prepaid contract to understand what you are buying.

  Another option is for your beneficiary to collect the death benefit under the policy and use it to help pay for funeral expenses. The Texas Department of Banking regulates prepaid funeral contracts. TDI regulates insurance policies used to fund prepaid contracts. For your protection, Texas law requires a seller of an insurance-funded prepaid contract to be a licensed insurance agent.

  Prepaid funeral contracts are not all alike. The cost of life insurance policies funding prepaid funeral contracts is relatively high compared to other life insurance. The premiums paid may equal or exceed the death benefit of the policy in a few years. It is important to shop around and understand the benefits and services each contract provides. Also, the cash value of a life insurance policy used to fund a prepaid funeral contract might make you ineligible for Medicaid. If so, you may use an "irrevocable assignment" or permanently transfer all of your rights under the insurance policy to a third party without counting the policy as an asset to qualify for Medicaid. You may still have the right to change funeral homes, but you do not have access to your policy for other purposes.

  Shopping Wisely for Life Insurance Get "apples-to-apples" price comparisons from several companies when shopping for life insurance. Life insurance agents use charts or illustrations as sales tools to show how a policy´s cash value might grow. Confirm that the illustration shows the guaranteed values based on the guaranteed interest rate the company promises to pay. Don´t buy a policy based on projected future or current values.

  These are only estimates and may be higher than what you will actually receive. Understand the pattern of policy values, surrender charges, and other expenses. Ask your agent for this information if the illustration doesn´t show it. Get copies of all the illustration pages, including those showing the guaranteed values. Be careful if an agent tells you that interest or dividends on your policy will cause your premiums to "vanish" during the life of the policy. If interest rates or dividends drop, you may have to pay additional premiums for a longer time. Also, the amount you pay may be greater than you estimated.

  Be sure the agent illustrates the guaranteed values based on the guaranteed assumptions stated in the policy. Projected values based on current assumptions are not guaranteed, and should never be considered or relied upon as a promise of future policy performance. Since a universal life policy is "interest-sensitive," it is likely to pay more in times of high interest rates and less in times of low interest rates.

  Read your policy carefully within the 10-day free look period after you receive it. If anything is unclear, ask your agent or company to explain. Although insurance companies must offer the free look period for variable life policies, they may opt not to offer it for others. During the free look period, which starts on the date you receive your policy, you may return the policy for a full refund of the initial premium.

  Insurance companies sometimes market life insurance policies as retirement, savings, or estate plans; education funds; or mortgage protection. Not clearly identifying the products as life insurance is misrepresentation and a violation of the law. If you believe an agent or company misrepresented a life insurance policy to you, call TDI´s Consumer Help Line.

  Be wary of insurance agents who talk to you about buying a life insurance policy for the sole purpose of selling it. It´s possible that you´re being targeted to participate in fraud. Verify that the viatical/life settlement company or broker is properly registered in Texas. Call TDI´s Consumer Help Line. It´s important to shop not only for a good life insurance value but also for a company with a good record of service and financial strength. For a company profile that provides information about a company´s financial strength and its complaint history, call TDI´s Consumer Help Line or visit our Web site.

  Buy only from licensed insurance companies. If your life insurance company fails, each state has a guaranty association that pays claims for licensed companies that become insolvent. Most licensed life insurance companies in Texas belong to the Life, Accident, Health and Hospital Insurance Service Guaranty Association. The association does not provide coverage for all companies and policies.

  For example, if you have a variable life policy, the association does not cover the cash value in the separate investment account. The association may pay up to the following amounts for valid claims under a covered policy: $300,000 for death benefits from one or more life insurance policies on the same individual $100,000 for net cash surrender or net cash withdrawal for one or more life insurance policies on the same person $100,000 under one or more individual annuity contracts issued to the same person.

Back to top