Is it possible to change my life insurance policy if I already have one?
Q. What is life insurance?
A. Life insurance can be a resource of funds for your loved ones to meet their needs in the event of your death. You enter into a contract with an insurance company, which promises to provide your beneficiary(ies) with a certain amount of money (the death benefit) upon your death. In return, you make periodic payments, known as premiums. The amount of the premiums generally depends on factors such as your age, gender, occupation, medical history and whether you intend to build up cash value in your policy. Some policies may require a medical exam.
Q. Do I need life insurance?
A. Yes, if you have bills, a car loan, dependents, or a mortgage, you need life insurance. If you are the primary earner and your income is necessary to maintain the family household, your dependents may suffer financially if you die. The policy’s death benefit can fund your dependents’ needs.
Q. How much life insurance should I carry on myself?
A. Your income can be considered your family's most valuable asset because it allows you to obtain the necessities of life. Some day you may not be here to provide that income, yet the need for income may continue for those who are financially dependent upon you. Your need for life insurance and the amount required will depend on your personal and financial circumstances. If any of the following statements applies to you, you probably do need to consider life insurance:
- You have a spouse.
- You have dependent children.
- You have an aging parent or disabled relative who depends on you for support.
- Your retirement pension and savings are not enough to insure your spouse's future against a rising cost of living.
- You have a sizeable estate.
- You own a business.
Q. How do I determine which policy is right for me?
A. Life insurance is a long-term commitment. Before buying any policy, ask yourself these very important questions:
- How much insurance do I need? If I were to die, what would my spouse and dependents need in order to live comfortably?
- In addition to protection, what am I trying to accomplish with life insurance? Am I accumulating funds for education costs? Providing a way to pay estate taxes? Do I need some additional supplemental income for my retirement or emergencies? Remember that term life pays a death benefit only, while whole life, universal life and variable life policies can supplement your income through withdrawals or loans against a policy's cash value.
- How much can I afford to pay for a policy?
- Is the insurance company I'm considering financially secure? Do they have a good claims payment history, good customer service and competitive prices? Independent companies such as Standard and Poor's, A.M. Best, Moody's, Fitch and Weiss rate insurance companies on these issues. Their publications can be found in your local library or may be available on the Internet.
Q. What is the difference between term and permanent life insurance?
A. Term life insurance is typically the least expensive type of coverage, at least initially, and the simplest. These policies do not build up a cash value. Coverage is in effect for a fixed term or period of time, usually one to 30 years, and typically may be renewed after the initial term. The policy pays your beneficiary a fixed death benefit if you die while the policy is in force. The premiums are lowest when you are young and increase upon renewal as you age. Be sure to check your policy for age or other renewal restrictions.
Permanent life insurance includes whole life, universal life and variable universal life insurance.
Whole life provides protection as well as a guaranteed cash value. The premiums remain at a fixed level for the duration of the policy. Over time, the policy generally builds up cash value on a tax-deferred basis. Some companies pay a dividend, which is a return of excess premiums.
Universal life insurance is a flexible life insurance plan. These policies are interest-sensitive and give the owner the option to adjust the death benefit and/or premium payments, within limits, to fit the owner's situation. The net premium payments are applied to the accumulation fund, which earns a guaranteed interest rate. As with whole life insurance, the cash value belongs to the policy owner, who may withdraw it or borrow against it as provided for in the policy.
Variable universal life insurance is a life insurance policy that is based on the performance of the financial markets. The policy offers several professionally managed investment options and the policy owner decides how the net policy values are to be invested. The values may accumulate more rapidly than with other cash value policies, but the policy owner incurs additional risk. If market performance is poor, the death benefit may decrease, and/or the policy owner may have to pay higher premiums to keep the policy in effect. As with whole life and universal life policies, policy owners may borrow against or withdraw the cash value at anytime. Loans and withdrawals may reduce cash values and the death benefit.
Always read your policy carefully for any possible charges associated with these transactions. Variable universal life insurance policies are sold by prospectus, a valuable disclosure document, that should be read carefully.
Q. Is it possible to change my life insurance policy if I already have one?
A. You can replace your current policy, however there are several issues to consider when determining to change coverage. New policies typically have high costs the first few years. If you want to increase your total life insurance, it may be wiser to keep your old policy and simply add a new one, or increase your specified face amount under the same life insurance policy. Your existing policy premiums will generally be less than those for a new policy, because you bought it when you were younger and you won't lose any existing cash value. A new policy will contain a contestable clause, which will permit the insurance company the option to contest any material misrepresentation. (The two year period on your current policy's contestable clause may have expired.) Be sure to ask your agent, financial advisor or insurance company about the best alternative for your specific situation.