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Life Insurance: Providing Security for Your Survivors

Shopping for an Individual Policy

Shopping for an individual life insurance policy does not need to be a confusing process. With a bit of planning up front, you should be able to purchase the coverage and type of insurance that properly fits your family's needs. Your agent is an invaluable resource in helping you determine which policy is the best choice for you.

Looking at Computer-Generated Illustrations

Always remember that the life insurance illustration is not the insurance contract... it is not the policy you are buying. It is what the insurance agent discusses with you before you buy a policy.

A sales illustration is simply a projection of how the policy will perform over time based on certain assumptions. In order for the projection to be accurate, the assumptions have to be realistic, and the actual results have to equal the assumptions.

Depending upon the type of policy you are considering, the assumptions may include one of the following: the current cost of insurance, the current dividend scale, the current interest rate, and the projected average rate of return.

Here are some things you'll want to discuss with your agent when evaluating a policy illustration.

Term Insurance


  • the current dividend scale (participating policy)
  • the scheduled cost of insurance (nonparticipating policy)

If the term policy pays dividends that can be used to reduce the premium, and the illustration just shows the net premium, ask the company or agent to run the illustration with the guaranteed rates and the current dividend scale. Dividends are not guaranteed, so you'll see the maximum premium the company can charge you if they fail to pay a dividend. Likewise, in a nonparticipating schedule, make sure the guaranteed rates are run alongside the scheduled premiums.

In both policies, make sure the net payment index for the scheduled (net) premiums and the guaranteed rates are at the bottom of the illustration.

Whole-Life Insurance


  • the current dividend scale

Depending on how you use the dividend, it can either 1) reduce your premium, 2) increase your total cash value, or 3) increase your total death benefit. The company's dividend is based on mortality assumptions, investment experience, and company expenses. Some companies have done very well over the past 10- and 20-year periods and have been able to pay a higher dividend than projected. Sometimes insurance companies have to reduce their projected dividends because of rising costs and lower returns on their investments.

Ask your agent to run the same illustration using a reduced dividend scale (their computers are programmed to do this) and see how the policy performs.

Ask your agent how borrowing from the contract affects future dividends, particularly if you're planning to use the cash value to supplement your retirement savings. Request an illustration showing money borrowed or withdrawn annually from the policy starting at age 60 or 65. You may decide it is not worth it.

Universal Life Insurance


  • the current cost of insurance
  • the current interest rate
  • the level premium

All universal life illustrations show values with the guaranteed interest rate and the current interest rate. Have the illustration run with an assumed rate 1.5–2% lower than the current rate, in the event the actual average interest rate over the life of the policy is lower.

Make sure the number of years in the illustration equals the number of years you intend to hold the policy. If you're purchasing it for life, have the illustration run to age 95. If the current values show the policy lapses when you're age 60, you should increase the annual premium.

Ask the agent if the values and benefits shown in the illustration assume the entire premium is paid at the beginning of the policy year. If you're planning to make monthly contributions, have the illustration run using monthly contributions. The values and benefits may be significantly reduced.

Variable Universal Life


  • the current cost of insurance
  • the current interest rate
  • the level premium

Ask the agent for the sub accounts' performance over the past three-, five- and ten-year periods. Select sub accounts that are consistent with the level of risk you are willing to assume. Although past performance does not guarantee future results, have the illustration run with an interest rate assumption that is consistent with the sub account's 10-year performance. Determine whether the rate of return is sufficient to meet your goals.

Review Riders Carefully

Some of the riders that add to the cost of your policy may not be worth the extra cost, while some give you more flexibility:

  • Disability Waiver of Premium—If your disability lasts longer than six months and, in most cases, you are under age 60, the insurance company will continue to pay your policy for as long as your disability lasts. It is important to know how the company defines disability and exactly what the waiver does and doesn't do.

Whole life plans with this rider are sold on the basis that they are said to be "self-completing": The entire premium is paid, and your cash value grows. Universal life policies usually limit the payments to cover the insurance and contract costs to keep the policy in force, unless you want to buy a more expensive rider to cover the planned schedule of contributions.

Is it worth the extra cost? You and your financial professional can discuss the benefits of the riders in more detail, but a brief explanation of the riders follows. If you have adequate disability coverage, you should be able to cover your term insurance costs. If you have cash-value life insurance, consider whether your disability coverage could handle the ongoing premiums before adding the rider.

  • Accidental Death Benefit—It pays you a larger death benefit if you die in an accident.
  • Cost-of-Living Rider—Your insurance increases along with rises in the Consumer Price Index (inflation rate). It is not a bad feature, but consider the expense.
  • Paid-Up Additions Rider—It allows you to invest additional money into your whole life policy, up front or annually, to buy additional paid-up insurance. It allows for more tax-deferred cash-value build-up and/or helps to shorten the number of years you have to pay out-of-pocket premiums. This should be considered only if you have excess cash.
  • Living Benefit Rider—This rider allows you access to your death benefit if you are terminally ill and are not expected to live more than six months. The company will usually pay you up to 75% or a maximum specified amount, minus administrative expenses. This is a worthwhile feature that may be included at no additional cost. But remember, the insurance is not for you, it is for your dependents.
  • Guaranteed Insurability Rider—This allows you to buy additional amounts of insurance at standard rates without evidence of insurability. You can typically buy scheduled amounts on future policy anniversaries or major life events (wedding, childbirth) until age 40 or so. It is only necessary if you have future health concerns, e.g., a family medical history that would render you substandard or uninsurable.
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