1. Understand Why You Need It
While most people may need life insurance at some point in their life, don't buy a policy just because you heard it was a good idea. Life insurance is designed to provide families with financial security in the event of the death of a spouse or parent. Life insurance protection can help pay for mortgages, a college education, help to fund retirement, provide charitable bequests and of course is a key element in estate planning. In short, if others depend on your income for support, you should strongly consider life insurance. Even if you don't have any of these needs immediately, you still may want to consider purchasing a small "starter" policy, if you anticipate you will have them in the future. The reason: the younger you are, the less expensive life insurance will be.
2. Determine the Amount of Coverage You Need
The amount of money your family or heirs will receive after your death is called a death benefit. To determine the proper amount of life insurance an online calculator, like the one available at this site, can be helpful. You can also get a ballpark figure using any number of formulas. The easiest way is to simply take your annual salary and multiply by 8. A more detailed method is to add up the monthly expense your family will incur after your death. Remember to include the one-time expenses at death and the ongoing expenses such as a mortgage or school bills. Take the ongoing expenses and divide by .07.That indicates you'll want a lump sum of money earning approximately 7% each year to pay those ongoing expenses. Add to that amount any money you'll need to cover one-time expenses and you'll have a rough estimate of the amount of life insurance you need.
As useful as calculators and rough estimates are, there are some things they don't do.
They cannot provide you with any final answers. Calculators only allow you to perform "hypotheticals," recalculating and generating new results as you make and input new assumptions. Using these tools and educating yourself on the workings of life insurance and other financial products, however, can help you feel more comfortable when discussing your needs with such professionals as a New York Life agent.
3. Find the Right Type of Policy
Once you've got an estimate of how much insurance you'll need, it's time to think about the type of policy that best fits your needs. Today life insurance comes in many varieties, but there are four basic types term, whole life, universal life, and variable life. As a first-time buyer, one will more than likely fit your needs.
Term Life Insurance
As its name implies, term insurance provides life insurance protection for a specific period of years. Benefits can be used to help pay off mortgages and other outstanding debts in the event of a premature death. Generally the least expensive form of life insurance, term provides pure insurance protection only. It does not accumulate cash value, and generally does not receive dividends.
Term may be an ideal choice when you need life insurance coverage for a well-defined period of time. It can be used to protect needs that last for a predictable period, such as a student loan or mortgage. People in their 20s and 30s often purchase a term policy and later convert it to a permanent plan (see Whole Life, below). The conversion privilege in their term policies guarantees their insurability at a later date-even if they become uninsurable.
New York Life makes a variety of term policies available, including five-, ten-, and 20-year policies.
In contrast to term insurance, whole life, also known as permanent insurance, protects you throughout your lifetime, from the day you purchase the policy until you die, as long as you pay the premiums. Another difference between the two is that permanent insurance builds cash value. Through policy loans, you can access the cash values and use them for a host of purposes such as education funding and supplemental retirement income. However, policy loans against the cash value accrue interest and reduce the death benefit and the cash value by the amount of the outstanding loan plus interest. Guaranteed for life, your policy will be renewed every year, regardless of your health for as long as you live, again, as long as required premiums are paid.
Permanent policies are also eligible to receive dividends, a portion of the company's surplus that is distributed to the owners of participating policies. (Dividends can be taken in cash, used to reduce the premium, left to accumulate at interest, or used to purchase paid-up additional insurance. Dividends are not guaranteed.) Whole life can provide a permanent solution to several financial concerns including:
- Mortgage protection: Benefits can be used to help pay off mortgages and other outstanding debts in the event of a premature death.
- Estate preservation: Whole life insurance can provide funds to cover estate expenses and help avoid the need to sell assets and or borrow money to cover these expenses.
- Retirement funding: Cash values can be accessed through policy loans or surrenders to supplement a retirement income. Loans will reduce the death benefit.
- Charitable giving: A whole life insurance policy can enable you to make a significant donation to your favorite charity upon your death.
- Business needs: Whole life can be an attractive executive and employee benefit and a means to assure a business's financial future.
Universal life also provides permanent life insurance protection and access to cash values that grow tax-deferred. Universal Life differs from whole life in its flexibility that enables you to choose the amount of protection that best suits your family or business. With Universal Life, you can increase or decrease your coverage, as your insurance needs change and control the amount and frequency of premium payments. The policy can also be customized with various riders to fit your lifestyle.
Variable universal life insurance is a type of flexible premium, permanent life insurance policy that allow the policy owners to have premium dollars allocated to a variety of investment options, including a fixed account backed by the assets in the general account of NYLIAC. Variable universal life insurance generally provides a federal tax-free death benefit, and is accessible through policy loans and/or withdrawals. Note, all guarantees, including death benefit payments are dependent on the claims-paying ability of NYLIAC and do not apply to the investment performance or the safety of the underlying Investment Divisions on the variable universal life policies. Also, loans against the cash value and withdrawals may reduce death benefit and the cash value. If the policy is designated as a Modified Endowment Contract, withdrawals taken prior to age 591/2 may be subject to a 10% IRS penalty and surrender changes may apply. Additional taxes may apply to policies designated as a modified endowment. The product prospectus contains this information in details.
There are risks associated with investing in variable universal life insurance policies. Please be aware that assets allocated to the Investment Divisions are subject to market risks and will fluctuate in value. Please be aware there are fees and charges associated with the contract. Variable universal life insurance policies are sold by prospectus only through properly licensed Registered Representative. To obtain a copy of the product and fund prospectuses for the VUL policy that may be right for you, please contact your NYLIFE Securities Registered Representative or call 1-800-598-2019. Investors are asked to consider the investment objectives, risks, charges and expenses of the investment carefully before investing. Both the product and the underlying fund prospectuses contain this and other information about the product and underlying investment options. Please read the prospectuses carefully before investing.
*VULs are issued by New York Life Insurance and Annuity Corporation (A Delaware Corporation) and distributed by NYLIFE Distributors LLC, Member FINRA/SIPC.4. Look at the Quality of the Company
An insurance policy is only as good as the company that backs it. You want to know for certain that the company that issues your policy will be around to service it and eventually pay the death claim. To help you discern the strongest companies, there are several ratings agencies that rate insurance companies on the quality of their fiscal fitness, quality of investments, and overall financial soundness. A credit rating represents an independent assessment of the insurer's ability to pay its claims on time and meet all its other financial obligations, the bottom line for any life insurance company. There are four leading agencies: A.M. Best, Standard and Poors, Moody's, and Fitch.
Each agency has slightly different criteria and looking at different ratings for one company will give you a good overview of the company's financial strength. New York Life's ratings are among the highest from each of the four agencies.
New York Life and its subsidiary, New York Life Insurance and Annuity Corporation, have received among the highest ratings for financial strength from four major rating services as indicated below:1
Agents provide an invaluable service. First, an agent can help you factor in the other "human' elements into your insurance equations to help you determine the right amount of insurance. The relationship you develop with an agent can last a lifetime. Second, an agent can help you update your coverage as your needs change. They can help you guide you through a lifetime of financial decisions, giving you one less thing to worry about. ]
6. Increase Your Vocabulary
Any discussion of insurance will probably include words such as cash value, premium, dividends, death benefit and more. To discuss life insurance knowledgeably, it will help to understand the terms. Below is a brief summary of some common terms. This site offers a complete glossary of insurance terms.
- Cash Value: In a whole life (also called "permanent") life insurance policy, this is the money that can accumulate in the policy.
- Dividends: A portion of the company's surplus that is distributed to the owners of participating policies. Dividends are not guaranteed.
- Mutual company: An insurance company which has no capital stock or stockholders, but is instead owned by its policyowners. New York Life is a mutual company.
- Premium: In insurance, the periodic payment required to keep a specific policy in force.