California Insurance > California Life Insurance|
Life Insurance and Annuities
If you are planning to purchase a life insurance policy or an annuity contract, you should first consider your needs and understand the different type of insurance products that are available. Many more consumers are using life and annuity products as part of their financial planning goals. Consumers spend substantial sums of money each year on life insurance policies or annuity contracts knowing very little about what it is that they are getting. This guide was developed to help consumers make educated decisions and to help them understand both the benefits and the risks involved in financial planning.Back to Top
The purchase of life insurance is an important decision for both you and your family. There are many reasons why life insurance policies or annuity contracts are purchased, but these reasons should be based upon your financial planning needs. Factors such as your marital status, number of dependents and cost for their support, future education needs, current and anticipated family income, and your current assets and debt obligations all play a role in determining the amount of life insurance that is right for you.
Your need for life insurance will vary with your age and responsibilities. The amount of insurance you buy should depend on the standard of living you wish to assure for your dependents. You should consider the amount of assets and sources of continuing income available to your dependents when you pass away. Simply stated, you should choose an amount of life insurance that is determined necessary to meet the needs you are trying to satisfy. A balance needs to be achieved in this process. To be over-insured can negatively affect your budget and threaten your long range financial goals just as much as being under-insured can. While each person must individually assess their responsibilities, needs, and financial situation, it is important to be careful to choose an amount of life insurance that reflects your specific circumstances without under-insuring or over-insuring.
Once you have completed these steps, you will be able to move ahead and contact several life insurance companies (through an agent or broker) to shop for the right type of policy for you.Back to Top
There are many reasons for purchasing life insurance, among which are the following:
There are two basic types of life insurance: term life insurance and cash value life insurance. There are many policy variations between these two types of life insurance.
Many employers offer life insurance under a group plan and sometimes pay part or all of the premium. A medical exam is usually not required for insurance purchased this way, and the insurance can be less expensive than coverage purchased as an individual. Under California law, group life insurance must be convertible to permanent insurance at the insured's option when the insured's coverage under the group policy terminates. The converted policy will probably be much more expensive than the group insurance. Some employers will allow insurance companies to send agents or enrollers to their premises in order to offer insurance to their employees. Policies offered in this manner are different from group insurance, and you should evaluate the materials shown to you in the same way as if you were considering a purchase of an individual policy through an agent.
Insurance by Mail Order or Through the Internet
Some insurance companies solicit by mail or through the Internet. In most cases, the prospective buyer mails a completed application directly to the company. Both Internet and mail order marketing may not provide a complete range of choices as target marketing often involves offering only one type of policy. Before you buy by mail or through the Internet, consult an expert who can help you determine the best policy for you. You should verify that the insurance company offering the coverage is licensed to sell life insurance in California.
It is likely that an agent will show you one or more life insurance sales illustrations. An illustration consists of a series of numbers indicating how the policy works. The illustration usually shows the guaranteed results under the policy for each year in the future, and the results if all the nonguaranteed items continue at their present level. Actual results may be better or worse than the nonguaranteed amounts shown in the illustration (but not worse than those that are guaranteed).
Your chances of finding a good buy on a life insurance policy is better if you use the index numbers that have been developed to aid you in shopping for life insurance. The Buyer's Guide that each insurer is required to provide to a purchaser explains these index numbers in detail. They are good tools to help you compare the merits of similar policies.
Many consumers are approached by life insurance agents or life sales representatives and are asked to consider canceling their current life insurance policy in order to purchase a replacement policy. In most cases, the cash value of the current life policy is used to buy more insurance or a new policy. While a decision to replace an existing life insurance policy may be a good one, sometimes this may not be in your best interest. More than likely you purchased your policy with a long term financial plan in mind. Replacing or changing your insurance policy at this point may affect the intended results of your overall financial plan. If you are considering replacing or changing your life insurance policy, you should first assess your needs and determine what is in your own long term best interest. It is also important to consider the interests of those you are protecting. Deciding how much insurance you need, how long it is needed, and which policy provides the best coverage is crucial to your financial security.
While life insurance proceeds are paid at the time of death of the insured, the proceeds of an annuity can provide you with an income for as long as you live. There are two types of annuities:
Both types of annuities offer you certain options for receiving your income. It is usually paid to you monthly. The most common options are:
In recent years, there has been an increasing emphasis on deferred annuities. If you are going to make an informed choice when you buy a deferred annuity, you need to understand which kinds are available. If one type does not seem to fit your needs, find out about the other contracts that are described in this guide. If you need more information than is given here, you should check with a life insurance agent or company, or consult books on life insurance which are available at your public library. You may also contact the California Department of Insurance (CDI) toll-free Hotline 1-800-927-HELP (4357) for assistance.
There are two basic types of deferred annuities: fixed annuities and variable annuities. There are several variations on them.
Finding a Good Buy
A fixed deferred annuity always contains guarantees. For example, it might guarantee that the interest rate on the funds accumulating in your policy will be at least 4%. The guarantees are conservative, so that the company will be able to pay you the guaranteed amounts, even if conditions are very bad. Today, most companies pay greater amounts than they guarantee, but do not promise to continue to do that indefinitely. If you are shown any tables of numbers illustrating how the annuity might grow in the future, you should keep in mind that the nonguaranteed numbers could turn out to be lower or higher than those shown.
You should also ask questions about the amounts you will receive if you decide to surrender your annuity, and find out the difference between the accumulation value and the amount you will receive. It is important to make sure that you receive all guarantees in writing for both life insurance and annuities.
Back to Top
Other Useful Information
The suitability of a purchase of an annuity should be determined by reference to the totality of the particular customer's circumstances. For example, the customer's income, need for an annuity, age, values, benefits and costs of the existing annuity program, if any, when compared to the values, benefits and costs of the recommended annuity contract or contracts. Suitability is especially important when selling life insurance and annuities products to seniors.
Life insurance agents are licensed by the State, and may represent one or more companies. If you use an agent, choose carefully. Agents earn a commission on your business, and should do more for you than just sell you a life insurance policy or annuity contract. They should assess your individual needs, answer your insurance questions and help you establish your goals. If you are considering the purchase of a variable annuity, the agent should have an insurance license and a registration with the National Association of Securities Dealers to sell variable products, which are considered to be securities. You should receive a prospectus describing the investment alternatives available to you.Back to Top
In the past, high-risk investment strategies have threatened the solvency of some companies and thus the safety of policy benefits. Be sure to check out independent rating services' rating of any life insurance company you are considering before purchasing a life insurance policy or annuity contract. Also make sure that your life insurance company is licensed in California. Owners of annuity contracts or life insurance policies issued by companies licensed in California may be partially protected by the California Life and Health Insurance Guarantee Association (CLHIGA) in the event of the failure of the insurer.
If you need further information on CLHIGA or California Insurance Code Section 1067.02 (c) that explains the monetary protection under CLHIGA, then contact The California Department of Insurance toll free Hotline number 1-800-927-HELP (4357).
Additional information about life insurance companies can be found by reading insurance company rating services reports. Five major insurance rating companies grade insurers on their financial health and ability to pay claims. These companies are:A.M. Best - www.ambest.com
Standard and Poor's - www.standardandpoors.com
Moody's Investor Service - www.moodys.com
Duff & Phelps - www.duffandphelps.com
Weiss Research - www.weissrating.com
You should check two or three of these services to get a good look at the company's condition. They can usually be found in your local library.
The California Insurance Code and Code of Regulations
Specific requirements are imposed on agents and insurers when a life insurance policy or annuity replacement or change is proposed. Some of these rules are as follows:
Your best defense against an ill-advised replacement or change to your life insurance policy or annuity is knowledge. The more you know and understand about your current policy and the proposed new policy, as well as the company and the representative, the better equipped you will be to make the best decision. Remember, if you intend to replace or change an existing coverage, you should be sure that the agent selling the new policy has your best interests at heart, and bases the purchase recommendation on an appropriate needs analysis. Agents have a duty to inquire about your current coverage. Once on notice, the regulatory steps designed to protect you should occur.Back to Top
Purchasing the right insurance that meets your needs can be challenging. Insurance can be one of the most important ongoing purchases you make to protect yourself and your family from fi nancial hardship. Since your needs and financial situation change over time, it is important to understand and review your insurance policies to decide if the same policies are still right for you. If you are considering buying, reviewing or replacing insurance, then the following insurance tips can be of assistance:
Accelerated Benefit Provision - A provision in many new policies which will allow the policy owner to receive a portion of the death benefi t early if the insured person is diagnosed with a terminal illness or permanently confined to a nursing home.
Accidental Death Benefit - A rider added to a policy that provides an additional benefi t if the insured dies from accidental causes.
Accumulation Phase - The phase in which you pay into your annuity.
Annuitization Phase - The phase in which you receive monthly payment from your annuity.
Basis Points - The fees in your annuity; reflects a percentage of your investment.
Certificate - A document provided to a person insured under a group insurance policy that provides evidence that the coverage exists.
Death Benefit - The amount of money your beneficiary receives if you die before you begin the annuitization phase; generally the value of your annuity or the amount you have invested, whichever sum is greater.
Evidence of Insurability - Medical and other information about a person applying for insurance that the life insurance company keeps confidential, but uses to decide whether the policy can be issued and what premiums will be charged.
Face Amount - The amount to be paid to the beneficiary when the insured dies. It will be reduced by any unpaid policy loans and interest on those loans, and may be increased by any dividends.
Free Look - The right of the policyowner to have a period of ten or more days to examine an insurance policy and, if not satisfied, return it to the company for a full refund of all amounts paid.
Grace Period - A period of time (usually 31 days) after the premium due date when an overdue premium may be paid without penalty. The policy remains in force throughout the period.
Guaranteed Insurability - An option that permits the policyholder to buy additional stated amounts of life insurance at certain times in the future, without having to provide new evidence of insurability.
Illustration - A document used in life insurance sales presentations showing year-by-year numbers indicating how a policy will work. Usually it assumes that amounts being paid today will continue in all future years.
Insured - The person whose life is covered by a life insurance policy; the policyowner; the policyholder.
Lapse - The discontinuation of insurance without cash value when the required premium is not paid. If cash value exists, there may be nonforfeiture provisions available.
Loan Value - The amount which can be borrowed by the policyowner from the company using the value of the policy as collateral. Usually the interest rate payable on the loan varies based on an index defined in the policy.
Mode of Premium Payment - The frequency of premium payments during the policy year. Premium payments can usually be made on annual, semi-annual, quarterly, or monthly mode.
Mortality and Expense (M&E) - The fee the insurance company charges you to provide you with a lifetime income, and your beneficiaries with a death benefit should you die during the accumulation phase.
Mortality Table - A statistical table showing the death rate (probability of death) for each age.
Nonforfeiture Options - A provision in the policy that allows the policyowner to choose how the cash value of the policy will be used if the policy is surrendered or lapses due to nonpayment of premium.
Non-Qualified Annuity - An annuity that is funded with after-tax dollars.
Ownership - All rights, benefi ts, and privileges under a policy controlled by the owner, who is usually the insured. Ownership may be transferred or assigned to someone else by written request of the current owner.
Paid-Up Insurance - A life insurance policy where all premiums have already been paid, with no further premium payment due.
Participating Insurance - Insurance on which the policyowner is entitled to share in the surplus earnings of the company through dividends, which reflect the difference between the premium charged and the actual earnings and costs of providing coverage.
Policy - The printed document issued to the policyowner by the company stating the terms of the insurance contract.
Policy Year - A one-year period starting on the day and the month the policy was issued. The fi rst policy year starts on the date of issue, and ends on the day before the policy's first anniversary date.
Premium - The payment a policyowner is required to make to an insurance company to purchase insurance coverage and to keep the policy in force.
Qualified Annuity - Annuity that is funded with pre-tax dollars.
Rated Policy - A policy issued with an additional premium to cover the extra risk involved if an insured has impaired health, a hazardous occupation or hobby, or is a private pilot.
Reinstatement - The restoring of a lapsed or surrendered policy to full force and effect. The company requires evidence of insurability and payment of all amounts necessary, including interest, to put the policy into the condition it would have been in had the lapse or surrender not occurred. The company is not obligated to reinstate a policy.
Rider - A provision added to a policy that provides additional benefits, usually accompanied by a corresponding premium increase or change.
Settlement Option - The manner in which the insured or benefi ciary may choose to have the policy proceeds paid.
Suicide Clause - A policy provision which reduces or eliminates the amount to be paid if the insured dies from suicide within the fi rst two policy years.
Standard Risk - The classification of an applicant for a life insurance policy who fulfi lls the physical, occupational, and other requirements on which most of the company's policies are issued. Someone whose characteristics are more favorable may be classified as a "Preferred Risk." When the characteristics are less favorable, the applicant may be characterized as "Rated" or refused coverage altogether.
Surrender - To voluntarily terminate or cancel a policy or the act of getting out of your annuity for its cash value or other nonforfeiture options. Usually a fee is applied if you surrender your insurance policy or annuity within the first seven or eight years of owning it.
Tax Deferral - The money that accumulates in your annuity grows tax-deferred, meaning you do not pay taxes on it until you begin receiving annuity payments.
Term Certain Annuity - An annuity that provides you with income payments for a specifi c period of time, such as 10 or 20 years, rather than a lifetime.
Underwriting - The process of evaluating applicants for insurance and classifying them fairly, so the appropriate premium rate may be charged. This may involve a physical examination of the applicant.
Waiver of Premium - A rider added to policy that will waive the premium payments required by an insured during the total disability of the insured.Back to Top