Life Insurance Guide: How to Get the Most Out of Your Life Insurance. ohio shopper s guide series

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1 ohio shopper s guide series Life Insurance Guide: How to Get the Most Out of Your Life Insurance Bob Taft Governor Ann Womer Benjamin Director

2 From Ohio Governor Bob Taft and Department of Insurance Director Ann Womer Benjamin: Assuring financial security for our dependants after we are gone is critical to us all. The Ohio Department of Insurance has produced this Ohio Shopper s Guide to Life Insurance to help you make informed decisions when choosing life insurance. This guide uses simple language to help you understand the differences in policies, beginning with the basics. You will learn what you need to know when applying for life insurance. This guide explains the difference between term and whole life insurance, between universal and endowment. We include information regarding your rights as a consumer and the responsibilities of insurance carriers conducting business in Ohio. The Department of Insurance has included in this guide a list of companies authorized to sell life insurance in Ohio. An Internet address and/or a phone number you can call for sales information appears for each of the companies listed. This guide will allow you to make informed decisions, while navigating you through the many options available. You will find suggested questions to ask yourself and the agent during the buying process to help you determine what policy is right for you and your family. If you have questions or need additional information, the Consumer Services Division of the Ohio Department of Insurance is ready to help you. Most questions or issues can be addressed by one of the Department s expert individuals or referred for proper assistance. You can reach Consumer Services of the Ohio Department of Insurance at or by logging onto Please remember the Ohio Department of Insurance is here to help you with questions or problems you may have when making these important decisions. Sincerely, Bob Taft Governor Ann Womer Benjamin Director, Ohio Department of Insurance

3 Table of Contents Chapter 1: Life Insurance Basics 2 What Is Life Insurance? 2 Insurable Interests 3 Chapter 2: Applying For Life Insurance 4 Age And Health Factors 4 Determining Premiums 4 Underwriting 4 Physical Exams 4 Application Questions 5 Genetic Testing 5 Guaranteed Issue Policies 6 Clean Sheeting 6 Naming A Beneficiary 6 Changing Policies 7 Chapter 3: Types Of Life Insurance 8 Term Life 8 Whole Life 10 Endowment Insurance 14 Universal Life 14 Vanishing Premium Pitch 15 Funeral Policies 16 Mortgage Life 17 Credit Life And Credit Disability Insurance 17 Chapter 4: Benefits And Claims 18 Life Insurance Riders 18 Viatical Settlements 19 Benefit Payments 20 Chapter 5: Shopping For Life Insurance/Consumer Protections 22 Purchasing Term Life 22 Purchasing Whole Life Or Universal Life 22 Using An Agent 23 Life Illustrations 24 Private Rating Firms 25 OLHIGA 26 Resolving Complaints And Disputes 26 Table of Contents Chapter 6: Company List And Contact Information 29 Chapter 7: Glossary 32 Get more insurance information on our web site: Many good life products are available in today s market. The various kinds of life insurance have been designed to fulfill needs that different people s lives demand. Insuring your life to provide for your family is quite a simple concept, but trying to decide which product would best meet your needs can be confusing. This guide is intended as a basic foundation. It does not try to describe every type of life insurance, nor is one product endorsed over others. With this guide and the help of an agent, you should find it easier to identify a product that will protect the future of you and your family. For information about annuities, see The Ohio Shopper s Guide to Annuity Contracts.

4 Chapter 1 Life Insurance Basics What Is Life Insurance? Simply stated, life insurance is purchased to ensure your loved ones are financially secure when you die. Premiums are paid to the insurance company, and the company invests the money. When the insured dies, the company pays that person s beneficiary. In reality, life insurance is not this simple. Over the years people have used life insurance as a basic building tool for an ever-increasing and ever-changing variety of financial plans. Note: It is illegal for an insurance agent to sell life insurance by calling it an investment. Life Insurance Basics Why Buy Life Insurance? Life insurance provides the people who depend on you with money after you die. It replaces your income with a non-taxable death benefit. It reduces the financial burden on your family after you die. Depending on the policy you choose It helps put your children through school It pays the mortgage, car payments and other debts you leave behind It pays your funeral expenses It pays your estate taxes Does My Life Insurance Policy Have Cash Value? When you buy life insurance, you normally buy insurance only, not stocks, bonds or securities. Cash value is created in some policies, but the interest on cash value is low. Moreover, dividends and other elements are neither guaranteed nor predictable. Some policies will allow you to elect to invest the cash value in various securities. How Is Life Insurance Different Than Other Types Of Insurance? See Chapter 3 for information about the various types of life insurance policies. Life insurance is fundamentally different from all other kinds of insurance. The main difference is that other kinds of insurance protect you against things that might happen. Examples include the following: You buy auto insurance because your car might be stolen or involved in an accident, or You buy health insurance because you might get sick. If you are lucky, those things will never happen, and the premiums you paid will be used by the insurance company to cover claims for other people who are also insured. Life insurance is different because it insures in the event of death, the one thing guaranteed to happen. It is not something we like to think about, but sooner or later we all die. Life insurance has its own language. Common English words often take on very different meanings when used to describe life insurance policies. Words highlighted in gold are defined in the glossary. See Chapter 7. 2

5 The other difference is that you usually insure your life to protect someone else. Due to tax consequences, it is generally not a good idea to be the beneficiary of your own life insurance policy. How Does Life Insurance Work? An insurance company collects money from a large group of people, called the insurance pool. Life insurance uses a large pool - new members join and old members die or cancel. The company promises each pool member that it will pay money when a member dies - if all required premiums are paid. What Happens If I Die Before Paying All My Premiums? Insurance companies are in the business of taking chances. The companies call it "assuming risk." When you purchase life insurance, the company hopes that you will live a long life so that by the time you die, you will have paid your full share into the insurance pool. However, the company also knows there is a chance you could pass away the day after you buy the policy. Therefore, the company accepts the risk that it may pay out a lot more than you paid in. Who Can Take Out A Policy On My Life? Only someone who has an insurable interest can purchase an insurance policy on your life. That means a stranger cannot buy a policy to insure your life. Those who have an insurable interest generally include members of your immediate family. In some circumstances your employer or business partner might also have an insurable interest. Insurable interest may also be proper for institutions or people who become your major creditors. Must My Beneficiary Have An Insurable Interest? No. If you buy a policy on your own life, you become the owner of the policy. As the owner, you can name anyone as beneficiary. Insurance Tip: Consumer Services can help answer your questions about life insurance. Call How Does Life Insurance Work 3

6 Chapter 2 Applying For Life Insurance How Do I Apply For Life Insurance? Life insurance policies begin with an application. Your answers will help the company decide whether it wants to insure you. When you complete the application, make sure to fill in every blank. Never leave blank spaces for anyone to fill in later. Your application becomes a part of your contract with the insurance company. Always tell the truth on your application! Omissions, half-truths and outright lies could invalidate your policy, leaving you or your beneficiary with nothing. Are My Age and Level of Health Considered When Buying Life Insurance? Yes. Your age and overall level of health are taken into consideration when buying life insurance. Applying For Life Insurance Although insurance companies are in the business of assuming risks, they try to make sure the odds are in their favor. In order to minimize risk, companies must determine what to charge each insured based on certain underwriting factors, including age and health. Companies use statistical averages - called mortality tables - to predict how long you will live. The availability and cost of life insurance are directly related to how long the mortality tables predict you will live. As you get older, the risk increases and so do life insurance costs. Life insurance can be inexpensive when you are very young, or it can be unaffordable or even unavailable when you are very old. Insurers also look at other things that can affect your life expectancy, including your health, family health history, health-related habits, and occupation. How Do Companies Determine How Much To Charge? The cost of insurance is a company's calculation of how much money it needs to collect from each member of the insurance pool. Life insurance cost is always based on the mortality tables and the statistical calculation of how much risk the company is accepting by insuring your life at any point in time. How Do Companies Evaluate Their Risk In Insuring Me? When you apply for life insurance, the company will ask you questions about your health and may require you to have a physical examination. The company will use this information to decide if and how it wants to insure you. This process is called underwriting. There are very few limits on the kinds of information life insurance underwriters can consider. Will I Need A Physical Examination? Life insurance companies often require you to have a physical exam. This will probably not be with your own doctor. The insurance company may arrange for you to go to a medical office or for a doctor or medical technician to come to your home. There should be no charge for the physical exam. 4

7 Do All Insurance Companies Require A Physical Exam? No. Not all companies require a physical exam for life insurance. However, although there may be no physical, you will probably have to answer a few, broad health questions on your application. Also, the insurance may be more expensive than if the company required a physical. Higher face amounts usually require physical exams. What Kinds Of Questions Will The Company Ask When I Apply For Life Insurance? Most likely, your application for insurance will ask questions similar to the samples below. Do you use tobacco products? Insurance companies definitely believe that smoking can shorten your life. Most companies charge higher rates for smokers. Do you have heart disease, cancer, diabetes, AIDS, etc.? Depending on the seriousness of your health problem, a company may issue life insurance to you at its regular rates, or it may charge you a higher rate than usual. If your health problem is very serious, some companies will simply turn you down. Do you have a dangerous job? The company may turn you down or charge a higher rate if it believes your line of work is unusually dangerous. Some examples: test pilot, race car driver, coal miner. Is there a family history of fatal disease? The company is not limited to knowing about just your own health record. It can look at your family history for diseases that appear to run in the family. Examples: Huntington s Disease, heart disease, stroke, Sickle Cell Anemia. These are examples only. Your application may ask different and more detailed questions. What Other Questions Might Be Asked On The Application Form? A company may ask certain questions to evaluate high-risk insureds. The following are examples of the types of questions you may be asked: Insurers Questions 1) In the past seven years have you been a. Cited for drunk driving? b. Diagnosed and/or treated by a doctor for: heart disease or disorder, cancer, stroke, diabetes, chronic liver disorder, chronic lung disorder, AIDS or AIDS-Related Complex? c. Advised by a doctor to discontinue or reduce use of alcohol? 2) Are you currently disabled or did you retire because of any injury or illness? Although answering "Yes" to any of these questions could mean you may not get the policy, it is very important to answer all questions truthfully. If not, the company can deny paying a claim. Are Insurance Companies Permitted To Use Genetic Testing For Life Insurance Applications? Yes. Life insurance companies believe they can learn a lot about you by looking at your blood. The company obviously wants to know about any diseases you have now, but your blood can also tell them about diseases that you might get in the future. Therefore, some companies have begun looking at your chromosomes for evidence that you have inherited genes that have been linked to various diseases. 5

8 Important! Ohio does not allow genetic testing for health insurance. However, insurance companies can use genetic information when you apply for life insurance. I Was Treated For Cancer Five Years Ago. The Doctors Have Declared That I Am Completely Cured. Can A Life Insurance Company Turn Me Down? Yes. Each insurance company sets its own rules. Some may be willing to insure you, others may not. Some Life Insurance Ads Claim 'You Can Not Be Turned Down.' What Is The Catch? Such ads are for "guaranteed issue" policies that ask no health history questions. The company knows it is taking a risk because people with bad health could buy their policies. The company balances this risk by charging higher premiums or by limiting the amount of insurance you can buy. In some cases, the premiums can be almost as much as the insurance. After a few years you could pay more to the insurance company than it will have to pay to your beneficiary. Such policies may offer only the return of your premiums if you die within the first couple of years after you buy the policy. Questions You May Have My Insurance Agent Told Me Not To Answer All The Questions On My Application. Should I Trust This Advice? Insurance agents earn a commission when they make a sale. If the company rejects your application, the agent gets no commission. A dishonest agent may tell you not to bother with all the health questions and to leave blank spaces on the application. Later, you look like the perfect applicant because the agent wrote answers to key health questions in a way to get you approved. This scam is called "clean sheeting." You may get the policy; but if the company decides to investigate and discovers the truth, you could lose the policy. If the truth is discovered after you have died, your beneficiaries could have a hard time collecting. Never sign a blank application! Most insurance agents are very professional and honest. However, if you believe your agent has acted unethically, please call the Ohio Department of Insurance at How Do I Make My First Premium Payment? If you are buying through an insurance agent, the agent will ask you for an initial payment, which may be part or all of your first year's premium. Pay by check, but never make your check payable to the agent. Your check should be made out to the insurance company with a note on the check referencing the policy. DO NOT pay in cash. How Do I Name A Beneficiary? The policy owner has the right to name one or more beneficiaries. If you are applying as the policy owner, you can name any person or organization as a beneficiary. You can also specify the amount each beneficiary is to receive. 6

9 What Is A Contingent Beneficiary? A contingent beneficiary receives benefits only if the primary beneficiary has died. What Is The Difference Between A Revocable Beneficiary And Irrevocable Beneficiary? A revocable beneficiary can be changed at any time. An irrevocable beneficiary has legal rights in your policy, and you need the beneficiary's consent to make any changes, to surrender the policy, or take out a policy loan. For these reasons, it is not a good idea to name a child as an irrevocable beneficiary. If I Change Life Insurance Policies, Will My Taxes Be Affected? The value in your insurance policy is not taxable when it is directly transferred into a new policy. However, if you surrender the policy you might owe taxes. What Should I Do Before Changing Policies? Compare the rights and benefits of each policy carefully before you switch. Be sure you are not giving up benefits that are important to you. If I Already Have Life Insurance, Am I Automatically Eligible For Other Policies? Not necessarily. If your health has deteriorated since you bought the old policy, you may have become uninsurable. Your old policy can not be cancelled because of your health problems, but you may not be able to get a new policy. If you change policies, you may be subject to a new two-year contestability period. Will I Lose Money Even If I Switch Between Cash Value Policies? When you replace a policy that you have owned for several years, you could lose money! Insurance agents sometimes suggest that you use the cash value from an old policy to make a large first payment toward a new policy. This could be a step backwards. More Questions In the first few years you have a policy, the company uses most of your excess payments for sales commissions and administrative expenses. When you switch policies in these first few years, your cash value can disappear and much of your new premium may again be eaten up by commissions and expenses. Surrender charges may also be applied. What Is A Replacement Notice? Ohio law requires insurance agents to complete a replacement notice any time they replace a life policy or take actions that will affect its cash value. Read the notice carefully. The agent must get your signature on the notice. A copy of the notice will be sent to the company that issued your old policy. That company then has a chance to persuade you not to switch (this is called conservation). Insurance Tip: Do not cancel your old policy until you have the new policy and you are satisfied that it is what you want. A lot could be riding on your decision. If an agent has recommended switching, ask the agent to carefully explain all the reasons and put them in writing. Before you sign with a new agent or company, contact the agent or company that sold you the old policy. Explain the switch that you are considering and listen to what the agent or company representative has to say. Make sure you understand what you are buying and what you are giving up. 7

10 Chapter 3 Types Of Life Insurance What Is Term Life Insurance? Term life is the simplest type of life insurance. Term gets its name from the limited length or "term" of the contract. Term insurance usually has no cash value, generally lasts for 1, 5, 10, 15, or 20 years, or to some specified age such as age 65 or age 100. If you die during the term, the insurance company will pay the death benefit if all premium obligations are met. If you do not die during the term, no benefits will be paid. You may be able to renew the contract at the end of the term, or you will need to buy another policy. Are There Different Types Of Term Life Insurance? There are three major types of term insurance. They are Level - Provides a death benefit that stays the same over the period. Example: A five-year level term policy with $10,000 in coverage means the company will pay $10,000 if you die any time during the 5 years the policy is in effect. Premiums normally stay the same (level) during the term. Types Of Life Insurance Decreasing - Provides a death benefit that decreases over the term in a specified manner. Example: The benefit during the first year of a five-year decreasing term policy may be $10,000 which then decreases by $2,000 each subsequent year. At the end of the fifth year, the face value is zero and coverage expires. Premiums for decreasing term usually remain level throughout the term. Increasing - Provides a death benefit that increases over the term in a specified manner. Example: The benefit for a five-year increasing term policy may have a face amount that starts at $10,000 and then increases 5% every policy anniversary date. The coverage may also be tied to increases in the cost of living as measured by a standard index. Premiums usually increase with the coverage in this type of policy. Are Term Policies Renewable? Most term policies include a guarantee that you can renew the policy for a specific number of years, without having to again prove insurability (good health). For example, a 10-year renewable term policy covers you for 10 years at a level premium. After the 10-year term, the company will send you a renewal for the next 10 years. Although your premium will again be level for the new 10-year period, the new premium will be higher because you are older than when you first bought the policy. Note: The policy's renewal provision will normally specify that your right to renew is limited by age or by a maximum number of renewals. Renewable term usually has a higher premium than that for a similar nonrenewable policy. 8

11 Are Term Policies Convertible? Term policies are generally convertible. This means they guarantee the right to switch or "convert" from term to one of the company's whole life policies. Conversion rights usually guarantee that you will be accepted for the whole life policy regardless of your health when you convert. However, the whole life policy you switch to could be much more expensive. Insurance Tip: You may see the phrase Without proof of insurability in a renewable or convertible term policy. It means you will not have to prove you are healthy in order to renew the term policy or to convert it to whole life. What Is The Premium Structure For Term Life Insurance? There are generally four types of payment patterns associated with term insurance. Level: The dollar amount of your premium remains the same throughout the term. Increasing: The premium increases by a set dollar amount after a set number of years, as specified in the contract. Level/increasing: The premium is level for a specific period, then increases by a set amount annually. Indeterminate: Two premium rates are established - a guaranteed maximum, and a lower rate you actually pay. The lower premium is level for a specific period of time. After that period, the company establishes a new rate that may be higher or lower than the initial premium. The premium you pay can never be more than the guaranteed maximum rate. Why Is Term Life Often Called Temporary Insurance? Insurance agents sometimes refer to term insurance as "temporary" because the term policy lasts only for a specific period. In reality, it is probably no more "temporary" than your auto or homeowner insurance. Just like term, those types of policies provide coverage for a specific period of time and must be renewed when that period ends. Why Are Some Insurance Agents Reluctant To Sell Term Insurance? An agent may believe term is risky, but only because you could have a hard time buying a policy in the future if your health deteriorates or you cannot afford the higher premiums. Term Policies Commissions could also be a reason for an agent who discourages term. The agent often makes less money for selling term than for other forms of life insurance. An Insurance Agent Has Suggested I Switch Term Companies Every Couple Of Years To Take Advantage Of The Company's Promotional Rates In The First Couple Of Years. Is There Anything Wrong With Doing That? No, but there is always a risk when you switch polices. For one, you would be subject to a new contestability period each time you change policies. If you die during that two-year period, the insurance company can (and probably will) investigate the statements you made on your application. If you gave inaccurate or incomplete answers, the company may (and probably will) refuse to pay the death benefit. 9

12 What Is Whole Life Insurance? Whole life insurance gives you lifetime coverage at a premium rate that does not increase with your age after you buy it. Level premium payments build a reserve in your policy that is used to insure you as you age. Insurance companies call this reserve the "cash value." Are There Different Types Of Whole Life Insurance? Yes. The more common types are described below. Joint Whole Life Provides basic whole life benefits, but two lives are insured under the same policy. When one person dies, the benefit is paid to the survivor, who then has an option to purchase an individual whole life policy without having to prove insurability. Last Survivor Whole Life A type of joint whole life, designed mainly for married couples. Federal estate taxes are not collected on property left to a spouse, but when the surviving spouse dies, estate taxes may be owed and can be very high. A last survivor policy pays a benefit only after both spouses have died, providing funds for estate taxes. Universal Life Allows you to choose your policy's face amount and premium and to change these factors while the policy is in effect. Your choices must fall within the company's specified minimum and maximum amounts. These guidelines are set to meet life insurance regulations and maintain healthy relationships between premium, face amount, benefit and cash value. Whole Life Adjustable Life Allows you to vary your coverage as your insurance needs change. You normally choose the face amount you need and the premium you want to pay, and the company calculates a plan that provides coverage for your request. The result could be any plan from a term life policy with a short period to a limited-payment whole life policy. You can also choose the type of plan and face value you want, leaving it to the company to calculate the premium rate needed. Indeterminate Premium Life Specifies two premium rates - a guaranteed maximum and a lower rate you actually pay. The lower premium is level for a set period of time. Then the company establishes a new rate that may be higher or lower than the initial premium. Your premium can never be more than the guaranteed maximum. Interest Sensitive Whole Life Similar to indeterminate premium life, but taken a step further. Cash value can increase beyond the stated guarantee if economic conditions warrant. You decide whether you want favorable changes to result in lower premiums or higher cash value. Also called current assumption whole life. 10

13 Variable Life A security that has benefits and features similar to traditional whole life, but face amount and cash value depend on investment performance of a special fund. Reserves are placed in designated investment accounts that are separate from the company's general account and values of these separate accounts rise or fall based on returns from the separate investments. Face amounts and cash values depend on how investments perform. Most policies guarantee the face amount will not fall below a set minimum, but minimum cash value is rarely guaranteed. Variable Universal Life Combines rate and benefit flexibility of universal life with investment and risk factors of variable life. Like variable life, this product is considered a security. It can be sold only by agents who have passed the National Association of Securities Dealers (NASD) exam. What Is Cash Value? Cash value is the amount of money you will receive as a refund if you cancel coverage and surrender the policy to the insurer, minus any penalties or interest that have accrued. Cash value is a feature of whole life insurance. Can I Borrow Against The Cash Value Of My Whole Life Insurance Policy? Once a policy builds cash value you can use it to get a policy loan. The loan can be for any amount up to a percentage of the policy's cash value. The loan will accrue interest. If the loan plus interest amount exceeds the cash value, the policy will expire with no value. How Is The Cash Value Determined? When you are young, you pay more in whole life premiums than it takes to insure you. The insurance company uses the reserve to insure you later in life when the premium you pay no longer provides enough insurance to cover you. This is necessary because your premium stays level as long as you own the policy. Reserves relate to the policy's cash value. Cash value and reserves grow during the life of the policy and are eventually equal to the face amount - usually when you have reached age 100. Cash Value The actual cash value amount depends on many factors: The policy's face amount, How long you have owned the policy, Length of the premium payment period, and Whether you have any outstanding policy loans. Are There Advantages To A Policy Loan? A policy loan has some advantages over a commercial loan. Usually the loan is easier to get and there is no schedule for repayment. The insurance company will not check your credit; it will grant the loan based only on your policy's cash value. You can repay a policy loan at any time, in part or in full. Of course, if you die before the loan is repaid, the amount of the unpaid loan (plus interest) is subtracted from the death benefit. 11

14 Are There Other Advantages To Whole Life Insurance Policies? Some whole life policies can return money to you in the form of dividends. These are called participating policies. If the company earns a surplus because of profitable operations, owners of participating policies could share in the surplus. A life insurance dividend is actually a refund of part of your premium. When a company collects more money in premiums than it needs to pay death claims and maintain the insurance pool for future claims, the company may pay dividends at the end of that year. Since earning such a surplus depends on many variables, dividends are never guaranteed. What Happens When A Dividend Is Paid? You generally will have five choices: Take the dividend in cash Buy additional insurance at net cost (this option is called a "paid up addition") Let it accumulate with your cash value Reduce your premiums Purchase 1-year term insurance Paying Premiums Are There Different Ways Of Paying Premiums For Whole Life Insurance? Yes, there are many different ways to pay premiums for whole life insurance, including those listed below. Continuous: Premiums are payable throughout the life of the person insured. Limited Payment: Payments are limited to a specified number of years, or an age after which premiums are no longer due. The annual premium amount is larger for limited payment policies than for continuous premium policies, but these policies build cash value more quickly. Single Premium: A type of limited payment policy that requires only one payment and yields instant cash value. Modified: For an initial specified period of time premium payments are lower, then they increase to a level amount for the rest of the life of the policy. The policy's face amount does not change, so you can buy a larger policy than you might be able to afford otherwise. Cash value grows more slowly than with traditional whole life policies. Graded: A type of modified premium policy that has three or more steps of payment amounts. I Understand My Policy Would Be 'Fully Paid Up' At Age 65. What Does That Mean? "Fully paid up" means that you have made enough premium payments to cover the cost of insurance for the rest of your life. I Had A Policy That Was Paid Up; Now I'm Told I Don't. What Can I Do? You may have signed papers that permitted the cash value of your paid up policy to be used to pay for another, larger policy. If you are not sure or can not remember, call the insurance company. If you are still not satisfied after talking to the company, contact Consumer Services at the Ohio Department of Insurance:

15 What Happens To The Cash Value After The Policy Is Fully Paid Up? The company plans to use the cash value to pay premiums until you die. If you take cash value out, there may not be enough to pay premiums. The company could require you to resume paying premiums, or reduce the amount of the death benefit to an amount that the remaining cash value will support. An Insurance Agent Has Suggested That I Buy Term Instead Of Whole Life. Does It Make Sense To Buy Term And Invest The Difference? "Buy term and invest the difference" has been a popular sales slogan for term life. The pitch compares term, the least expensive form of life insurance, with other kinds of life insurance. Here is an example for a $100,000 death benefit at age 35. Annual premium Whole life: $1,800 Annual renewable term: $250 Difference: $1,550 If you buy whole life, the difference is used to keep your premiums lower than the actual cost of insurance as you get older. If you buy term life, you keep the difference. As you get older your term premiums will increase to keep up with the cost of insurance. If you invested the difference, you could use your investment to pay the higher cost of insurance, but if you spent the difference you will have to find another way to pay higher premiums. If your health deteriorates you may not be able to buy a new policy. For 10 Years I Paid The Insurance Company $1,000 Every Year. That's $10,000! But When I Cashed In The Policy They Sent Me Only $5,800. Where Did The Rest Of My Money Go? It paid for insurance! You were entitled to only the cash surrender value - the amount you had paid to "pre-fund" insurance in your old age. The amount would have been even less if you had borrowed money that had not yet been repaid. Endowment Insurance How Much Cash Value Is In My Policy? Read your policy. It has a table of cash values that should provide the answer. If you are still not sure of the cash value amount, call your agent. What Happens To The Cash Value In My Whole Life Policy When I Die? When you die, the insurance company will pay the death benefit. No matter how much cash value you may have had in the policy the moment before you died, your beneficiaries can collect no more than the stated death benefit. Any loans you have not repaid (plus interest) will be subtracted from the death benefit. Therefore, your beneficiary could wind up with less than the face amount of the policy. Some whole life policies pay both the death benefit and the cash value when you die. This is the exception, not the rule! 13

16 What Is Endowment Insurance? Endowment insurance is not technically whole life insurance, but is included here because it builds cash value. The company pays the policy's face amount whether or not you die during the term. Endowment insurance policies usually have level premiums. How Does Endowment Insurance Work? Your endowment policy names a "maturity date." This date occurs either at the end of a specified period of time or when you attain a specified age. If you are still living on the maturity date, the insurance company will pay you the face amount. If you die prior to the maturity date, the face amount is paid to your beneficiary when you die. As owner, you will designate both the person to receive the benefit on the maturity date (normally yourself) and the person to receive the benefit if you die during the term. What Is Universal Life Insurance? Universal life insurance describes a specific type of flexible life insurance that provides for coverage similar to term life insurance along with the benefit of tax deferred savings. Universal Life The policy owner may change the death benefit from time to time (with satisfactory evidence of insurability for benefit increases) and vary the amount or timing of premium payments. Premiums are credited to a policy account and interest is credited at rates that vary. Are There Certain Advantages To Universal Life Coverage? Universal life policies have the potential for cash value to earn more than the minimum (guaranteed) interest rate. Also, premium amounts and death benefits are flexible. You may be able to change the amount of your premium payments and/or your death benefit after you buy the policy. Decreasing your payments might be allowed only if the policy has enough cash value to cover the current cost of insurance. You can increase your coverage by paying larger premiums, but you may be required to answer health questions or have a physical to increase the benefit. What Are The Cash Value Options For Universal Life Insurance? It is not guaranteed, but it is possible the cash value in a universal life policy could grow faster than is needed to pay the cost of insurance. You can generally choose how that money is used. Your options include the following: Allowing your policy to accumulate interest Taxes won't be due until you take it in cash Future premiums may be reduced Your beneficiary is entitled to only the death benefit in the event of your death Taking cash out of your policy The funds could be treated as taxable income and lower the policy's cash value What Are The Death Benefit Choices For Universal Life? Death benefit choices include the two options shown below. Option A: Level death benefit is equal to the policy's face amount. Option B: Increasing death benefit is equal to the policy's face amount plus the policy's account value. Premiums will be higher for an Option B plan. 14

17 I Was Told That I Eventually Would Not Have To Pay Universal Life Insurance Premiums. Is This Too Good To Be True? Some insurance companies and agents have led customers to believe their universal life premiums could disappear or vanish. Do not believe it; you will not get something for nothing! Consumer complaint example: "We are writing out of concern and frustration about the company that sold us our life insurance policy. When we bought this policy eight years ago, we put $20,000 into our first premium payment. The agent explained we would have to pay premiums for only another five years, and after that the company's separate account earnings would make the cash value grow fast enough to cover our premium payments. He called this the vanishing premium and showed us a computer printout with enough cash value from earned interest to cover premium payments for the rest of our lives. The five years have come and gone. Every year we get a statement that shows a balance due for annual premiums, and now it looks like we will have to pay premiums for the rest of our lives. The premiums have not vanished, but our initial $20,000 investment sure has. The Ohio Department of Insurance has received many complaints like the one above. Agents generally use illustrations (see page 24) to explain universal life. However, a few have used a sales pitch that suggested premiums could vanish. This is considered an abuse. Regulations took affect in October 1997 to make this vanishing pitch illegal. What Is The Vanishing Premium Sales Pitch? The agent or company representative starts by telling you to put a large, lump sum into a universal life policy. Then you are told that the policy has the potential for making money, much like an investment. (But do not forget, it is illegal to sell life insurance by calling it an investment.) The company may pay interest, if it has a good year. If the company does as well as the agent says it can, the percentage of interest could be very high. So if you started out by pre-paying $20,000 or $30,000 and then leave the interest and dividends in your policy to further build up its cash value, you could have enough cash value in the policy to pay the premiums after only a few years. Vanishing Premiums While it is possible things could work this way, it is very likely that they will not. The bottom line is that the vanishing pitch depends on rosy numbers that are not guaranteed. Therefore, no matter what numbers the insurance agent may show you, the company will not stand behind any value that is "not guaranteed." Premiums never vanish, disappear, or go away. They must be paid every year, either from the accumulated values of your policy or from your pocket. Is It Reasonable To Count On Dividends Or Other Company Profits To Grow My Policy? Do not count on dividends or other potential profits your life insurance policy could earn. These potential sources of profit may be referred to as "non-guaranteed elements in your life policy. 15

18 Is It Possible To Have Enough Cash Value To Cover My Premiums? While it is possible, it is not likely. Having enough cash value in your policy to pay the cost of insurance only happens if a lot of things go in your favor: If the company has very good years, If the company pays high dividends and If you do not withdraw cash value. Remember: The interest rates and dividends are "not guaranteed." That means the company might pay less than what's shown on the illustration...or nothing at all. Do I Need A Funeral Policy? Funeral policies can make sense. It makes good sense to want enough insurance to cover your funeral expenses. It makes less sense when the policy costs more than it will pay out. Ask questions and do the math before you purchase funeral insurance. When you are older and purchasing life insurance, it is possible to live long enough that you will pay more in premiums than the face value of the policy, perhaps in as little as 8-10 years. However, the reverse is also true. You could pay one premium and die, and the company would be responsible to pay the full face amount to your beneficiary. Insurance Tip: The typical "funeral policy" is a whole life policy with a small death benefit - usually under $5,000. Irrevocable Assignment Can The Funeral Director Who Sells Me My Funeral Policy Also Be Named The Beneficiary? Insurance agents generally cannot be beneficiaries on policies they sell to you. That is considered a conflict of interest. However, there is an exception for funeral directors. Ohio law now permits funeral directors to sell you insurance and name themselves as beneficiary on the policy. Some funeral directors now package life insurance plans together with funeral contracts. Because the funeral director is the beneficiary, when you die the insurance company pays the death benefit directly to the funeral home. Is There An Alternative To Funeral Insurance? If your main concern is paying funeral expenses, the traditional alternative is a pre-need contract with a funeral director. Here is how it works. The funeral director contracts to provide a funeral for a specified amount. Your payments go into an escrow fund. The money remains yours. Unlike life insurance, you can withdraw your money from the pre-need escrow fund. Ohio law regulates pre-need contracts. What Is An Irrevocable Assignment? The funeral director might ask you to sign a contract that assigns ownership of the policy to the funeral director. That means the funeral director owns all rights to the policy, including the right to name the beneficiary. This is called irrevocable assignment. One Ohio couple did not discover what this meant until two years after they had paid an up-front premium of $14,000 for two funerals. Here is part of the letter they sent the Ohio Department of Insurance: "We asked for our money back. That's when we discovered that we had signed a form that assigned all ownership of the policy to the funeral director. We were told the assignment was 'irrevocable' and that the funeral director now owns all rights to the insurance policy." 16

19 Read and understand your policy! Most insurance disputes occur because consumers have not read and understood the policy. Too many times a consumer has false impressions about what the policy will and won't cover. Read the entire policy before buying. Ask the agent to explain everything you do not understand. Also, most policies include a free look period. If you still have questions, contact Consumer Services at the Ohio Department of Insurance and ask to speak with a life analyst. Call What Is Mortgage Life Insurance? If you own a house and have a mortgage, chances are you have heard the pitch for mortgage life insurance. It often comes in an envelope from your lender, and may include a letter from your lender recommending that you buy a policy. However, the insurance itself is sold by insurance companies. Although called mortgage insurance, it is really decreasing term life insurance that will pay off your mortgage if you die. How Are Premium Payments Structured? Mortgage life is a decreasing term policy. The policy begins with a death benefit that is equal to your current mortgage balance. The death benefit decreases at the same rate as your mortgage balance. The premium payments never change but may stop prior to the loan payment. Your lender may agree to add the premium payments to your monthly mortgage payment. Is Mortgage Life Insurance That Same Thing As Private Mortgage Insurance (PMI)? No. Mortgage life insurance is often confused with Private Mortgage Insurance (PMI), but they have nothing to do with each other! You buy mortgage life voluntarily to protect your survivors from having to pay the mortgage. Mortgage lenders require you to buy PMI to protect them (the lenders) against the possibility that you will default on the mortgage. Credit Life Insurance Insurance Tip: Ask insurance agents to quote their best price for a decreasing term policy in the same amount, period, and interest rate before purchasing from a solicitation sent by your mortgage company. What Is Credit Life Insurance And Credit Disability Insurance? When financing some types of large items - car, furniture, stereo set - there is a good chance you will be offered credit life and credit disability insurance. Credit life promises to pay your debt if you die. Credit disability will make your payments if you become disabled and unable to work. Credit life is a decreasing term policy. The insurance premiums are usually added into the loan contract.this type of insurance is always optional, and it can be quite expensive. Your lender cannot require you to buy credit life or credit disability insurance. Although they may have some similar features, credit life and credit disability insurance are not mortgage life insurance. 17

20 Chapter 4 Benefits And Claims What Is A Life Insurance Rider? A "rider" is something that is added to the basic policy. Riders can be used to either add benefits to the policy or limit benefits already in the policy. Common riders are described below. Accidental death: Double indemnity is another name for this rider. It means that the benefits paid by your policy will be two times the face amount of the policy if you die in an accident. About 20% of all policyholders die in accidents. The cost for an accidental death rider is generally inexpensive. Some critics point out that how you die has nothing to do with how much money your survivors will need. Waiver of premium: This rider lets you stop paying premiums whenever you become disabled and can not work. Make sure you understand how the rider defines "disabled." For example, the definition could be very restrictive and require you to be so disabled that you can not do any kind of work. A disability policy can also protect you from financial hardship due to a disability. Depending on the type of policy you buy, it could provide money to pay for all of your living expenses, not just your life insurance premium. Benefits and Claims Mortgage protection: This rider essentially attaches a mortgage life policy to your main policy. Read more about mortgage life on page 17. Other insured: You can add life benefits for your spouse or children. They might have different coverage amounts and might have to pass medical underwriting. Guaranteed insurability: This rider would typically be added to a whole life or universal life policy. It gives you the right to buy a new policy or increase the limit on your existing policy without having to pass another medical exam. The rider will probably specify how much you can add and when you can do it. The guarantee might not continue after you reach age 45 or 50. Accelerated death benefit: This lets you use some part of your death benefit when you have a terminal illness. Read more about this benefit on page 19. Some policies will add this rider without causing your premium to increase. Insurance Tip: If your agent automatically includes one or more riders when calculating your premium, ask the agent to price each rider separately. You can then decide whether you believe the added benefit any rider provides is worth the extra cost. 18

21 Is It Possible To Collect On My Life Insurance Before I Die? Some life insurance policies permit you to "accelerate" the death benefit. This provision makes it possible to collect on your own life insurance before you die. Some companies call this the "living benefit" provision. This provision may be built into the policy or offered as a rider. It is intended to let you use death benefits to pay hospital or medical bills connected with terminal illness. Generally, it requires that you have a terminal illness, backed up by a doctor's predic tion that you will die within a set period of time. (The amount of time will be specified in the policy). The policy may limit the dollar amount you can take out. Be careful! If you accelerate and use the death benefit, there will be less left in the policy for your family or other beneficiaries when you die. What Are Viatical Settlements? A viatical settlement is an agreement to sell the ownership of your life insurance policy to another, unrelated person, who becomes both the owner and beneficiary of the policy. Remember, it is illegal for a stranger to take out an insurance policy on your life. The stranger has no insurable interest and could have an unhealthy desire to see you die sooner than nature intends! However, a life insurance policy is like anything else. If you own it, you can sell it, even to a perfect stranger who has no conceivable insurable interest. That person becomes the policy owner and can then name himself as the beneficiary. Note: Ohio law gives authority to the Ohio Department of Insurance to license companies and individuals who deal in viatical settlements. Viaticals What Are Viatical Buyers And Sellers? Buying and selling life insurance policies is the specialty of businesses that call themselves viatical settlement firms. The viatical firm buys insurance policies from people with terminal illnesses and sells them to investors. Viatical example: A doctor confirms Joe has only a year to live. Joe needs cash; he has used up his savings and the bills are piling up. He owns a $100,000 life insurance policy. A viatical firm offers Joe $50,000 for the rights to the policy plus a contract promising Joe that his identity will not be revealed. Joe signs over all rights to the policy and collects $50,000, which he can use to pay medical bills or whatever he wants with it. The viatical firm now owns the policy but not for long. It puts the policy on the market with a promise to investors of a fast and impressive return on their money. Potential investors are shown medical records to support the claim that Joe has less than one year to live. An investor pays $80,000 for the policy, and the firm makes a $30,000 profit. The investor is now the owner of the policy and responsible for paying the premiums. The investor also becomes the beneficiary. Therefore, when Joe dies, the investor collects the full $100,000 death benefit, making $20,000 on the original investment. 19