About Life Insurance

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Why should I buy life insurance?

Many financial experts consider life insurance to be the cornerstone of sound financialplanning. It can be an important tool in the following situations:

1. Replace income for dependents

If people depend on your income, life insurance can replace that income for them ifyou die. The most commonly recognized case of this is parents with youngchildren. However, it can also apply to couples in which the survivor would befinancially stricken by the income lost through the death of a partner, and todependent adults, such as parents, siblings or adult children who continue to relyon you financially. Insurance to replace your income can be especially useful if thegovernment- or employer-sponsored benefits of your surviving spouse or domesticpartner will be reduced after your death.

2. Pay final expensesLife insurance can pay your funeral and burial costs, probate and other estateadministration costs, debts and medical expenses not covered by health insurance.

3. Create an inheritance for your heirs

Even if you have no other assets to pass to your heirs, you can create aninheritance by buying a life insurance policy and naming them as beneficiaries.

4. Pay federal death taxes and state death taxesLife insurance benefits can pay estate taxes so that your heirs will not have toliquidate other assets or take a smaller inheritance. Changes in the federal deathtax rules between now and January 1, 2011 will likely lessen the impact of this taxon some people, but some states are offsetting those federal decreases withincreases in their state-level death taxes.

5. Make significant charitable contributionsBy making a charity the beneficiary of your life insurance, you can make a muchlarger contribution than if you donated the cash equivalent of the policys premiums.

6. Create a source of savingsSome types of life insurance create a cash value that, if not paid out as a deathbenefit, can be borrowed or withdrawn on the owners request. Since most peoplemake paying their life insurance policy premiums a high priority, buying a cash-value type policy can create a kind of forced savings plan. Furthermore, theinterest credited is tax deferred (and tax exempt if the money is paid as a deathclaim).

How much life insurance do I need?

In most cases, if you have no dependents and have enough money to pay your finalexpenses, you dont need any life insurance.

If you want to create an inheritance or make a charitable contribution, buy enough lifeinsurance to achieve those goals.

If you have dependents, buy enough life insurance so that, when combined with othersources of income, it will replace the income you now generate for them, plus enough tooffset any additional expenses they will incur to replace services you provide (for a simpleexample, if you do your own taxes, the survivors might have to hire a professional taxpreparer). Also, your family might need extra money to make some changes after you die.For example, they may want to relocate, or your spouse may need to go back to school to

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be in a better position to help support the family.

You should also plan to replace hidden income that would be lost at death. Hiddenincome is income that you receive through your employment but that isnt part of your grosswages. It includes things like your employers subsidy of your health insurance premium,the matching contribution to your 401(k) plan, and many other perks, large and small.

This is an often-overlooked insurance need: the cost of replacing just your health insuranceand retirement contributions could be the equivalent of $2,000 per month or more.

Of course, you should also plan for expenses that arise at death. These include the funeralcosts, taxes and administrative costs associated with winding up an estate and passingproperty to heirs. At a minimum, plan for $15,000.

Other sources of income

Most families have some sources of post-death income besides life insurance. The mostcommon source is Social Security survivors benefits.

Social Security survivors benefits can be substantial. For example, for a 35-year-old

person who was earning a $36,000 salary at death, maximum Social Security survivorsmonthly income benefits for a spouse and two children under age 18 could be about$2,400 per month, and this amount would increase each year to match inflation. (It dropsslightly when the survivors are a spouse and one child under 18, and stops completelywhen there are no children under 18. Also, the surviving spouses benefit would be reducedif he or she earns income over a certain limit.)

Many also have life insurance through an employer plan, and some from another affiliation,such as through an association they belong to or a credit card. If you have a vestedpension benefit, it might have a death component. Although these sources might provide alot of income, they rarely provide enough. And it probably isnt wise to count on deathbenefits that are connected with a particular job, since you might die after switching to a

different job, or while you are unemployed.

A multiple of salary?

Many pundits recommend buying life insurance equal to a multiple of your salary. Forexample, one financial advice columnist recommends buying insurance equal to 20 timesyour salary before taxes. She chose 20 because, if the benefit is invested in bonds that pay5 percent interest, it would produce an amount equal to your salary at death, so thesurvivors could live off the interest and wouldnt have to invade the principal.

However, this simplistic formula implicitly assumes no inflation and assumes that one couldassemble a bond portfolio that, after expenses, would provide a 5 percent interest streamevery year. But assuming inflation is 3 percent per year, the purchasing power of a gross

income of $50,000 would drop to about $38,300 in the 10th year. To avoid this incomedrop-off, the survivors would have to invade the principal each year. And if they did, theywould run out of money in the 16th year.

The multiple of salary approach also ignores other sources of income, such as thosementioned previously.

A simple example

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Suppose a surviving spouse didnt work and had two children, ages 4 and 1, in her care.Suppose her deceased husband earned $36,000 at death and was covered by SocialSecurity but had no other death benefits or life insurance. Assume the surviving spouse is36.

Assume that the deceased spent $6,000 from income on his own living expenses and the

cost of working. Assume, for simplicity, that the deceased performed services for the family(such as property maintenance, income tax and other financial management, andoccasional child care) for which the survivors will need to pay $6,000 per year. Assume thatthe survivors will have to buy health insurance to replace the coverage the deceased hadat work, and that this will cost $12,000 per year.

Taken together, the survivors will need to replace the equivalent of $48,000 of income,adjusted each year for an assumed 4 percent inflation.

Thanks to Social Security, the survivors would need life insurance to replace only about$1,700 per month of lost wage income (adjusted for inflation) for 14 years until the olderchild reaches 18; Social Security would provide the rest. The survivors would need lifeinsurance to replace about $2,100 per month (adjusted for inflation) for three more years

when the non-working surviving spouse has only one child under 18 in her care.

The life insurance amount needed today to provide the $1,700 and $2,100 monthlyamounts is roughly $360,000. Adding $15,000 for funeral and other final expenses bringsthe minimum life insurance needed for the example to $375,000.

Whats left out?

The example leaves out some potentially significant unmet financial needs, such as

The surviving spouse will have no income from Social Security from age 53 until 60unless the deceased buys additional life insurance to cover this period. It could be

assumed that the surviving spouse will obtain a job at or before this time, but shecould also become disabled or otherwise unable to work. If life insurance werebought for this period, the additional amount of insurance needed would be about$335,000.

Some people like to plan to use life insurance to pay off the home mortgage at theprimary income earners death, so that the survivors are less likely to face thethreat of losing their home. If life insurance were bought for this goal, the additionalamount of insurance needed is the amount of the unpaid balance on the mortgage.

Some people like to provide money to pay to send their children to college out oftheir life insurance. We may assume that each child will attend a public college forfour years and will need $15,000 per year. However, college costs have been risingfaster than inflation for many decades, and this trend is unlikely to slow down. If life

insurance were bought for this goal, the additional amount of insurance neededwould be about $200,000.

In the example, no money is planned for the surviving spouses retirement, exceptfor what the spouse would be entitled to receive from Social Security (about $1,200per month). It could be assumed that the surviving spouse will obtain a job and willeither participate in an employers retirement plan or save with an IRA, but shecould also become disabled or otherwise unable to work. If life insurance werebought to provide the equivalent of $4000 per month starting at age 60 until 65 and

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$3,000 per month from 65 on (because at 65 Medicare will make carrying privatehealth insurance unnecessary), the additional amount of insurance needed wouldbe about $465,000.

What are the principal types of life insurance?

There are two major types of life insuranceterm and whole life. Whole life is sometimescalled permanent life insurance, and it encompasses several subcategories, includingtraditional whole life, universal life, variable life and variable universal life. In 2003, about6.4 million individual life insurance policies bought were term and about 7.1 million werewhole life.

Life insurance products for groups are different from life insurance sold to individuals. Theinformation below focuses on life insurance sold to individuals.

Term

Term Insurance is the simplest form of life insurance. It pays only if death occurs during theterm of the policy, which is usually from one to 30 years. Most term policies have no other

benefit provisions.

There are two basic types of term life insurance policieslevel term and decreasing term. Level term means that the death benefit stays the same throughout the duration of

the policy. Decreasing term means that the death benefit drops, usually in one-year

increments, over the course of the policys term.

In 2003, virtually all (97 percent) of the term life insurance bought was level term.

For more on the different types of term life insurance, click here.

Whole Life/Permanent

Whole life or permanent insurance pays a death benefit whenever you dieeven if you liveto 100! There are three major types of whole life or permanent life insurancetraditionalwhole life, universal life, and variable universal life, and there are variations within eachtype.

In the case of traditional whole life, both the death benefit and the premium are designed tostay the same (level) throughout the life of the policy. The cost per $1,000 of benefitincreases as the insured person ages, and it obviously gets very high when the insuredlives to 80 and beyond. The insurance company could charge a premium that increaseseach year, but that would make it very hard for most people to afford life insurance atadvanced ages. So the comapny keeps the premium level by charging a premium that, in

the early years, is higher than whats needed to pay claims, investing that money, and thenusing it to supplement the level premium to help pay the cost of life insurance for olderpeople.

By law, when these overpayments reach a certain amount, they must be available to thepolicyowner as a cash value if he or she decides not to continue with the original plan. Thecash value is an alternative, not an additional, benefit under the policy.

In the 1970s and 1980s, life insurance companies introduced two variations on the

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traditional whole life productuniversal life insurance and variable universal life insurance.

For more on the different types of whole life/permanent insurance, click here.

How is life insurance sold?

You can buy life insurance either as an individual or as part of a group plan.

Individual Policy

When you buy an individual policy, you choose the company, the plan, and the benefitsand features that are right for you and your family. You might be able to buy the policy fromthe same agent or company representative who sells you property and liability insurancefor your home, auto or business. And although you wont qualify for any discounts bybuying your life insurance and other insurance from the same representative, working witha single advisor for all your insurance needs can make your financial life simpler.

Individual policies are typically sold through insurance agents or brokers. If you buy a policy

through an agent or broker, you will pay a commission, also called a load, that is built intothe premium rate. The commission compensates the agent or broker for the time spentadvising you on how much and what type of life insurance to buy, for facilitating theapplication process, and for any further service thats needed in future years to keep thepolicy up-to-date (such as changing beneficiary designations, arranging policy loans orcoordinating your financial plans with your lawyer and accountant).

There are two other ways to buy individual life insurance. In Connecticut, Massachusettsand New York, you can buy it from a savings bank. Or you can buy a policy directly from aninsurance company or from a fee-only financial advisorwhats known as a no load orlow load policy. Although there is no sales commission on these policies, the companywill still have charges built into the premium to cover its marketing expenses, application

processing expenses and subsequent services. Finding an insurance company that will sellyou a no-load policy isnt easy; typing in no load life insurance on Internet search engineswill in many cases lead you to an agent or broker.

Group Policy

You might have life insurance automatically from your employer; many large companies dothis. Your employer also might offer you the chance to buy additional life insurance under agroup policy. And you might be eligible to buy life insurance under a group policy from aunion or trade association or other group you belong to (such as a college alumniassociation or an automobile club).

Compared to buying an individual life insurance policy, there are several advantages to

buying life insurance under a group policy: Group purchase can sometimes offer you a lower rate for a given death benefit

either because the employer or other group sponsor subsidizes the premium orbecause the rates are averages weighted by people younger than you.

There are virtually no health qualifications for getting the group coverage. Premium payment is usually by payroll deduction (for employer-based group

coverage) or linked with other payments (e.g., credit card bills), lowering thechance of missing a payment.

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Most employer group plans are term insurance, but if you leave that employer your statemay require that you be allowed to convert the policy to a form of whole life insurance withthe same insurance company that provides the group life insurance. You would then paypremiums directly to the company and keep the insurance in force. This can be anadvantage if you are older, or have experienced deteriorating health, as it gives you theopportunity to qualify for whole life insurance without having a medical exam.

Credit Life Insurance

Credit cards and lending institutions may offer life insurance to pay off your outstandingloans in the event of your death. This is generally made available in two ways

1. As part of the loan at no extra charge. In this case the cost of the life insurance isborne by the lender and is included in its interest rate or other finance charges. Ifyou have this type of credit life insurance, you dont need separate life insurance topay off that loan if you die.

2. As an option at an extra charge. In this case, you should usually reject the optional

coverage, provided that you have some other life insurance (group or individual)that can be designated to pay off the loan if you die. If youre under age 50 and youdont have other insurance that could pay off this loan, consider buying individuallife insurance for this purpose as the rates will probably be better. At 50 or over (oryounger with health issues), if you have no other life insurance for this purpose, theoptional credit life insurance is likely to be cheaper than individual life insurance.

What is a beneficiary?

A beneficiary is the person or entity you name in a life insurance policy to receive the deathbenefit. You can name:

One person

Two or more people The trustee of a trust youve set up A charity Your estate

If you dont name a beneficiary, the death benefit will be paid to your estate.

Two levels of beneficiariesYour life insurance policy should have both primary and contingent beneficiaries. Theprimary beneficiary gets the death benefits if he or she can be found after your death.Contingent beneficiaries get the death benefits if the primary beneficiary cant be found. Ifno primary or contingent beneficiaries can be found, the death benefit will be paid to your

estate.

As part of naming beneficiaries, you should identify them as clearly as possible and includetheir social security numbers. This will make it easier for the life insurance company to findthem, and it will make it less likely that disputes will arise regarding the death benefits. Forexample, if you write "wife [or husband] of the insured" without using a specific name, anex-spouse could claim the death benefit. On the other hand, if you have named specificchildren, any later-born or adopted children will not receive the death benefitunless youchange the beneficiary designation to include them.

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Besides naming beneficiaries, you should specify how the benefits are to be handled if oneor more beneficiaries cant be found. For example, suppose you have two children and youname each one to receive half of the death benefit. If one of the children dies before youdo, do you want the other child to get the entire death benefit, or the deceased childs heirsto get his or her share?

If the death benefit goes to your estate, probate proceedings could delay distributing themoney, and the cost of probate could diminish the amount available to your heirs.

Choosing beneficiaries, and keeping those choices up-to-date, is an important part ofowning life insurance. The birth or adoption of a child, marriage or divorce can affect yourinitial choice. Review your beneficiary designation as new situations arise in order to makesure your choice is still appropriate.

TYPE OF LIFE INSURANCE

What are the types of term insurance policies?

Term insurance comes in two basic varietieslevel term and decreasing term. These days,almost everyone buys level term insurance. The terms level and decreasing refer to thedeath benefit amount during the term of the policy. A level term policy pays the samebenefit amount if death occurs at any point during the term.

Common types of level term are: yearly- (or annually-) renewable term 5-year renewable term 10-year term 15-year term

20-year term 25-year term 30-year term term to a specified age (usually 65)

Yearly renewable term, once popular, is no longer a top seller. The most popular type isnow 20-year term. Most companies will not sell term insurance to an applicant for a termthat ends past his or her 80th birthday.

If a policy is renewable, that means it continues in force for an additional term or terms,up to a specified age, even if the health of the insured (or other factors) would cause him orher to be rejected if he or she applied for a new life insurance policy.

Generally, the premium for the policy is based on the insured persons age and health atthe policys start, and the premium remains the same (level) for the length of the term. So,premiums for 5-year renewable term can be level for 5 years, then to a new rate reflectingthe new age of the insured, and so on every five years. Some longer term policies willguarantee that the premium will not increase during the term; others dont make thatguarantee, enabling the insurance company to raise the rate during the policys term.

Some term policies are convertible. This means that the policys owner has the right to

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change it into a permanent type of life insurance without additional evidence of insurability.

Return of PremiumIn most types of term insurance, including homeowners and auto insurance, if you haventhad a claim under the policy by the time it expires, you get no refund of the premium. Yourpremium bought the protection that you had but didnt need, and youve received fair value.

Some term life insurance consumers have been unhappy at this outcome, so someinsurers have created term life with a return of premium feature. The premiums for theinsurance with this feature are often significantly higher than for policies without it, and theygenerally require that you keep the policy in force to its term or else you forfeit the return ofpremium benefit. Some policies will return the base premium but not the extra premium (forthe return benefit), and others will return both.

What are the different types of permanent policies?

Whole or ordinary lifeThis is the most common type of permanent insurance policy. It offers a deathbenefit along with a savings account. If you pick this type of life insurance policy,you are agreeing to pay a certain amount in premiums on a regular basis for a

specific death benefit. The savings element would grow based on dividends thecompany pays to you.

Universal or adjustable lifeThis type of policy offers you more flexibility than whole life insurance. You may beable to increase the death benefit, if you pass a medical examination. The savingsvehicle (called a cash value account) generally earns a money market rate ofinterest. After money has accumulated in your account, you will also have theoption of altering your premium payments providing there is enough money inyour account to cover the costs. This can be a useful feature if your economicsituation has suddenly changed. However, you would need to keep in mind that ifyou stop or reduce your premiums and the saving accumulation gets used up, thepolicy might lapse and your life insurance coverage will end. You should check with

your agent before deciding not to make premium payments for extended periodsbecause you might not have enough cash value to pay the monthly charges toprevent a policy lapse.

Variable lifeThis policy combines death protection with a savings account that you can invest instocks, bonds and money market mutual funds. The value of your policy may growmore quickly, but you also have more risk. If your investments do not perform well,your cash value and death benefit may decrease. Some policies, however,guarantee that your death benefit will not fall below a minimum level.

Variable-universal lifeIf you purchase this type of policy, you get the features of variable and universal lifepolicies. You have the investment risks and rewards characteristic of variable lifeinsurance, coupled with the ability to adjust your premiums and death benefit that ischaracteristic of universal life insurance.

Why should I purchase permanent insurance?

A permanent life policy provides lifelong insurance protection. The policy pays a deathbenefit if you die tomorrow or if you live to be a hundred. There is also a savings elementthat will grow on a tax-deferred basis and may become substantial over time. Because ofthe savings element, premiums are generally higher for permanent than for term insurance.

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However, the premium in a permanent policy remains the same, while term can go upsubstantially every time you renew it.

There are a number of different types of permanent insurance policies, such as whole(ordinary) life, universal life, variable life, and variable/universal life. In a permanent policy,the cash value is different from its face value amount. The face amount is the money that

will be paid at death. Cash value is the amount of money available to you. There are anumber of ways that you can use this cash savings. For instance, you can take a loanagainst it or you can surrender the policy before you die to collect the accumulatedsavings.

There are unique features to a permanent policy such as:

You can lock in premiums when you purchase the policy. By purchasing apermanent policy, the premium will not increase as you age or if your health statuschanges.

The policy will accumulate cash savings.Depending on the policy, you may be able to withdraw some of the money. Youalso may have these options:

o Use the cash value to pay premiums. If unexpected expenses occur, youcan stop or reduce your premiums. The cash value in the policy can beused toward the premium payment to continue your current insuranceprotection providing there is enough money accumulated.

o Borrow from the insurance company using the cash value in your lifeinsurance as collateral. Like all loans, you will ultimately need to repay theinsurer with interest. Otherwise, the policy may lapse or your beneficiarieswill receive a reduced death benefit. However, unlike loans from mostfinancial institutions, the loan is not dependent on credit checks or otherrestrictions.

How should I choose what type of life insurance to buy?

You should considerterm life insurance if: You need life insurance for a specific period of time. Term life insurance enables

you to match the length of the term policy to the length of the need. For example, ifyou have young children and want to ensure that there will be funds to pay for theircollege education, you might buy 20-year term life insurance. Or if you want theinsurance to repay a debt that will be paid off in a specified time period, buy a termpolicy for that period.

You need a large amount of life insurance, but have a limited budget. In general,this type of insurance pays only if you die during the term of the policy, so the rateper thousand of death benefit is lower than for permanent forms of life insurance. Ifyou are still alive at the end of the term, coverage stops unless the policy isrenewed. Unlike permanent insurance, you will not build equity in the form of cashsavings.

If you think your financial needs may change, you may also want to look into convertibleterm policies. These allow you to convert to permanent insurance without a medicalexamination in exchange for higher premiums.

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Keep in mind that premiums are lowest when you are young and increase upon renewal asyou age. Some term insurance policies can be renewed when the policy ends, but thepremium will generally increase. Some policies require a medical examination at renewal toqualify for the lowest rates.

You should considerpermanent life insurance if:

You need life insurance for as long as you live. A permanent policy pays a deathbenefit whether you die tomorrow or live to be 100.

You want to accumulate a savings element that will grow on a tax-deferred basisand could be a source of borrowed funds for a variety of purposes. The savingselement can be used to pay premiums to keep the life insurance in force if you cantpay them otherwise, or it can be used for any other purpose you choose. You canborrow these funds even if your credit is shaky. The death benefit is collateral forthe loan, and if you die before its repaid, the insurance company collects what isdue the company before determining whats goes to your beneficiary.

Keep in mind that premiums for permanent policies are generally higher than for terminsurance. However, the premium in a permanent policy remains the same no matter howold you are, while term can go up substantially every time you renew it.

There are a number of different types of permanent insurance policies, such as whole(ordinary) life, universal life, variable life, and variable/universal life.

How do I pick a life insurance company?

Roughly 1,000 life insurance companies sell life insurance inthe U.S., but many are members of groups of companies andso arent really competitors with each other. Having separatecompanies enables a group to offer its products throughseparate distribution channels, to more efficiently meet theregulatory requirements of particular states, or to achieve other

organizational goals. There are an estimated three hundredcompany groups.

Moreover, not every group has a company licensed to operatein each state. As a general rule, you should buy from acompany licensed in your state, because then can you rely onyour state insurance department to help if theres a problem.

And if the insurance company becomes insolvent, your stateslife insurance guaranty fund will help only policyholders ofcompanies it has licensed. To find out which companies arelicensed in any state, contact that states state insurancedepartment.

There are several other points to keep in mind when selecting alife insurance company:

Product most, but not all, companies offer a broad range of policies and features,so choose a company that offers the product and features that meet your needs.

Identity life insurance company names can be confusing, and differentcompanies can have similar names. Life insurance company names often usewords that suggest financial strength (such as Guaranty, Reserve, or Security),

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financial sophistication (such as Bankers, Financial, or Investors), maturity (such asFirst, Pioneer, or Old), dependability (such as Assurance, Reliable, Trust), fairness(such as Beneficial, Equitable, or Peoples), breadth of operations (such asContinental, National, or International), government (such as American, Capital, orRepublic), or well-known and respected Americans (such as Jefferson, Franklin, orLincoln). Be sure you know the full name, home office location, and affiliation (if

any) of any company you are considering (for an example, click here). Financial Solidity life insurance is a long-term arrangement. There is no

guarantee for life insurance policyholders similar to that provided for bank accountsby the Federal Deposit Insurance Corporation (FDIC). Select a company that islikely to be financially sound for many years, by using ratings from independent ratingagencies.

Market ethics some life insurance companies subscribe to the principles andcodes of conduct of the Insurance Marketplace Standards Association, a nonprofitorganization that promotes ethical conduct in life insurance marketing.

Advice and service for many people, life insurance is a strange, complexproduct, so that it helps to deal with a representative with whom you cancommunicate and who is attentive to your needs. This might be connected to theselection of a life insurance company because some agents represent only one ora very few life insurance companies. See How do I select a life insurance agent?

Claims you may want to check a national claims database to see what complaintinformation it has on a company. Also, your state insurance department will be ableto tell you if the insurance company you are considering doing business with hadmany consumer complaints about its service relative to the number of policies itsold.

Premium and cost The premium is the amount you pay the company for the lifeinsurance contract with all of its benefits. Even for a given death benefit and type ofinsurance (e.g., term life), the premium can vary widely among companies, eitherbecause some companies policies have features that others dont, or becausesome charge more than others for the same coverage. So the first step in

comparing policies is to make sure you compare similar insurance plans, based on-Your age-The type of policy and policy features-The amount of insurance you are purchasing

The premium for the policy isnt the same as the cost of the protection portion of thepolicy. One policy might have a higher premium but also offer more benefits (forexample, it might pay policy dividends) than another. Or both might promisedividends, but in different amounts at different points in time. In each case, thehigher-premium policy might have a lower cost of protection. How can you tell whata policys cost is? Companies should tell you a policys Net Payment Cost Indexand its Surrender Cost Index. Use the Surrender Cost Index if youre thinking ofkeeping the insurance only for a specific period of time; use the Net Payment CostIndex if you expect to keep the policy indefinitely. Generally, the lower the costindex, the better.

How can I assess the financial strength of an insurance company?

Five independent agenciesA.M. Best, Fitch, Moodys, Standard & Poors, and Weissrate the financial strength of insurance companies. Each has its own rating scale, its ownrating standards, its own population of rated companies, and its own distribution ofcompanies across its scale. Each agency uses numbers or plusses and minuses to

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indicate minor variations in rating from another rating class.

The agencies disagree often enough so that you should consider a companys rating fromtwo or more agencies before judging whether to buy or keep a policy from that company.Moreover, agencies will announce changes of ratings on any day. Its probably prudent tocheck annually on the ratings of any company youre interested in.

Some points for using the ratings: Dont rely only on what the insurance companies say about their ratings from these

agencies. Companies are likely to highlight a higher rating from one agency andignore a lower one from another agency, or to select the most favorable commentsfrom a rating agencys report.

To use the ratings from more than one independent agency, you need tounderstand that each agencys rating code is different from the others. Forexample, an A+ from A.M. Best is the next-to-top rating of its 15 categories, but an

A+ from Fitch or S&P is their 5th-highest rating (out of 24 categories for Fitch, andout of 19 categories for S&P). Moreover, Moodys doesnt have an A+ rating.

However, the ratings can be classified into secure and vulnerable mega-categories.Here, as of August 2005, are the rating scales for each of the secure rating classes, andall the vulnerable classes combined (source, except for Weiss: The Insurance Forum,September 2005 issue).

RatingAgency Category Description

# ofcompaniesin category

% of ratedcompaniesin category

A.M. Best A++ Superior 67 4.5

A+ Superior 259 17.3

A Excellent 288 19.2

A- Excellent 326 21.7

B++ Very good 166 11.1

B+ Very good 145 9.7

B andlower Vulnerable 250 16.5

Fitch AAAExceptionallystrong 24 5.4

AA+ Very strong 72 16.3

AA Very strong 68 15.3

AA- Very strong 78 17.6

A+ Strong 59 13.3

A Strong 52 11.7

A- Strong 38 8.6

BBB+ Good 17 3.8

BBB Good 21 4.7

BBB- Good 8 1.8

BB+ andlower Vulnerable 6 1.4

Moody's Aaa Exceptional 12 3.8

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Aa1 Excellent 18 5.6

Aa2 Excellent 59 18.4

Aa3 Excellent 91 28.4

A1 Good 24 7.5

A2 Good 33 10.3

A3 Good 48 15.0Baa1 Adequate 16 5.0

Baa2 Adequate 3 0.9

Baa3 Adequate 1 0.3

Ba1 andlower Vulnerable 15 4.7

S & P AAAExtremelystrong 30 4.6

AA+ Very strong 43 6.5

AA Very strong 97 14.7

AA- Very strong 63 9.6

A+ Strong 83 12.6

A Strong 134 20.4

A- Strong 61 9.3

BBB+ Good 26 4.0

BBB Good 37 5.6

BBB- Good 4 0.6

BB+ andlower Vulnerable 80 12.2

Weiss* A+ Excellent 29** 3

A Excellent 29** 3

A- Excellent 29** 3

B+ Good 282** 29

B Good 282** 29

B- Good 282** 29

C+ Fair 380** 39

C Fair 380** 39

C- Fair 380** 39

D+ andlower Vulnerable 272** 28

*2004 figures; updated information not available**As of March 25, 2003

Ratings Agency Contact Information

All of the ratings agencies can be found on the Web, or reached by phone.

Web site

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Agency Address

Phone

number

A.M. BestCompany,Inc www.ambest.com

Ambest Rd.Oldwick, NJ08858

908-439-2200

Fitch Ratings www.fitchibca.com

1 StateStreet PlazaNew York,NY 10004

1-800-75-FITCH

MoodysInvestorServices* www.moodys.com

99 ChurchStreet NewYork, NY10007

212-553-0300

Standard &PoorsInsuranceRatingsServices* www2.standardandpoors.com

55 WaterStreetNew York,NY 10004

212-438-2000

WeissResearch** www.weissratings.com

15430EndeavorDrive

Jupiter, FL33478

800-289-9222

*To use these Web sites, you have to register, but its free.

**Weiss charges $14.99 for each rating. However, its public Web sitelists the ten highest and ten lowest ranked companies, and thecompanies themselves might reveal their Weiss rating.

How should I choose a life insurance agent?

When youre considering buying life insurance, its important to choose an agent or brokerwho can help you. Buying life insurance can be complicated or confusing. The key to

buying the right amount and the right type of policy at a good rate is a good agent orbroker. You should choose one who:

Understands your financial situation, including your attitudes about risk, yourincome and estate tax brackets, and your other financial assets and obligations,as well as your personal situation (that is, your age, marital status, dependents,etc.)

Explains, in terms you can easily understand, issues, options and planned use oflife insurance in your financial program

Provides you with a personalized written document that-records the facts of your current financial and personal situation and-describes the features of the life insurance and how it fits into your situation

Doesnt pressure you into a decision, but works with you until youre ready and

convinced that you are doing what is best for you Is prepared to review with you periodicallyperhaps every three years or so

whether the product continues to be suitable for your needs and circumstances Is licensed by your state insurance department.

If you dont have an agent or broker who fits this description, ask your lawyer, accountant,friends, relatives and business associates for the names of insurance agents or brokerswith an excellent reputation. You can also use this link: http://www.life-line.org/find_agent.htmlto connect with the nearly 70,000 members of the National

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Association of Insurance and Financial Advisors (NAIFA), who subscribe to theorganizations Code of Ethics ( http://www.naifa.org/about/ethics.cfm).

An agent or broker who has one or more professional financial services designations hasdemonstrated a commitment to specialized education in the field. Designations you mightsee include the following:

DesignationFull name ofdesignation

IssuingInstitution Institutions Web site

CLUChFC

Chartered LifeUnderwriterCharteredFinancialConsultant

TheAmericanCollege www.theamericancollege.edu

CFP

CertifiedFinancial

Planner

CertifiedFinancialPlannerBoard ofStandards,

Inc. www.cfp.net

RRRP

RegisteredRepresentativeor RegisteredPrincipal

NationalAssociationofSecuritiesDealers, Inc www.nasd.com

The Compensation Issue

Like everyone else, agents and brokers get paid for their services, which are enriched bytheir education and experience. Most agents and brokers are paid by commission, butsome work on a fee basis. Typically, the largest part of the compensation is paid at the timeyou purchase the annuity, since most of the agents or brokers work occurs at that time or

just before it. As with any professional service, you should understand how your agent orbroker will be compensated and how that might affect the purchase recommendation.

The bottom line? The best way to protect yourself is to make sure you understand whatyoure buying and the nature of the products limitations, penalties or fees if you want todrop the policy.

How can I save money on life insurance?

There are ways to save money when buying life insurance, but they dont always entailpaying a lower premium immediately. As your top priority, look for a policy that meets yourneeds. Buying the wrong benefits for a low premium is a waste, not a saving. Beyond that,

here are some ways to maximize your life insurance dollars.

Before you buy

Once youve determined what type of life insurance product to buy:

1. Focus on financially sound companies.Dozens of companies sell life insurance. Limit yourself to companies with highratings from two or more independent rating agencies. A low premium from a shakycompany isnt a good buy. See How do I choose a life insurance company? for more

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details.

2. Shop around to get a sense of the premium youre likely to pay.Quote services on the Internet may serve this purpose, or you can ask an agent orbroker to get you a premium estimate.

As part of this research, determine which rate class youll fit into. Most companiesthat sell individual life insurance have several different price classesusually calledpreferred (non-tobacco), standard (non-tobacco), preferred (tobacco), andstandard (tobacco). A small percentage of people have health conditions orhistories that disqualify them for even standard rates. Many in this group will beoffered insurance at impaired risk or nonstandard rates.

3. Look into group insurance.Consider participating in your employer-sponsored life insurance program, even ifyou have to contribute to it financially. Employers often subsidize their groupinsurance costs, so it can be less expensive than individual life insurance. Youmight obtain coverage up to a certain level without providing evidence of goodhealth, an advantage for some people. Youll probably pay premiums throughpayroll deduction, which can be a nice convenience. However, make sure tocompare group and individual rates, as depending on your age and health status,group insurance may or may not provide a savings. In comparing group toindividual life insurance, remember that if you have over $50,000 of group lifeinsurance, IRS tables determine how much it costs to provide the amount over$50,000 and charges you taxable income for that cost.

4. Take care of yourself.Find out into which rate class youll be grouped and, if necessary, consider makingsome lifestyle changesdont smoke, maintain a healthy weight and exerciseregularlyto qualify for a more favorable rate class.

When you're ready to buy

1. Shop around to get a good rate.Life insurance is a very competitive business, and youll find differences ofhundreds of dollars (for annual premiums) even among financially strongcompanies for essentially the same policy.

2. Consider the net cost index.How can you compare two policies, one with premiums that start lower than theother but later are higher than the other? Or one with low premiums and a low cashvalue, the other with higher premiums and a higher cash value? Use a net cost

indexa standard method for collapsing these variables into one number. Thelower the number, the better, but ignore small differences (since the indexes areapproximations based on assumptions, small differences might not signal truedifferences in values). The agent or broker with whom youre dealing, or thecompany from which youre considering buying a policy, will provide these indexnumbers.

3. Be aware of premium discounts for particular amounts of insurance.Most companies offer rate discounts for specified insurance amounts. For example,you might actually pay a smaller premium for $250,000 of life insurance than for

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$200,000, or for $500,000 of life insurance than for $450,000, because a discountkicks in at the higher insurance amount.

4. Beware of fractional premiums.Typically, you can pay your life insurance premium once a year, once every half-year, once a quarter, or once a month. Although paying quarterly or monthly mightseem to be easier to fit into your budget, some companies levy high charges for

paying premiums frequently. Others levy quite small charges to do this. If acompany levies high charges for paying more frequently, try budgeting so that youcan pay your premium only once or twice a year.

5. If youre buying a term policy, look for renewal guarantees.A renewal guarantee gives you the right to start a new term after the current oneends, paying a higher premium based on your current age, but without requiringyou to undergo a new health exam or submit any other evidence of insurability.Without the guarantee, youd have to shop for life insurance all over again, and ifyour health has deteriorated, you might have to pay much more or not get it at all.

SPECIAL BUYING SITUATIONS

What is burial insurance?

Burial insurance usually refers to a whole life insurance policy with a death benefit of from$5,000 to $25,000. As its nickname implies, people buy this type of policy to provide moneyfor funeral and burial costs for themselves and/or family members. It is possible to buy apolicy after answering a few health-related questions on the application and with no medicalexam.

Premiums are payable weekly or monthly. The premium is usually collected at thepolicyowners home or workplace, and the premium is usually a small round number, suchas $2 or $3 per week; the death benefit is whatever that premium will buy given the insuredscurrent age. For example, a $3 per week premium might buy a $6,000 death benefit for a 36-

year-old man or an $18,000 death benefit for a 9-year-old boy.

Burial policies may be designed to cover one person or everyone in a family.

Under some state laws, funeral homes may be licensed to sell burial insurance, but it ismainly sold through brokers and agents of insurance companies licensed to sell lifeinsurance.

An approach that is similar to burial life insurance (and sometimes called burial or pre-needinsurance) is pre-payment of your funeral arrangements. Under this program, you may selectthe funeral home, type of service, casket (or cremation), flowers, headstone, burial plot, thecost of digging and filling the grave, and other items, and lock in the prices for them bypaying in advance.

Should I buy life insurance on my childs life?

The main reason for buying life insurance on anyones life is to replace income lost or payfor expenses caused by the death of the insured person. If your child dies, theres no lostincome, but there will be funeral, burial and related expenses that could run to thousands ofdollars, which might cause a financial hardship to the parents of the deceased child.

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Another reason for buying life insurance on a childs life is to guard against the possibilitythat, when the child is older, he or she might not be able to buy life insurance because ofintervening illness or other circumstance.

Still another reason for buying life insurance on a childs life is part of a program to teachthe child financial responsibility. Typically the insurance is whole life insurance, ownership

of which is transferred to the child when he or she turns 21.

Most insurance advisors recommend that families spend their insurance budget to buy lifeand disability income insurance on the parents first, before considering insurance onchildrens lives. Death of a parent, particularly an income-earner, could have financialconsequences that are devastating compared to the financial effects from a childs death.

Do "empty nesters" need life insurance?

Quite possibly. Here are 10 reasons to own life insurance after your kids have left home:

1. To meet goalsIf your children are in college and/or not completely financially independent, life

insurance can help finish the job. Although you may have saved enough fortuition, the kids living expenses (e.g., room and board, laundry,entertainment/activity costs, etc.) continue, but not Social Security benefitpayments for the surviving spouse and childrenthey stop when the kids leavehigh school.

2. To support other dependentsIf you have parents, disabled adult children, or others who depend on you forfinancial support, life insurance would continue this support if you die before theydo.

3. To cover the Social Security blackout periodA recent study showed that 5 percent of married women ages 51-64 were poor, but

20 percent of widows that age were poor. This happens because many peopledont plan for life insurance to pay income to the surviving spouse after their kidsare grown. As noted above, Social Security pays nothing from when the youngestchild leaves high school until the surviving spouse applies for benefits based on thedeceased spouses record (minimum age for eligibility is 60). This interval is calledthe blackout period.

4. To offset reduced Social Security survivors benefitsIf a survivor begins receiving Social Security survivor benefits earlier than the full-benefit age (66-67, depending on when the survivor was born), the Social Securitybenefit amount is permanently reduced. Moreover, because of the deceaseds earlydeath, he or she didnt get salary increases that might have boosted Social Securitybenefits further. A life insurance policy can help offset the effect of these lostraises.

5. To offset other lost retirement savingsAlso, because of the deceaseds early death, he or she didnt get salary increasesthat might have boosted employer pension benefits and/or IRA contributions. A lifeinsurance policy can help offset the effect of these reduced retirement savings.

6. To meet commitments based on two incomesMost two-earner couples make financial commitments (e.g., home mortgage, loans,leases, etc.) based on their combined income. Life insurance on each earnerenables the survivor to continue to meet those commitments.

7. To pay unplanned expenses caused by an early death

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Young people dont generally plan to have savings available to pay for funeral andburial costs, final medical expenses, estate administration and transfer costs, andfederal and state income and estate taxes. Life insurance can cover these costs,which can easily reach tens of thousands of dollars.

8. To create a financial safety netConventional wisdom says each household should have an emergency fund

equal to about half a years income, to meet surprise unavoidable outlays. If thehousehold does not already have an emergency fund, the post-death family will beeven more financially vulnerable without one. Furthermore, it might also besomewhat more difficult for the survivors to obtain credit. Life insurance can solvethis problem.

9. To offset lost income if a spouse dies after beginning Social Securityretirement benefitsWhen a couple retires and begins receiving Social Security retirement benefits,each one receives an income. The earner with the larger pre-retirement incomegets a benefit based on that income, and the person with the smaller (or no) pre-retirement income gets either a benefit based on his or her own earnings record orhalf of the spouses Social Security benefit, whichever is greater. When one spousedies, the larger retirement benefit continues but the second benefit stopsin effect,

a 33 percent income reduction. Life insurance can offset this income drop.10. To provide bequests to heirs and charities

If you want to be sure that your heirs and/or favorite charities get money after yourdeath, you can designate some or all of your life insurance benefits to go to them.This is particularly useful if, without the life insurance, your executor would have toliquidate other assets to meet this objective.

KEEPING YOUR LIFE INSURANCE CURRENT

How should I organize and store my life insurance records?

The last thing you want to happen after you die is for your beneficiaries to be unable tolocate and submit a claim on your life insurance. To prevent this, you should have copies ofyour life insurance records in at least two places. This is to make it less likely that youll losethem (to fire, flood, accidental discarding, etc.) and more likely that, after your death, yourbeneficiaries will find them.

What information should I keep?

For each individual life insurance policy on your life, you should record the followinginformation:

The full name of the life insurance company that issued the policy The city and state of the home office of the company that issued the policy The name and U.S. headquarters of the group, if the issuing company belongs to a

group of companies The policy number The date the policy was issued The amount of the death benefit The name and address of the agent/broker who sold you the policy The type of policy (e.g., term, whole life, etc.) The location of the original life insurance policy

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You might have life insurance automatically from your employer. Your employer also mightoffer you the chance to buy additional life insurance under a group policy. And you might beeligible to buy life insurance under a group policy from your union or trade association orother group you belong to (such as a college alumni association or an automobile club). Foreach of these life insurance benefits, you should record the following information:

The name of the employer or group that sponsors the insurance

The office or person to contact when its time to file a claim The certificate number (comparable to the policy number under an individual policy) The date the insurance was started The amount of the death benefit

Sometimes financial programs that are mainly designed for income or other purposes havedeath benefits as additional features. This might include pensions, annuities, workerscompensation programs, disability insurance, travel accident insurance, etc. For each suchprogram, you should record the following information:

The type of policy that has a death benefit as part of its features The full name of the life insurance company that issued the policy The city and state of the home office of the company that issued the policy

The policy number The date the policy was issued The amount of the death benefit The name and address of the agent/broker who sold you the policy The location of the original insurance policy

Credit cards and lending institutions may offer life insurance to pay off your outstandingloans in the event of your death. For each life insurance benefit on your life dedicated topaying off a loan, you should record

The full name of the lending institution through which you obtained the life insurance The loan number and issue date of the loan The name of the person or office to contact when its time to file a claim

The policy number of the life insurance policy that pays off the loan

Where should I keep the information?

Keep one set of these records in your home, in a place where others who need thisinformation are likely to find it (and after you put the information there, tell the people whollneed it where it is). This might be with your other financial records (such as income tax,checking account, investment records), with your other legal papers (such as a copy of yourwill, living will, health care proxy, etc.), or anywhere your survivors are likely to look for them.

Keep another set of these records off sitethat is, outside of your home, perhaps in a safedeposit box, or with a professional or a relative who can be counted on to produce them

when theyre needed.

On each page, record the date on which the information was last updated. That way, if thecopy in your home differs from the one in the safe deposit box, its easy to tell which is themore current.

How often should I review my policy?

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You should review all of your insurance needs at least once a year. If you have a major lifechange, you should contact your insurance agent or company representative. The changein your life may have a significant impact on your insurance needs. Life changes mayinclude:

Marriage or divorce

A child or grandchild who is born or adopted Significant changes in your health or that of your spouse/domestic partner Taking on the financial responsibility of an aging parent Purchasing a new home A loved one who requires long-term care Refinancing your home

Coming into an inheritance

HELP!

If I cant pay my premium, what should I do?

If unexpected expenses come up and you cant pay your life insurance premium, youshould know the possible consequences. The effect depends on the type of policy andcoverage you have and the policy terms and conditions.

Term: If you stop paying premiums, your coverage lapses.

Permanent: If you have this type of policy, you will have the following choices:

Cash out the policy.This means that you can stop paying the premium and collect the available cash

savings. You will no longer be covered by life insurance, but you will at least savesome of the proceeds of the policy. You may, however, have to pay taxes on someof the cash value if the sum exceeds what you have paid in premiums.

Non-forfeiture optionsThere may be a reduced paid-up option. This means that you can stop payingpremiums completely in return for a reduced death benefit and no cash saving. Youmay also be able to convert the permanent policy to an extended term policy for atime period based on the accumulated cash savings in the policy.

Policy will lapseIf this happens, see if the policy can be reinstated. Some insurers may allow this ifyou do it within five years of lapsing. You will most likely have to pass a physical

examination for the reinstated policy and pay back the premiums you would havepaid plus interest. Annual premiums for the reinstated policy may be lower thanthose for a new, comparable policy.

How do I file a life insurance claim?

To begin the claims process:

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Get several copies of the death certificate.

Call your insurance agent. He or she can help you fill out the necessary forms andact as an intermediary with the insurance company. (Dont keep life insurancepolicies in your safe deposit box. In most states, safe deposit boxes are sealed

temporarily upon the death of the owner, which can delay the settlement. ) If youdont have an insurance agent, or dont know who the deceased's agent was,contact the company directly.

Submit a certified copy of the death certificate from the funeral director with thepolicy claim. Once the claim is submitted, a settlement should be issued to youshortly. Once a life insurance claim is submitted, you must determine how theproceeds will be distributed. These are some of the options available:

o Lump sum -- You receive the entire death benefit in a single amount.o Specific income provision -- The company pays you both principal and

interest on a predetermined schedule.o Life income option -- You receive a guaranteed income for life. The

amount of income depends on the death benefit, your gender and your age

at the time of the insured's death.

o Interest income option -- The company holds the proceeds and pays youinterest on them. The death benefit remains intact and goes to a secondarybeneficiary upon your death.

How can I locate a lost life insurance policy?

If a family member dies and you are unable to locate his or her life insurance policies, thereis, unfortunately, no national or statewide database of all life insurance policies that youcan consult. However, you can try to determine:

which insurance company might have issued the policy which agent or broker might have sold or serviced the policy whether the deceased might have had insurance through an employer, union or

trade association, or other group to which he/she belonged.

Here are some strategies that might turn up useful information:

1. Look for insurance-related documents.Search through files, bank safe deposit boxes, and other storage places to see ifthere are any insurance-related documents. Also, look through address books tosee if the names of any insurance agents or companies are listed. An agent orcompany who sold the deceased their auto or home insurance may know about theexistence of a life insurance policy.

2. Contact current and prior financial advisors.Contact current or prior attorneys, accountants, investment advisors, bankers,business insurance agents/brokers and others who might have known about thedeceaseds life insurance.

3. Review life insurance applications.The application for each policy is attached to that policy. So if you can find any ofthe deceaseds life insurance policies, look at the applications for them. Theapplication will have a list of all other life insurance policies owned at the time of theapplication.

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4. Contact previous employers.Former employers may have a record of a past group policy or policies.

5. Check bank books and canceled checks.See if any checks have been made out to life insurance companies over the years.

6. Check the mail for a year following the death of the policyholder.Look for premium notices or dividend notices. If a policy has been paid up, there

will no notice of premium payments due. However, the company may still send anannual notice regarding the status of the policy or it may pay or send notice of adividend.

7. Review the deceaseds income tax returns for the past two years.Look for interest income from and interest expenses paid to life insurancecompanies. Life insurance companies pay interest on accumulations on permanentpolicies and charge interest on policy loans.

8. Contact all relevant state insurance departments.The National Association of Insurance Commissioners has a Life InsuranceCompany Location System to help you find state insurance department personnelwho might help identify companies that might have written life insurance on thedeceased. To access that service, click here.

9. Check with the state's unclaimed property office.

If a life insurance company knows that an insured client has died but cant find thebeneficiary, it must turn the death benefit over to the state in which the policy wasbought as unclaimed property. If you know (or can guess) where the policy wasbought, you can contact the state comptrollers department to see if it has anyunclaimed money from life insurance policies belonging to the deceased.

10. Contact a private service that will search for lost life insurance.Several private companies will, for a fee, contact insurance companies for you tofind out if the deceased was insured. This service is often provided through theirWeb sites.

11. Do you think the life insurance might have been bought in Canada?If so, you might contact the Canadian Life and Health Insurance Association(phone: 1-800-268-8099; Web site: www.clhia.ca).

12. Try the MIB database.There is a database of all applications for individual life insurance that wereprocessed during the last 12 years. There is a $75 charge per search. Manysearches are not successful: a random sample of searches found only 1 match inevery 4 tries. For information, click here.

Where can I get additional information on life insurance?

For more detail on life insurance, you can contact:

American Council of Life Insurers1001 Pennsylvania Avenue

N.W., Washington, D.C. 20004-2599202-624-2000www.acli.com

Life and Health Insurance Foundation for Educationwww.life-line.org

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Which companies are the largest writers of life insurance?

TOP TWENTY U.S. LIFE/HEALTH INSURANCE GROUPS AND COMPANIESBY REVENUES, 2006

($ millions)

Rank Group Revenues Assets

1 MetLife $53,275 $527,715

2 Prudential Financial 32,488 454,266

3 New York Life Insurance 28,365 165,665

4 TIAA-CREF 26,757 412,980

5Massachusetts Mutual LifeInsurance 24,863 154,071

6 Northwestern Mutual 20,726 145,102

7 AFLAC 14,616 59,8058 Genworth Financial 11,029 110,871

9 Unum Group 10,719 52,823

10 Principal Financial 9,870 143,658

11 Guardian Life of America 9,694 39,488

12 Lincoln National 9,063 178,494

13 Assurant 8,071 25,165

14Thrivent Financial forLutherans 6,165 56,534

15 Pacific Life 5,202 99,347

16 Western & Southern Financial 4,838 30,320

17 Mutual of Omaha Ins. 4,498 17,12818 Conseco 4,467 32,717

19 Torchmark 3,421 14,980

20 American National Ins. 3,114 17,932

Source: Fortune.