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To help you get started with your planning,
we have provided answers to a few of the common questions
most frequently asked about life, health and disability insurance.
Life/Health Insurance 101 Questions and
Answers
What
is life insurance?
When a person dies, there are many expenses
that will need to be paid. These expenses may include such
items as funeral costs, burial expense, current bills, and
estate taxes. In addition, there may be financial needs the
insured would have met if they had remained alive, including
family living expenses, mortgage payments, long-term debt,
and college costs for children. A life insurance policy’s
primary function is to provide, upon death of the insured,
an amount sufficient to pay for any or all of the preceding
costs and expenses. Which expenses or costs are to be provided
for, and how much money will be needed is entirely up to the
insured.
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How much life insurance should I have?
There are many and varied needs for funds
upon the death of an individual, and all must be taken into
account to arrive at a proper amount of insurance. For simplicity,
some authorities recommend a good rule of thumb to be five
times your annual income. Your agent can talk with you about
your needs and goals, and illustrate how each item translates
into a given amount of funds needed at the time of death.
He or she can also share how to account other sources of income
(such as Social Security or retirement plans) that will actually
lower the amount of life insurance necessary.
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Who will receive money if I die? How much?
Upon death of the insured, the insurance
company pays the policy’s benefit amount to the beneficiary
(or beneficiaries) named by the insured on the policy. Some
policies may provide additional benefits, so be sure to discuss
this with your agent.
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Does it matter how I die as to how much
my beneficiaries will collect?
During the first two years of the policy
period, there may be conditions (fraud, misstatement of age,
suicide) that can affect the death benefit paid by the policy.
Your agent can discuss these with you. After two years, the
full policy death benefit is payable, regardless of the cause
of death. (Some policies may also pay extra benefits in certain
conditions, such as the insured dies in an accident.)
Will my beneficiaries receive the benefit
in one lump sum, or will it be distributed over a period of
years?
That is entirely up to you, or you can
leave the decision to your beneficiaries. Both options are
available.
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Who can I name as my beneficiaries?
How often can I change them? Your
choice of beneficiaries is entirely yours. You can name individuals,
organizations or your estate. You can also change them at
any time. The original beneficiaries under your policy, as
well as any changes you later make, must be designated in
writing to the insurance company, and attached to your policy
by endorsement.
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Are there different types of life insurance
I should consider?
Although there are many types of life insurance
policies, nearly all are variations of two basic types - term
and permanent. (A third type, known as universal life, is
a combination of term, permanent and various investment options.
Its complexity is beyond the scope of our overview, but if
you are interested, your agent can discuss if universal is
a good fit for your life insurance needs and goals.)
- Term insurance is exclusively
death coverage. The policies are written for a specific
length of time (the term referred to in the name). Common
terms are one year, five year and ten year, although longer
terms may be available. If the insured dies during the term
of the policy, the death benefit is paid to the beneficiaries.
If at the end of the term the insured is still alive, the
coverage ends.
- Unlike term insurance, a permanent
insurance policy (often referred to as whole life) never
terminates as long as the premiums are paid. It also builds
cash values in the policy that can provide valuable “living”
benefits in addition to the death benefit.
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Do I have to die to collect life insurance?
For term insurance, the answer is always
yes. For permanent insurance, as the living benefits accumulate,
they may be used to provide funds for financial needs such
as loans, premium payments and retirement benefits.
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Will I ever need to requalify to keep my
life insurance policy, as long as my premiums are paid on
time?
For permanent insurance, no. For term insurance,
if an insured wishes to continue the coverage beyond the specified
term, many policies (known as renewable term) allow the insured
to continue the coverage for another term of the same length,
without any need to fill out a new application or undergo
an underwriting review. This is a valuable provision, since
the insured's health or occupational status may have changed
during the policy period in ways that would render them uninsurable
if they were to try and purchase a new policy.
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How do they set a price for life insurance?
Although there may be a myriad of fees,
expenses, interest assumptions, and other factors used to
develop a given life insurance company’s premiums for
a policy, the rates for life insurance are ultimately based
upon one factor - the statistical chances of the insured dying
in a given year. Such statistics, based upon insurance company
experience and government records, are used to calculate an
annual death cost for each $1,000 of life insurance benefit.
Since statistically few people will
die at younger ages, the death cost for those years will be
extremely low. As people age, the statistical chance of death
increases—slowly at first, then more rapidly after the
insured passes middle age—and therefore so does the
annual death cost.
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Which life insurance is less expensive
- permanent or term?
Since term insurance only provides a benefit
if the insured dies during the policy term, its premiums will
be the closest to pure death cost. This is why term is the
least expensive coverage to buy at younger ages. At older
ages, however, the cost of a term policy rises rapidly along
with the increasing death cost, and may soon become prohibitive
for many senior citizens. A term insurance policy's premium
will remain the same during the term, and then increase at
each renewal. For example, an annual renewable term policy
is written for one year at a time, so the premium will generally
increase each year. A five-year renewable term policy's premium
will remain level for the five-year term, and then increase
at the renewal. Once renewed, the policy premium remains level
until the next renewal, and so on until the renewal provision
expires (typically at age 65), or when the insured either
decides the premium has risen too high or the insurance is
no longer wanted.
Permanent insurance rates are also
fixed for the policy term. However, since the policy is permanent,
this fixed premium must represent an average death cost over
the entire expected life of the insured. The result is that
permanent policy rates will be often be significantly higher
than term rates at the younger ages, but then significantly
lower at older ages.
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If term life insurance is less expensive,
why buy permanent?
There are many reasons. As food for thought,
here are three of the key considerations:
- Permanent insurance will always
be there. Some final expense needs are permanent, and only
permanent insurance is guaranteed, assuming you pay the
premiums, to be there when needed. Term insurance, by its
nature, is temporary, and at some point will become nonrenewable.
In fact, a good life insurance rule of thumb is to buy permanent
insurance for permanent needs (funeral, burial, estate liquidity),
and term insurance for temporary needs (mortgages, college
costs).
- Permanent insurance premiums are
fixed for life. While the premium may be higher at younger
ages than term, it will never go up. And that can be a great
comfort upon reaching older age and not having to face the
possibility of your term insurance premium increasing beyond
your ability to pay, possibly at the very time you need
your insurance the most.
- Permanent insurance builds cash
values. During those early years of your policy, when your
lifetime average premiums are higher than the death cost,
that extra money is set aside to help cover the higher death
costs in later years. But in the meantime it is put to good
use. In effect, it becomes a form of savings account inside
your life policy. This cash value, as it grows, can be used
as the basis for a loan from the insurance company, used
to pay premiums if necessary, or taken as a cash settlement
in the event you cancel the policy.
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If I need to cash in my life insurance
at some point, how much will it be worth?
If your policy is term insurance, it will
have no value. Term only provides a death benefit. If your
policy is permanent insurance, you will be eligible to receive
the current cash values contained in the policy, whatever
they may be at that point in time. Your agent will be able
to show you sample charts illustrating your policy's anticipated
values for any particular year after your policy is issued.
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What is the major purpose of health insurance?
To use the "machine" analogy
in our introduction, health insurance is designed to cover
repairs, maintenance and any lost income while the machine
is "in the shop".
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What are the major types of individual
health insurance policies?
There are many variations of health insurance
policies. The two most common are major medical and disability.
Your agent can share other, more specialized types of coverage.
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Do I need an individual policy if I have
group insurance at work?
Maybe. Many factors must be considered,
such as: Do I plan to remain at my current job? Do I feel
secure in my current job? What current benefits does my employer
provide, and do I feel they are sufficient? Are there certain
benefits that are not provided, or limited in a way I feel
leaves a gap to be filled in my coverages? Are there members
of my family who are not adequately covered, or are ineligible,
for my group benefits?
Discuss these issues with your agent
and he or she can make a recommendation as to the best choices
to assure your medical coverages are adequate for your needs.
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What is a major medical health insurance
policy?
This is the most common form of individual
or group health insurance is a major medical health policy.
It provides benefits for sickness or injury, regardless of
whether the care is provided at a doctor's office, clinic
or hospital. The types of sickness and injury covered are
typically broad, although there are always limitations that
should be discussed with your agent prior to purchasing the
coverage. Major medical policies normally have an annual deductible
and a lifetime maximum amount of benefits that will be paid.
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How does a health insurance deductible
work?
A deductible is the amount you must pay
before the insurance company begins to pay on your bills.
This is an annual amount per insured person, although typically
there will be a maximum amount of deductibles you will have
to pay in a given year. For example, if your "per person"
deductible is $500, and you have five people in your family
covered under your health insurance, the maximum "family"
deductible will usually be $1,500. Once three of the people
in your family have paid out a $500 deductible, no more deductibles
will apply to any member of the family for the remainder of
the year. This can vary, so be sure to discuss the specifics
of your policy with your agent.
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What does "coinsurance" mean
in a health insurance policy?
In a health policy, coinsurance represents
the percentage of the medical bills the insured will be responsible
to pay after the deductible is met. For example, if your policy
is "80% coinsurance", then once the deductible is
met, the insurance will pay 80% of covered medical bills and
you pay 20%. Typically there will also be a provision called
a "stop-loss", which is basically a maximum amount
you will ever have to pay out of your own pocket for covered
medical bills. For example, let's say your policy states it
is 80% coinsurance, with a $1,000 stop-loss. Once you’ve
paid your deductible, your covered medical bills are $7,000.
Here's how that would work: First, the coinsurance provides
the carrier will pay 80% of the $7,000 ($5,600) and you will
pay 20% ($1,400). But, your stop-loss says your maximum payable
for this claim is $1,000! So you only pay the $1,000, and
the additional $400 comes from your insurance company. Notice
this provision gets more valuable as the claim gets larger
- no matter how large the final claim, or what percentage
of coinsurance you’ve purchased, your stop-loss says
your share of the covered expenses will never exceed $1,000.
Please note some polices refer to
stop-loss as maximum out-of-pocket. And many polices include
the amount of the deductible in determining when you hit your
maximum, also a helpful provision.
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What is the purpose of "coinsurance",
"stop-loss", "maximum out of pocket",
etc. Isn't this just complicating the policy?
All of these are provisions meant to help
control the cost of the policy. For example, if the coinsurance
percentage tells you how much of the covered expenses the
insurance company is on the hook to pay, then clearly the
higher the coinsurance percentage, the higher your policy
premium will be. Similarly, the lower your deductible and
stop-loss, the more you are asking the insurance company to
pay, and the higher your policy premium. While these terms
my seem complicated, the bottom line is the more of your medical
expenses you can afford to pay out of your own funds, the
lower your medical insurance premium can be. Your agent can
discuss the various options available to you, and the amount
of difference each will make to your insurance premiums. You
can then choose the combination of provisions that best fits
your budget and needs.
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What does a disability income policy do?
Disability income is a form of health insurance
that is designed to provide you with an income during the
time you are unable to work due to illness or injury.
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What does “disability” mean?
In its simplest sense, it means you are
unable to work. But it's important you realize the definition
of the term under a given disability income policy will be
specified by that policy. The broader the definition of disability,
the higher the cost and increased limits to the underwriting
restrictions. For example, some policies will define "disability"
to mean "the inability to reasonably perform the duties
of your occupation," while another will define it as
"the inability to reasonably perform the duties of any
occupation". How significant is this difference of a
single word? To use an extreme example, if you were a highly
trained surgeon, the first policy would pay you if you were
sufficiently injured that you couldn't perform surgery. The
second would refuse to pay if you could perform any job -
even sweeping floors or answering phones. Despite the obvious
loss of income when going from surgeon to receptionist, the
policy definition of disability will determine whether you
will receive benefits for specific policy. As you might guess,
the second policy is likely to be great deal less expensive.
Also, you can see your current occupation is the single most
important factor in determining what type of disability policy
and coverage options you will be eligible for.
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How long can I collect under a disability
income policy?
Policy provisions vary, as do the premiums
depending upon which provisions you choose. Generally the
policy will specify a maximum period of time it will pay for
a covered disability. Typical policy terms are for two years,
five years, or to age 65. If during that time you recover
from the disability and return to work, the policy will provide
that a new disability will start a new benefit period. For
example, if under a "five year" disability policy,
you meet the definition of disability for three years, then
return to work, the policy will have paid you three years
worth of benefits. Four years later you suffer a new disability.
For that new disability, your policy will pay benefits for
up to five full years.
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Must I be disabled for a certain length
of time before my disability benefits begin?
Typically a disability policy will provide
for some length of time the disability must last before benefits
begin. This is usually referred to as a "waiting period."
Similar to a deductible under major medical insurance, the
purpose is to avoid paying benefits for minor injuries or
illnesses, thus saving the insurance to apply to major times
of need. The length of the waiting period can vary, and usually
you will have several options. Clearly the longer you are
willing to wait, the lower the premium. Your agent can discuss
your available options with you.
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What is a PPO?
This stands for "Preferred Provider
Organization". Basically, this is a network of health
care providers who have agreed to provide certain services
at agreed-upon costs for individuals whose coverage is a part
of the network. You are free to use any medical provider within
the network, and all will honor the agreed services and fees.
If you choose to use a provider who is not an approved member
of the network, your coverage may be diminished, your personal
cost higher or, in some cases, benefits for non-emergency
services may be totally denied. Be sure to discuss with your
agent if your coverage will utilize one or more PPOs, who
are the current approved providers, and how utilizing an out-of-network
provider will affect your coverage.
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What is a HMO?
This stands for "Health Maintenance
Organization". Unlike a PPO network of independent care
providers, HMOs are typically fixed facilities, and benefits
are designed to cover services obtained at the HMOs facilities
and supplied by HMO personnel. HMO coverage plans must specify
how and under what circumstances services may be obtained
from non-HMO providers, and this information is crucial to
determining the value of the HMO under your particular circumstances.
Your agent can assist you in determining whether there are
good HMO options available in your area, their benefits and
any limitations for you to consider in making your final medical
coverage choices.
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What is the purpose of PPO's and HMO's?
By assembling a network of providers who
agree to provide services at a discount (PPO) or by requiring
you get all of your services from a specific provider, with
an emphasis on preventative care (HMO), the hope is to provide
you the best possible care at the lowest possible costs. A
downside is such benefits and discounts require a great deal
of control over your health care options by the PPO or HMO,
and not all the limitations are popular or convenient. And
whether these approaches are always successful is subject
to ongoing debate, and results can vary greatly by where you
live.
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What if I want to go to any doctor or hospital
I choose?
You can buy health insurance which basically
says "go to whomever you want and have them send us the
bill"(often referred to as "indemnity" coverage),
but it lacks the negotiated cost discounts and overview of
services (meant to dissuade providers from over treating and
over billing) that PPOs and HMOs utilize to try and keep costs
lower. Thus an indemnity policy may be readily available to
you, but may be significantly more expensive than a coverage
plan utilizing a PPO or HMO. Ask your agent for your options
and possible premiums, and then choose the coverage method
that best meets your personal preferences and needs.
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