Private Passenger Automobile
Medical Expense (Health) Ins
Disability
Life Insurance
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Medical Expense (Health) Insurance
Automobile Insurance:
The main advantages of combining the various coverage’s are lower expenses, and therefore a lower cost to consumers, and the convenience of being able to purchase the property, automobile liability and other coverage’s in a single policy. The standard private passenger automobile insurance policy can have up to four different coverage’s. Only the first coverage is standard - the remaining three coverage’s are optional.
Part A provides liability coverage that protects the insured from lawsuits arising from either the negligent operation or ownership of a covered automobile. There are two coverage’s provided in Part A - bodily injury liability (BIL) and property damage liability (PDL).
1.BIL provides coverage for the bodily injury claims of people you negligently injure in an accident. 2.PDL provides coverage for any third party property damage claims that the courts determine you are responsible to pay.
Part B provides medical payments to the policy owner and any other passengers in the car when there is an accident.
Part C provides uninsured motorist and underinsured motorist protection for the policy owner.
Both coverage’s are designed to compensate the injured policy owner when the negligent driver has an insufficient amount of liability insurance under his/her own policy. Typically, Part C covers only bodily injury losses, but property damage losses are included in some states.
Part D covers damages to your car when it is involved in an accident.
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I have an older car whose current market value is very low - do I
really need to purchase automobile insurance? Except for the minimum liability coverage’s that you may be required to purchase, many people with older cars decide not to purchase any of the physical damage coverage’s. It is often the case that the cost of repairing the damages to an older car is greater than its value. In these cases, your insurer will usually just "total" the car and give you a check for the car's market value less the deductible.
Many people forgo the Part D coverage’s because of the relatively low values of their automobiles.
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Suppose I lend my car to a friend, is he/she covered under my automobile insurance
policy?
Whenever you knowingly loan your car to a friend or an associate, he or she will be
covered under your automobile insurance policy. In fact, even if you do not give explicit
permission each time a person borrows your car, they are still covered under your
automobile insurance policy as long they had a reasonable belief that you would have given
them permission to drive the car.
What coverage does my automobile insurance policy provide me when I
rent a car?
The answer to this question is not as easy as it once was. In the not-too-distant past,
most automobile insurance policies would extend coverage to rental cars whenever you
rented one. This is not quite true anymore.
In most cases, your personal automobile insurance policy will provide coverage only
when you are renting a car on vacation. Many insurance companies no longer extend personal
automobile insurance coverage when you are traveling on business. The best way to find out
what rental car coverage you have under your automobile policy is to call your insurance
agent/company.
What is the
difference between collision physical damage coverage and comprehensive physical damage
coverage?
Both collision and comprehensive are Part D coverage’s.
Collision is defined as losses you incur when your automobile collides with another car or object. For example, if you hit a car in a parking lot, the damages to your car will be paid under your collision coverage.
Comprehensive provides coverage for most other direct physical damage losses you could incur. For example, damage to your car from a hailstorm will be covered under your comprehensive coverage.
It is important to know the differences between the collision and comprehensive coverage’s for a couple of reasons. First, in order to make an informed purchasing decision about these optional coverage’s, you need to know the difference between them.
Second, the deductibles under the collision and comprehensive coverage’s are often different in amount.
What should I do if I have an accident?
The duties you need to perform after you have an accident are prescribed both by state law
and by the terms of your contract. Obviously, the first thing you should do is make sure
everyone is all right and call an ambulance if one is needed.
Second, for most accidents in most states, the police should be notified.
Third, you should give the other driver(s) involved in the accident your name, address, telephone number, and the name of your insurance company and/or your insurance agent. You also need to get this same information from the other driver(s).
Fourth, at the first opportunity, you should contact either your insurance agent or your insurance company to notify them that you have been involved in an accident.
Finally, there are a number of conditions in the insurance contract that you must satisfy in order to receive compensation from your insurer. For example, you need to cooperate with your insurer during any investigation undertaken during the claims settlement process. Failure to complete any of these actions can, and sometimes does, result in non-payment by your insurance company for losses that otherwise would have been covered.
Why does the premium
for my automobile insurance go up if I have an accident or if I get a ticket?
Actuaries and statisticians who have studied the claiming behavior of people involved in
accidents have long known that people who have either had an accident or received a ticket
recently are more likely to have another accident in the next couple of years than people
whose recent driving record has been incident free.
Insurance companies use this information not to punish people who have had an accident, but to charge them the premium that most accurately reflects their likelihood of having an accident. People who are more likely to have accidents should reasonably be expected to pay higher premiums.
How can I get insurance for my
motorcycle?
Motorcycle insurance can be obtained by adding a miscellaneous-type vehicle endorsement to
your existing automobile insurance policy. This endorsement will also provide coverage for
mopeds, motor homes, dune buggies and other such vehicles.
What is no-fault insurance?
With no-fault insurance, the victims of an automobile accident are compensated by their
own insurance company, regardless of who caused the accident. This outcome is different
from what occurs under the traditional tort system of compensating victims of an accident.
In the tort system, the party who is at fault is required to compensate the victims of the accident. The idea behind no-fault insurance is to keep small claims from being settled in our expensive legal system. To accomplish its purpose, no-fault insurance restricts the injured person's right to sue the negligent driver in those instances where the loss falls below a certain threshold.
Two types of thresholds are typically used: verbal thresholds and dollar thresholds. A dollar threshold prescribes a dollar limit that a claim must reach before the injured party regains his or her tort rights, and therefore the ability to sue.
A verbal threshold uses a written description to determine when the injured person regains his or her tort rights. For example, a person might regain his or her tort rights when the accident caused a serious handicap, such as permanent loss of a bodily function.
What do I gain and
what do I lose by giving up my tort rights?
Proponents of no-fault insurance argue policy owners gain a number of things by giving up
their right to sue in minor accidents. For example, under no-fault insurance you typically
pay lower automobile insurance premiums, collect claims payments faster, and spend less
time in court. The biggest thing you lose by giving up your right to sue is the
ability to collect payments for pain and suffering. No-fault insurance only pays your
direct economic losses, such as hospital bills, lost wages, etc. It does not compensate
you for any pain and suffering damages that you may incur as a result of an accident.
However, in most serious accidents, where the likelihood of incurring these non-economic losses is greatest, you regain your tort rights and therefore the ability to sue the negligent party for pain and suffering.
I live in a state where I
can elect either no-fault coverage or traditional tort coverage. Which one should I
choose?
A number of states allow policy owners to choose whether they would like no-fault
insurance or traditional tort coverage. Which one you choose depends upon your tolerance
towards the risk that you may not be able to sue for pain and suffering damages in all
accidents.
However, since the thresholds where you regain your tort rights are usually low, many policy owners choose the no-fault coverage because the premium can be substantially reduced by doing so.
What factors can
affect the cost of my automobile insurance?
A number of factors can affect the cost of your automobile insurance - some of which you
can control and some which are beyond your control. The type of car you drive, the purpose
the car serves, your driving record, and where you live can all affect how much your
automobile insurance will cost you.
Even your marital status can affect your cost of insurance. Statistics show that married people tend to have fewer and less costly accidents than do single people.
What should I
consider when purchasing automobile insurance?
There are a number of factors you should consider when purchasing any product or service,
and insurance is no different.
Here is a checklist of things you should consider when purchasing automobile insurance.
First, purchase the amount of liability coverage which makes sense for you.
Second, you should decide which optional coverage’s you want. For example, do you want the optional physical damage coverage’s in Part D or is the market value of your car too low to warrant purchasing them.
Another way to lower the cost of your automobile insurance is to look for any discounts that you may qualify for. For example, many insurers will offer you a discount if you insure multiple cars under the same policy, or if you have had a driver education class in the last five years. Be sure to ask your agent or your company about their discount plans.
Another easy way to lower the cost of your automobile insurance is to increase the deductible. Simply raising your deductible from $250 to $500 can lower your premium sometimes by as much as five or ten percent. However, you should be careful to make sure that you have the financial resources necessary to handle the larger deductible.
Although we make every effort to insure accuracy in the information provided, we cannot make any guarantees as to this accuracy. We urge you to consult your lawyer, accountant or tax advisor for specific legal or tax advice.
Medical Insurance:
Is medical expense
coverage available for substance abuse and mental illness?
Major medical expense plans also generally provide coverage for treatment of substance
abuse (e.g., alcoholism and drug usage) and mental illness. A higher coinsurance
percentage (e.g., 50 percent) and a lower lifetime benefit limit (e.g., $25,000 or
$50,000) generally applies, however. In addition, the extent of coverage may depend on
whether treatment is provided on an in-patient or out-patient basis.
What types of
expenditures are commonly excluded under major medical expense plans?
Although providing very broad coverage, major medical plans typically contain a number of
exclusions. Common exclusions include medical expenditures arising from: (1) convalescent
or custodial care; (2) physical examinations, unless required for the treatment of an
injury or illness (it should be noted that some plans now cover this expenditure); (3)
cosmetic surgery unless required to correct a condition resulting from an injury or a
birth defect; (4) occupational injuries and illnesses that are otherwise covered under a
Workers' Compensation law; and (5) routine dental and vision care (care required for
treatment of an injury and dental and eye surgery are frequently covered, however). Other
common exclusions relate to benefits provided by government agencies (e.g., VA hospitals)
and expenses paid under other insurance programs, including Medicare. Even though
major medical plans provide broad coverage, insureds still incur certain
"out-of-pocket" costs.
What are these costs?
An insured's "out-of-pocket" costs under major medical expense plans include the
deductible, cost-sharing amounts arising from the operation of the coinsurance clause, and
medical expenditures that are deemed by the plan to be in excess of "reasonable
and customary" charges. Only charges that are "reasonable and
customary" for a specific type of service, in a particular location or geographic
area, are eligible for reimbursement under medical expense plans. The definition of
"reasonable and customary" may vary somewhat from one medical expense plan to
another.
What is the
coinsurance clause in medical expense plans and how does it work?
Coinsurance, sometimes called "percentage participation," requires the insured
to share in the cost of medical care. Under an 80/20 coinsurance provision, the medical
expense plan pays 80 percent of eligible medical charges above any deductible. The insured
is required to pay the remaining 20 percent. Other coinsurance arrangements, e.g., 70/30
or 90/10, are sometimes used. In the event of large or catastrophic medical expenses, an
insured might suffer severe financial hardship due to the operation of the coinsurance
clause. To compensate for this possibility, many major medical expense plans contain a
coinsurance cap, or stop-loss limit. This provision places a limit on the insured's
out-of-pocket costs in a given year arising from the operation of the coinsurance
clause. The size of the coinsurance cap generally ranges from $2,000 to $3,000, depending
on the plan, although limits as low as $1,000 are sometimes used. Once the coinsurance cap
has been reached, all eligible expenses above this amount are paid in full, up to the
plan's overall limit of coverage.
What is the difference
between coinsurance and co-payment?
On occasion, these terms have been used interchangeably. However, it is preferable to
define the two terms differently, despite their similarity of purpose. Under a co-payment
or co-pay provision, the insured usually is required to pay a set or fixed dollar amount
(e.g., $3, $5, or $10) each time a particular medical service is used. Co-pay provisions
are frequently found in medical plans offered by health maintenance organizations (HMOs)
where a nominal co-payment is applied to each office visit and to each prescription that
is filled.
What is a preexisting
conditions clause and what is the effect of its inclusion in major medical expense plans?
A preexisting condition is often defined as a medical condition (i.e., an injury or
illness) that required treatment during a prescribed period of time, e.g., 3 or 6 months,
prior to the insured's effective date of coverage under the major medical expense plan.
Sometimes, a preexisting condition is defined to include medical conditions that were
known to the insured, even though no treatment was provided during the prescribed period.
A preexisting conditions clause excludes coverage for preexisting conditions for possibly
as long as 12 months after the effective date of coverage. Because the definition of a
preexisting condition, and the provisions of the clause itself, may differ considerably
from one plan to another, it is recommended that newly insured individuals (and
prospective insureds) completely familiarize themselves with this policy provision.
Disability:
Another factor supporting this view is that, in the case of disability, total expenses of the family unit will also be higher due to the costs of caring for the disabled worker.
How much disability
insurance should I own?
The recommended amount of disability income insurance generally ranges from 60-70 percent
of pretax income. The applicable percentage for higher-income persons is usually somewhat
lower than the percentage recommended for lower-income individuals, due primarily to
differences in income taxes. Amounts considerably less than full replacement of earnings
are recommended due to a reduction in income taxes and decreases in commuting and other
work-related costs that are likely to occur in the event of disability. On the other hand,
medical, rehabilitation and certain other expenses are often higher for disabled
individuals creating a need for larger amounts of replacement income. In determining how
much disability income insurance to buy, any benefits payable under Workers' Compensation,
Social Security, and employer-provided disability benefits under pension or group
insurance plans should also be considered. Whether the disability benefits themselves are
subject to income taxation should also be factored into this determination. The assistance
of a professional insurance adviser normally should be sought in making this
determination.
What type of
disability income insurance is best; insurance covering short-term disabilities only or
policies that cover long-term disabilities?
Assuming that only one of these types of disability insurance products will be purchased,
sound risk management principles would suggest the purchase of long-term disability (LTD)
insurance. LTD insurance protects the insured against disabilities that may last many
years, or even a lifetime, and thus provides protection against large losses of
potentially catastrophic magnitude. Although long-term disabilities occur less frequently
than disabilities of a relatively short duration (e.g., several weeks or even a few
months), the loss of income for a short duration can be more easily absorbed by the family
unit than can an income loss that lasts for several years or longer.
What are the primary
differences between short-term disability (STD) and long-term disability (LTD) insurance
policies?
These two types of insurance coverage differ most importantly in terms of the length of
the elimination (waiting) period, the length of the maximum benefit period, coordination
of the benefits payable under the policy with benefits payable under social insurance
programs (e.g., Social Security and Workers' Compensation), and the "definition of
disability" incorporated into the contract language.
What is an
elimination, or waiting, period and how does its definition differ between STD and LTD
insurance policies?
The elimination, or waiting, period in disability insurance refers to the length of time
between the onset of a qualifying disability and the point in time when benefits under the
disability insurance policy first become payable. In STD plans, waiting periods may range
from 0 days to 3, 7, 10 or 14 days, depending on the specific insurance policy and
the cause of disability. Disabilities resulting from accidents often are subject to
shorter elimination periods (e.g., 3 or 7 days) than are disabilities caused by sickness.
In LTD plans, elimination
periods generally range from 3 to 6 months, or longer, for disabilities arising from both
accidents and illnesses.
What is a maximum
benefit period and how does its definition differ between STD and LTD insurance policies?
The maximum benefit period in disability income insurance refers to the maximum length of
time during which benefits will be payable to an insured with an ongoing, qualifying
disability. By definition, STD insurance policies are those policies whose maximum benefit
period does not exceed two years (24 months) in length. Typically, however, STD insurance
provides coverage for benefit periods lasting a maximum of 13 or 26 weeks. In contrast,
LTD insurance policies typically provide benefits (contingent on continued disability, of
course) for as long as 5 years, to age 65 or 70, or even lifetime.
What types of
"definitions of disability" are commonly included in STD and LTD insurance
policies?
Some disability income insurance contracts provide coverage only for "total and
permanent" disabilities. Others provide coverage for "total and permanent"
disabilities, "partial disabilities," and "temporary" disabilities.
Some policies providing "partial" disability coverage require that the
"partial" disability be proceeded by a period of "total" disability.
Since these terms are often confusing, with their definitions differing somewhat from one
policy to the next, it is recommended that insureds discuss this issue at length with
their insurance adviser.
In addition to coverage of
partial or total disabilities and temporary or permanent disabilities, what other aspects
of a "definition of disability" are important to consider when purchasing
disability income insurance?
The way in which a disability is defined, especially as it relates to the inability
of the insured to perform a particular occupation, is exceedingly important. Several
insurers market policies that define total disability in terms of the inability of the
insured to perform the usual and customary duties of his or her "own
occupation"--the job the insured was doing at the time of the injury or onset of
sickness. Other policies define total disability in terms of the inability to perform the
regular duties of "any occupation." "Any occupation" is often defined
as a job for which the insured has the necessary skills and training and, possibly, at a
salary commensurate with the one in which the insured was employed at the time of the
incident. The "own occupation" definition is more liberal to the insured and is
frequently recommended over an "any occupation" definition. Sometimes a
"split definition" is used which incorporates an "own occupation"
definition for an initial period (e.g., 2 years), followed by an "any
occupation" definition thereafter.
Are disability
insurance policies available that do not express the eligibility for disability benefits
in terms of an "occupational" definition?
Some insurers market disability insurance policies that define disability not in terms of
a particular occupation, but rather simply in terms of the amount of income actually lost.
Under these contracts, if an insurable event occurs such as an accident or illness, then
disability benefits are payable to the extent that the insured suffers a loss of income
that exceeds a threshold amount, e.g., a loss of 20 percent or more of the individual's
earnings prior to the happening of the insured event. When the threshold amount is
exceeded, the policy pays a benefit that is based on the percentage of total "prior
earnings" lost due to the disability.
Do all disability
insurance policies cover losses arising from both accident and sickness?
No. Some policies cover only disabilities arising from an accidental injury,
providing no coverage for disabilities caused by sickness. A careful reading of the
contract is recommended to determine the extent of coverage provided under the disability
insurance policy that you are considering purchasing. Sound risk management suggests the
purchase of a policy that covers disabilities arising from either an accident or an
illness.
What specific causes
of disability, if any, are generally excluded from coverage in disability insurance
contracts?
Generally, injuries that are intentionally self-inflicted or caused by war or an act of
war are excluded. Disability policies may also include a "preexisting
conditions" exclusion whose purpose is to exclude from coverage, during an initial
period (e.g., the first one or two policy
years), a disability arising from an undisclosed health condition that was both
present within a prescribed time period prior to policy issuance and required medical
treatment or otherwise caused symptoms that normally would require medical care. Through
the "military suspense provision," coverage under a disability insurance policy
is suspended during any period that the insured is on active duty in the military.
The terms "non-cancelable" and "guaranteed renewable" are often
used when referring to disability income insurance policies. What do these terms imply,
and how do they differ?
"Non-cancelable" policies provide insureds with the right to renew their
policies each year, typically to age 65, by the timely payment of the required premium. A
guaranteed premium is stipulated in the contract and may not be changed by the insurer.
During the non-cancelable period, the insurer is precluded from canceling the contract or
otherwise making any unilateral change in the policy benefits. "Guaranteed
renewable" contracts also provide insureds with the right to renew their policies to
age 65 (typically) through the timely payment of the premium. However, under
"guaranteed renewable" policies, the insurer retains the right to change
premiums if it does so for all insureds in the same rating class. The insurer is not
permitted to cancel the policy or unilaterally amend the policy benefits during the period
that the policy is guaranteed renewable. Further, under both types of contracts, the
insurer is not permitted to increase the premiums, on a selective basis, only for those
insureds whose health status has deteriorated. Because of the premium
guarantee feature, "non-cancelable" policies may be somewhat more
expensive than "guaranteed renewable" policies. In general, disability policies
containing a "guaranteed renewable" or a "non-cancelable" feature
provide better protection to an insured, albeit possibly at a higher cost, than do
"conditionally renewable" or other similar types of disability insurance
policies that give the insurer a right to refuse to renew coverage for reasons stated in
the policy (and typically also give the insurer the right to increase premiums and change
benefits so long as these changes apply to all insureds in the same class).
What factors affect the
premium cost for disability income insurance?
A number of contract features and options affect the premium cost
for disability income insurance. Several of the more important factors are (1) the
amount of weekly or monthly benefit purchased, (2) the length of the elimination
(waiting) period, (3) the length of the maximum benefit period, (4) whether or not the
disability insurance benefits are coordinated with social insurance benefits, (5) the
occupational class of the insured, (6) the definition of disability, and (7) whether the
policy is non-cancelable or guaranteed renewable.
How do the lengths of
the waiting (elimination) period and the maximum benefit period affect the premium cost of
disability insurance?
The elimination (waiting) period in disability income insurance serves the same purpose as
a deductible in medical expense, automobile and other types of insurance. It eliminates
initial, or "first-dollar," benefits from coverage under the insurance policy.
As such, longer waiting periods result in lower premiums. There is a similar, but
opposite, relationship between varying maximum benefit periods and the premium cost for
disability income insurance. As the length of the maximum benefit period increases, total
premium cost also increases. When limited dollars are available to purchase disability
income insurance, it is generally recommended that longer waiting periods be selected so
that longer maximum benefit periods can be afforded. Of course, the amount of cash
reserves available to the insured as a
"safety net" should also be factored into the determination of the length
of the waiting period that is selected.
Why is it frequently true that group long term disability (LTD) insurance purchased
at work is less expensive than individually purchased LTD insurance?
There are a number of reasons why group LTD may be purchased by employees at a lower
premium cost than what these same individuals can purchase on their own, away from their
place of employment. First, an employer often contributes toward the premium cost of group
LTD coverage, thereby reducing the out-of-pocket cost to employees. Secondly, group LTD
plans almost always coordinate their benefits (i.e., plan benefits are reduced) with any
disability benefits payable under Workers' Compensation or Social Security. In contrast,
individual disability income insurance typically pays benefits in addition to any benefits
payable under social insurance programs. Third, individual policies often contain a longer
maximum benefit period, a "non-cancelable" feature, a "cost-of-living"
benefit rider, and an option to purchase additional insurance--expensive features not
always found in group LTD policies. Fourth, marketing and sales, administrative,
underwriting and other expenses are usually lower for employer-provided group insurance
than for insurance purchased individually from an agent.
What is the federal income
tax treatment surrounding benefits received from a disability insurance policy?
The answer to this question depends on who paid the insurance premiums. If the insured
paid the premiums with after-tax dollars, then the disability benefits should be received
income tax-free. In contrast, if an employer paid part or all of the premiums then an
equivalent portion of the benefits are generally taxable to the insured (in this instance,
however, an income tax credit may be available to the insured). In any event, your tax
adviser should be consulted with respect to the probable income tax treatment of any
disability income coverage that you currently have or are contemplating purchasing.
Where can more information on disability insurance be obtained?
A free copy of the Consumer's Guide to Disability Insurance can be obtained from the
Health Insurance Association of America, 555 13th Street N.W., Suite 600 East, Washington,
D.C. 20004-1109.
Life Insurance:
What about
purchasing life insurance on a spouse and on children?
In certain circumstances, it may be advisable to purchase life insurance on children;
generally, however, such purchases should not be made in lieu of purchasing appropriate
amounts of life insurance on the family breadwinner(s). It is of utmost importance that
the
income earning capacity of the primary breadwinner be fully protected, if possible,
through the purchase of the required amount of life insurance before contemplating the
purchase of life insurance on children or on a non-wage earning spouse. In a dual-earning
household, it is important to protect the income earning capacity of both spouses. Life
insurance on a non-wage earning spouse is often recommended for the purpose of paying for
household services lost at this individual's death.
Should term
insurance or cash value life insurance be purchased?
Although a difficult question--one whose answer will vary depending on
circumstances--several principles should be followed in addressing this issue. It must
first be recognized that in any life insurance purchasing decision, there are at least two
basic questions that must be answered: (a) "How much life insurance should I
buy?" and (b) "What type of life insurance policy should I buy?" The
question contained in (a) involves an "insurance" decision and the
question contained in (b) requires a "financial" decision. The
"insurance" question should always be resolved first. For example, the amount of
life insurance that you need may be so large that the only way in which this needed amount
of insurance can be afforded is through the purchase of term insurance with its lower
premium. If your ability (and willingness) to pay life insurance premiums is such that you
can afford the desired amount of life insurance under either type of policy, it is then
appropriate to consider the "financial" decision--which type of policy to buy.
Important factors affecting the "financial" decision include your income tax
bracket, whether the need for life insurance is short-term or long-term (e.g., 20 years or
longer), and the rate of return on alternative investments possessing similar risk.
How does mortgage
protection term insurance differ from other types of term life insurance?
The face amount under mortgage protection term insurance decreases over time, consistent
with the projected annual decreases in the outstanding balance of a mortgage loan.
Mortgage protection policies are generally available to cover a range of mortgage
repayment periods, e.g., 15, 20, 25 or 30 years. Although the face amount decreases over
time, the premium is usually level in amount. Further, the premium payment period often is
shorter than the maximum period of insurance coverage--for example, a 20-year mortgage
protection policy might require that level premiums be paid over the first 17 years.
Can an existing life
insurance policy be used to provide for the repayment of an outstanding mortgage loan?
Yes; the purchase of a new mortgage protection term insurance policy is usually not
required by the lender. An existing policy, either term or cash-value life insurance, can
be used for many purposes, including paying off an outstanding mortgage loan balance in
the event of the insured's death.
Credit life
insurance is frequently recommended in conjunction with the taking out of an installment
loan when purchasing expensive appliances or a new car, or for debt consolidation. Is
credit life insurance a good buy?
Credit life insurance is frequently more expensive than traditional term life insurance.
Further, if you already own a sufficient amount of life insurance to cover your financial
needs, including debt repayment, the purchase of credit life insurance is normally not
advisable due to its relatively high cost.
What is the tax
treatment of life insurance cash values, dividends, and death benefits?
The "interest build-up" portion of the annual increase in the policy's cash
value is not taxed currently to the policy owner. Dividends generally are considered to be
a "return of premium" and are not taxable to the policy owner. Although in the
typical case, life insurance death proceeds will not be subject to income taxation, these
proceeds may be subject to federal estate taxation. If the insured has any elements of
ownership in the policy at the time of his/her death, the proceeds are incredible in the
insured's gross estate for federal estate tax purposes. State inheritance taxes and
federal gift taxes may also apply to life insurance policies/proceeds under specific
circumstances. You should contact your tax adviser regarding questions concerning the
possible income, estate and gift tax consequences surrounding any life insurance that you
currently own or are contemplating purchasing.
What is participating whole life
insurance?
Participating (par) whole life insurance has been marketed for many years in the US The
participating feature allows for the payment of dividends to policy owners when actual
experience justifies such payment. Substantial amounts of participating whole life
insurance is still sold today, principally by the large mutuals.
I have heard a lot
about universal life insurance. How is this type of life insurance different from
traditional whole life insurance?
Both traditional whole life (WL) and universal life (UL) products are examples of
cash-value life insurance. However, there are several important differences between these
two products. While WL policies contemplate the payment of fixed, level premiums and
provide for level death benefits, UL policies offer adjustable death benefits and flexible
premiums that can be varied according to changing circumstances. This is a rather
simplistic comparison, however, since policy owner dividends under participating WL
insurance contracts can be used to offset a portion of the premium payment otherwise
required; in addition, dividends can be used to increase the policy's death benefit.
Because of these and other possible uses of policy owner dividends, an argument can be
made that participating WL insurance possesses some (but not all) of the same
flexibility/adjustability that is possessed by UL policies. Another important difference
between WL and UL relates to product transparency. In UL policies, it is easy for policy
owners to look at the internal operations of the policy and to examine the relationships
among various policy elements (premiums, cash values, interest credits, mortality charges,
and expenses) and how they interact with each other. Please note that Dividends
are not guaranteed.
Which type of cash
value life insurance policy, universal life (UL) or participating whole life (WL) , is a
"better buy" financially?
There is no simple answer to this question. The best performing product (from a financial
perspective), whether UL, WL or some other type of cash value life insurance, will likely
be the one offered by the insurer that enjoys the best future experience as it relates to
interest earnings, actual expenses and mortality costs. Insurers earning the highest
investment income, and who also incur the lowest expenses and the lowest mortality costs,
are in the best position to offer life insurance at the lowest cost. This is true whether
the cash value life insurance product being offered is UL or WL. Thus, it will be
necessary for prospective insureds and their advisers to carefully examine the financial
aspects of each product under consideration, irrespective of whether the product is UL or
WL.
What is variable life (VL) insurance, and how is it different
from universal life (UL) and participating whole life (WL)?
Variable life insurance is a type of fixed-premium whole life insurance policy where
changes in the policy's cash values and death benefits are directly related to the
investment performance of an underlying pool of assets. Policy owners typically can choose
among several investment options as to where the assets backing the policy's cash values
will be invested. The various investment options offered in the contract generally possess
different risk/return relationships and frequently include a money market fund, a bond
fund, and one or more common stock funds. Although the policy's death benefit is directly
related to the actual performance of the invested assets, the policy may
prescribe that the
death benefit will not fall below a minimum amount (usually the initial face amount) even
if the invested assets
depreciate in value by a substantial amount. Because the policy owner assumes all of the
investment risk, there is no similar "floor" below which cash values may fall.
In recent years variable universal life (VUL) insurance has become a more popular product
than VL. VUL
combines features of both UL and VL and, in essence, is the flexible premium version of
VL.
Variable Life insurance policies are sold by prospectus, which includes information on charges, expenses, and risks. To receive a current prospectus, please contact Bernard Mallan at (856) 866-9599. You should read the prospectus carefully before investing or sending any money.
