BBB Tip: Life Insurance

BBB Tip: Life Insurance

umbrella marked life insurance over cutouts of familyShare: go.bbb.org/lifeinsurance

For millions of people, life insurance is a key part of an overall financial strategy. It can provide support for dependents after a death, funds to pay for educating children, and/or extra income for the retirement years. You do not have to have dependents to benefit from life insurance. Regardless of your status, it can be a first step toward building long-range financial security.

BBB has general tips on buying any kind of insurance here. Read on for things to consider about life insurance specifically.

When you start your search for life insurance, first decide how much coverage you need and how much you can afford. You pay premiums to secure a death benefit for your chosen beneficiary when you die. Life insurance is usually less expensive when a wage earner is young and in good health.

There are two main types of life insurance policies: term and permanent.

Term Life Insurance

Term life insurance provides protection for a fixed number of years. It pays a benefit only if you die during the term. You pay premiums for each year of the term and when the term is up, you stop paying and no longer have coverage. Some policies are renewable at the end of the term for a limited number of additional terms. Most employer and other group policies are term life policies that end when you leave the company or organization.

Term insurance usually is the least expensive option. It is a good way for a wage earner with limited income to provide for their family or for a single person to cover their own death costs and debts. You may be able to exchange it for another type of insurance if your needs change.

Permanent Life Insurance

Permanent life insurance policies provide lifelong protection. There are several types, including whole, universal, and variable. Depending on the type of permanent life insurance, premiums can be set up in a variety of ways:

  • Annual premiums for as long as the buyer lives
  • Annual premiums for a set number of years or to a certain age
  • One single payment for the full cost of the policy at the time of purchase.

In addition to death benefits, these policies also accumulate a cash value. After a certain amount of time, the cash value has several benefits:

  • You can borrow money from the company up to the amount of the current cash value. If the policyholder dies and the debt is outstanding, the amount owed (plus interest) is deducted from the death benefits.
  • You can choose to let the insurance company draw from the cash value to keep the policy in effect if you miss paying a premium.
  • You can stop paying premiums and let the accrued cash value be converted to a paid-up term life policy for a specific period.
  • The cash value can be used to purchase an annuity that provides a guaranteed monthly income for life.
  • You can terminate the policy and the insurance company will pay you the cash value in a lump sum.

Permanent life insurance is generally more expensive than term life insurance and can be more complicated because of the cash value/investment aspect.

Comparing Costs

After you have made your decision about the amount of type of insurance you need, shop around for the best rates. There are many life insurance companies offering proven service to their policyholders, so there is a good deal of competition. State and provincial regulation agencies and the insurance industry set certain requirements to protect all parties. For example, premium amounts are based on the age of the insured with younger buyers paying less than older buyers do. A physical examination is often required to prove a buyer is in good health and a fair risk for the company. It is a good idea to review the policies, costs, and benefits offered by more than one company. You should also talk with more than one insurance representative.

Many states in the U.S. require cost disclosure statements and most companies provide them even if the state does not require them. Remember that the only valid cost comparisons are between similar plans.

Choosing an Insurance Company

Take the time to check on the financial strength of the companies who will have to stand behind the policies you are considering. A number of insurance rating services assess the financial strength of companies. You can find these ratings in your public or business libraries or directly from the rating service. Also, go to bbb.org for business profiles on the companies you are considering.

Choosing a Life Insurance Representative

A professional insurance representative can help you look at the big picture to put together a plan that includes all present and future needs as they change during your lifetime. If you have existing insurance coverage through your employer or other sources, make sure you have those details when you talk to that professional.

In all states in the U.S. and in all provinces and territories in Canada, life insurance representatives must be licensed to sell policies to consumers. Qualification is based upon a written examination and, often, further training in various insurance areas such as financial planning. You should choose a representative as you would a doctor or lawyer. Talk with more than one and be sure you have confidence in the person you select. Planning and adjusting an insurance program in later years requires guidance by a competent insurance representative. You must be sure the agent you select has the knowledge and experience to advise you. You also want to be confident they will provide the time and service to advise and assist you in the future.

Understand Your Policy

Make sure you fully understand any policy you are considering. If you are uncertain, ask a trusted family member, or your attorney, to review the policy with you. All terms and conditions of an insurance policy are set forth in the contract. They will state exactly how much a buyer must pay and for how long in order to have a stated amount of protection. Other clauses in a policy state what a policyholder can do in the event a premium payment is late, to avoid having a policy cancelled. There may also be information on restrictions as to insurance company investments.

Mail order life insurance

You may get offers to buy life insurance through the mail at attractively low prices. The pitch may say you will be approved regardless of age and health. Be careful! Never purchase such a policy until you have read and understood every word of the policy, not just the advertising. Also, check with state insurance authorities to find out if the company is licensed to sell insurance in your state.

Tips to remember

  • Always read your insurance contract carefully. If necessary, ask your agent for a point-by-point explanation of the language. Your insurance contract is a legal document. Familiarize yourself with the promises bound by that contract.
  • You can contact your state or province’s insurance office if you have questions about an insurance company or its policies.
  • Many states in the U.S. and some Canadian provinces have a “free look” or “cooling off” period of 10 days or more. This means that after you purchase life insurance, you can still change your mind and get a refund. Check with your state or provincial insurance department to see what the law is for you.
  • Give photocopies of your policy to your beneficiaries and your lawyer.
  • Keep your policy, the name of the company and policy number in a secure place, such as a safety deposit box.

Last Reviewed: July 7, 2017