In a participating policy (also par in the USA, and known as a with-profits policy in the Commonwealth), the insurance company shares the excess profits (variously called dividends or refunds in the USA, bonus in the Commonwealth) with the policyholder. Typically these refunds are not taxable because they are considered an overcharge of premium. The greater the overcharge by the company, the greater the refund/dividend. For a mutual life insurance company, participation also implies a degree of ownership of the mutuality.
Sunday, September 6, 2009
Participating
Types
There are several types of whole life insurance policies.[2] New York State defines six traditional forms: non-participating (aka "non par"), participating, indeterminate premium, economic, limited pay, and single premium.[3] A newer type is known generally as interest sensitive whole life. Other jurisdictions may classify them differently, and not all companies offer all types. It should be noted that there are as many types of insurance policies as can be written in their contracts while staying within the law's guidelines.
Non-Participating
All values related to the policy (death benefits, cash surrender values, premiums) are usually determined at policy issue, for the life of the contract, and usually cannot be altered after issue.
This means that the insurance company assumes all risk of future performance versus the actuaries' estimates. If future claims are underestimated, the insurance company makes up the difference. On the other hand, if the actuaries' estimates on future death claims are high, the insurance company will retain the difference.
Whole life insurance
Whole Life Insurance, or Whole of Life Assurance (in the Commonwealth), is a life insurance policy that remains in force for the insured's whole life and requires (in most cases) premiums to be paid every year into the policy.
History
All life insurance was originally term insurance. However, because term life insurance only pays a claim upon death within the stated term, most term insurance policy holders became upset over the idea that they could be paying premiums for 20 or 30 years and then wind up with nothing to show for it.
In response to market pressures, actuaries conceived of an insurance policy with level premium payments that were higher than traditional term insurance contracts. These contracts would offer a "cash value", which was designed to be a cash reserve that would build up against the known claim - the death benefit. These policies would also credit interest to the cash value account and upon maturity of the contract (usually at age 95 or 100), the cash value would equal the death benefit.
This produced a benefit to both the policy owner and the insurance company. By guaranteeing the death benefit and the cash value, the policy owner was assured that insurance coverage would be in force when the insured died. The insurance company benefited because with every premium payment made, the net amount at risk, and thus the cost of insurance, was reduced.[1]
Working with an agent
After reviewing the various life insurance policies available, you might still be unsure about which best meets your needs. The American Council of Life Insurers (ACLI) recommends consulting an insurance agent. Jack Dolan, spokesperson for ACLI, says an agent can help find a policy that is specific to your needs. “Look at the recommended policy with care to be sure it fits your personal goals," Dolan says.
Carefully study your agent's recommendations and ask for a point-by-point explanation. Make sure the agent explains items you don't understand. Because your policy is a legal document, it is important that you know what it provides.
ACLI suggests these tips when purchasing life insurance:
- Ask for specifics of coverage so you can look at all your options.
- Contact the state insurance department to determine if a company or agent is licensed in your state.
- Check financial strength ratings to determine if your potential insurer is financially stable.
- Be wary of offers of "free" life insurance policies. Nothing is free. A good example is "stranger-originated life insurance" where the elderly are offered money from investors to buy their insurance policies.
- Answer all application questions honestly. Do not omit information.
- Make sure you get your policy within 60 days; if not, contact your insurance company to find out why.
- Your state likely guarantees a "free look" period, which is often 10 to 30 days after the policy has been in effect. If you decide you don't want to keep the policy, you will be given a full refund.
- Check the effective date on the policy.
- Review your policy every year or when a major life event occurs, such as buying a new house, having a child or getting married or divorced.
- If you have a complaint with an insurance company that isn't resolved after contacting a customer service representative, your state's department of insurance can help.
Insurance experts recommend these tips when deciding which type of life insurance to purchase:
If your agent recommends a term life policy, ask:
- What are the Standard & Poor's, A.M. Best, Fitch and Moody’s ratings of this insurance company?
- What is the initial rate-guarantee period? Is this policy renewable past the initial rate-guarantee period without a physical exam? If so, what are the premiums?
- Is this policy convertible to permanent insurance without a physical exam? If so, for what period of time do I have the right to convert?
If your agent recommends a cash value policy, ask:
- What are the Standard & Poor's, A.M. Best, Fitch and Moody’s ratings of this insurance company?
- Can you tell me, in writing, why you are recommending cash value insurance for me at this time?
- Why should I combine my life insurance protection needs with my investment objectives?
- Can you please prepare an analysis for me that shows the true cost of this cash value insurance policy over 5, 10, 15, 20, 25 and 30 years versus buying term life and investing the difference in long term bonds over those same time periods?
- How much is your first-year commission on this proposed cash value policy versus your commission on an equivalent term life insurance policy?
- Are these proposed annual premiums within my budget?
- Why do you think that I can commit to paying these premiums over the long term, perhaps decades?
- How much will I receive if I surrender the policy?
How life insurance is priced
Life insurance is priced based on your life expectancy, the face amount you request and the length of the policy, whether it's the duration of your life (permanent life) or a specific period (term life).
Because your current and past health conditions impact your life expectancy, insurers want to know as much as possible about your health condition. Common conditions such as high blood pressure, heart disease, obesity, cancer and depression can all raise your premiums or even result in your being declined.
Based on your medical history, you'll be grouped into a category such as "preferred plus," "preferred," "standard" and "substandard." Your category ultimately determines your premiums. For more, read how life insurance companies view you: Underwriting categories.
Insurance buyers with severe health conditions or a combination of conditions can find it hard or impossible to find life insurance. They are known as "impaired risks." Local agents may not be experienced enough to find a company that specializes in insuring people with certain medical conditions. Fortunately, impaired-risk specialists have expertise in knowing where to direct applications for folks with medical conditions. For more, read how impaired-risk specialists find life insurance for people with medical problems.
The life insurance buying process
The life insurance applications process is paper-intensive, can take 30 to 45 days and often seems intrusive for people who value their privacy. A face-to-face paramedical examination is generally required for policies in excess of $100,000, which means, at minimum, giving both blood and urine samples to a paramedical professional.
Expect questions in detail regarding your lifestyle, intended foreign travel destinations, your family health history and your personal health history.
Expect questions in detail regarding your lifestyle, intended foreign travel destinations, your family health history and your personal health history. |
Sometimes multiple interviews are required in order to verify your information. The paramed examiner typically asks these questions face-to-face and often insurance companies will conduct follow-up telephone interviews so that you can verify the first set of answers. Regardless of the type of life insurance you buy, most policies require you to meet certain guidelines regarding your lifestyle and medical history.
For more, here's the lowdown on life insurance medical exams.
If it sounds tempting to shortcut this process by withholding information or outright lying, don’t do it. Policies that were sold based on applications that contained misleading information can be voided at claim time. False information on insurance applications is fraud.
Insurers will likely report your medical exam results (reported as numbered codes) to MIB (formerly called the Medical Information Bureau), which maintains a database of those who have applied for life, health, disability and other insurance in the last seven years. If you've given different answers to medical questions in the past, it will raise a red flag with MIB. The goal of the MIB database is to reduce fraud.
All standard life insurance policies cover death by any cause at any time in any place, except for death by suicide within the first two policy years (one year in some states).
If you want to avoid the underwriting process, you have two other, more expensive, options:
- Simplified issue life insurance can be purchased after answering only a few medical questions. There is no medical exam required. However, if you report health problems, you will likely be declined. Also, if you are healthy, or even if you have some negative medical history, an underwritten policy is still going to be your least expensive choice.
- Guaranteed issue life insurance is sold to anyone who applies (up to an age limit) and is by far the most expensive way to purchase life insurance. This should be considered only by those who are declined for everything else but still need life insurance. These policies have graded death benefits, meaning your beneficiaries won't receive the full death benefit until several years into the policy.
In naming a beneficiary, keep in mind that the life insurance company will want to see only the names of those who are financially dependent upon you. An acquaintance, friend or relative, absent of a financial relationship, will not do.
Universal life insurance
This kind of policy offers greater flexibility than whole or term life. Universal life has many moving parts to understand before you buy.
After your initial premium payment, you can reduce or increase the amount of your death benefit. Also, after your initial payment, you can pay premiums any time and in any amount, as long as you don’t miss a minimum payment level. In some cases, there are limits to how much extra you can pay in advance. If you choose to increase your death benefit, you may have to provide medical proof that your health has not deteriorated.
Some universal life policies perform like term life insurance: They can be configured at the time of purchase to provide both level death benefits and level premiums that are guaranteed for life as long as you pay the scheduled premium.
Variable life insurance
Variable life offers a death benefit with a side fund that operates like an investment account.
The insurance company invests your premiums and offers you a choice of funds in which your money will be invested. Returns are not guaranteed. The amount of money your beneficiaries will receive and the cash value of your policy depend on how well the underlying accounts perform. Theoretically, the cash value can go down to zero and, if so, the policy will terminate. Some variable life policies will guarantee a minimum death benefit.
Other permanent life considerations
When your cash value account grows large enough, it can be used by the insurer to pay your premiums for the rest of your life. This is known as being "paid up." You can still withdraw your cash value, but you'll have to resume premium payments to keep the policy in force or settle for a reduced benefit that the remaining cash value can support. Your policy illustration will show you how long it may take for your whole life policy to be "paid up."
If you no longer want your whole life policy, you can surrender it to receive the current cash surrender value or convert it into an annuity, but keep in mind that cashing in a permanent policy after only a couple of years is an expensive way to get insurance coverage for a short time.
For more on permanent life insurance, see the basics of whole life insurance.
Riders add benefits
You can add riders to your life insurance policy that guard against a number of unpleasant situations. Your insurer will have its own list of available riders, but here are a few:
- Accelerated death benefit rider (aka living benefits rider): Pays the benefit early if you become terminally ill.
- Accidental death benefit rider: Pays an extra benefit if you die as the result of an accident.
- Long term care rider: Pays for long term care expenses should you not be able to do some of the "activities of daily living," such as dressing or toileting.
- Waiver of premium rider: Waives premium payments should you become totally disabled.
Cash value life insurance
If you want more than a death benefit from your life insurance policy and like the idea of a long-term savings account (not insured by any federal agency) or investment, you might consider cash value life insurance such as whole life, universal life or variable life. But be prepared to pay much higher premiums per $1,000 of coverage because you are now funding a cash value account and paying fees and expenses.
| Additional Resources Consumer Federation of America's Insurance "Rate of Return" Service Insurance Information Institute: Learn about life insurance Your state's department of insurance may also have life insurance buying guides online, such as California's Life Insurance Information Guide and New York's Life Insurance Resource Center. |
In many cash value policies, the annual premium does not increase from year to year. Universal life policies allow you to fluctuate or even skip premium payments, which in turn adjusts your death benefit amounts.
Unlike term life insurance, which is easily compared online, cash value insurance is often marketed by agents and brokers in a face-to-face setting, where needs and strategies can be discussed.
Because of the complexity and dizzying array of possible outcomes for permanent life insurance, regulators insist that cash value insurance be sold using pre-approved illustration formats. These illustrations can run to 15 or more pages.
Pay particular attention to the guaranteed death benefit and premium-payment sections because these columns contain the actual company promises. If you don’t like what you see there, walk away.
Another caveat: Many cash value policies contain harsh penalties for surrendering the policies in the early years. Changing your mind within the first few years is an expensive decision.
For more on cash value and an example of a policy illustration, read about cash value in life insurance: What's it worth to you?.
Whole life
Ordinary whole life insurance offers “permanent protection” with a cash value account that grows over time. Whole life provides a level death benefit and level premiums throughout your life and for as long as you continue to pay the premiums. For example, a healthy 40-year-old female might pay $4,200 per year for a $500,000 whole life policy. The premium remains level at $4,200 per year for the rest of her life and, in the event of death at any age, the policy will pay $500,000 to her beneficiary.
Whole life also contains a cash value account that builds over time. |
Whole life also contains a cash value account that builds over time, slowly at first and gaining steam after several years. You can withdraw your cash value or take out a loan against it, but remember, if you die before you pay back the loan, the death benefit paid to your beneficiaries will be reduced.
Understand what your beneficiaries will receive upon your death. If you have a traditional whole life policy, your beneficiaries receive only the death benefit no matter how much cash value you've built up. Other payout options available for higher premiums are:
- Death benefit plus cash value
- Death benefit plus return of premium
Whole life policies can be issued as "participating" or "nonparticipating." Participating policies typically cost more but may return annual dividends if the insurer has a good financial year. Dividends are never guaranteed. Nonparticipating whole life insurance offers no dividends.
Buyers of whole life insurance like the certainty of fixed premiums with a known death benefit for life. They also appreciate the "forced savings" component and watching their cash value account build up.
Policy choices
ife insurance policies are divided into two main types:
- Term life insurance, which provides only a death benefit without any “cash values” (offering the least expensive cost per $1,000 of death coverage purchased).
- Permanent life insurance, which has a “cash value” account in which a return-on-investment component becomes an often complex and expensive part of the policy (most expensive cost per $1,000 of coverage).
Term life insurance
The easiest life insurance to understand: Term life insurance provides death benefit protection without any savings, investment or “cash value” components.
Term life insurance is available for set periods of time such as 10, 15, 25 or 30 years. With "annual renewable term life," your policy automatically renews and premiums increase each year. Choose "level term insurance" if you want your premium to stay the same for the duration of the policy. Also available is "decreasing term insurance," where premiums remain level but your death benefit declines over time. This is useful if you want to cover only a specific debt that decreases, such as a mortgage or business loan.
Quick facts |
| Americans purchased $3 trillion of new life insurance coverage in 2007. The average amount of the life insurance policy was roughly $167,700 in 2007. By the end of 2007, total life insurance coverage in the United States reached $19.5 trillion. Of new individual life policies purchased in 2007, 52 percent were term life insurance. The most common supplementary benefit is waiver of premium. Source: American Council of Life Insurers |
As long as you pay your premiums, the company cannot cancel you.
Term life insurance is a popular choice because of the long rate-guarantee periods. However, if you get to the end of your policy term and still need life insurance, you'll need to shop for a new policy, which will then be priced based on your age and health status.
For more, read the basics of term life insurance.
Choosing an initial rate-guarantee period is easy: Match the period of time your dependents need your income to the available rate-guarantee periods. For example, if your children are young and you have decades to go on your mortgage, try 30-year term life. If your children are leaving the nest and your home is paid off or nearly paid off, 10-year term might fit the bill.
Other policy provisions that drive the popularity of term life insurance are guaranteed renewal and guaranteed convertibility.
- Guaranteed Renewal. Before you buy a term life policy, ask the agent or company to confirm to you that the policy contains a guaranteed renewable option, which grants you the right to continue coverage beyond the initial rate-guarantee period without a medical exam. This feature, found in most term life policies sold today, is extremely important should you become sick and uninsurable toward the end of your rate-guarantee period.
For example, say that you’ve been paying $800 per year on a $500,000, 20-year level term life policy and develop cancer near the end of the 20-year period, thus making you uninsurable. Assuming that you want to continue the coverage, a guaranteed renewable clause would allow you to continue the coverage beyond 20 years on an annual renewable basis without an exam, albeit at a much higher annual premium of, say, $8,000 in year 21, $11,000 in year 22, and so on.
You may have sticker shock right now but these premiums don’t look so high when you are very sick and uninsurable but still in need of coverage.
- Guaranteed Convertible. Another built-in feature of most term life policies is the right to convert your coverage to any permanent cash value policy that the company offers at current rates without having to take another physical exam. This feature may be useful in the future if you decide you want cash value life insurance.
If you'd like term insurance to cover you for a certain period of time but you're confident you'll outlive the policy, consider a "return of premium" (ROP) term life insurance policy. Under this type of policy, if no death benefit has been paid by the end of your insurance term, all your premiums are refunded (tax-free). Return of premium term life insurance generally costs 50 to 150 percent more than a comparable term policy but it provides a way to hedge your bets no matter what happens.
For more, read "return of premium" term life insurance basics.
Life insurance basics
any of us buy life insurance because we want to make sure that our loved ones remain financially secure after we die. Income replacement is the No. 1 reason people buy life insurance.
Non-earning caregivers also have an important — and often overlooked — economic value that should be covered by life insurance.
Life insurance is also purchased by those interested in achieving specific business or estate-transfer goals.
There are many types of life insurance policies depending on your goals, and there are huge price differences among different companies offering identical coverage. To pinpoint a life insurance amount for yourself, use Insure.com's Life Insurance Needs Estimator Tool.
The top reasons to buy life insurance |
Income replacement To support a business To pay estate taxes
|
Here's an orderly way to go about shopping for life insurance:
- 1) Assess your needed life insurance amount.
- 2) Decide on the most appropriate policy type to meet goals (i.e. term, permanant, universal or variable universal).
- 3) Choose a good company by its financial strength ratings.
- 4) Comparison shop until you find a good price.
- 5) Look at ways to save money on life insurance.
Life insurance is a long-term proposition, so you should pay particular attention at time of purchase and throughout the life of the policy to the financial stability ratings of your life insurance company. Ratings indicate a company's ability to pay claims.
Assessing your life insurance needs
The first step in life insurance planning is to analyze your life insurance needs — meaning the economic needs of dependents left behind:
- Before purchasing a life insurance policy, consider your financial situation and the standard of living you want to maintain for your dependents or survivors. You might want to ask yourself who will be responsible for any outstanding medical bills and funeral costs. What would happen if your family had to relocate or otherwise change their standard of living once you've died? The assumption of immediate death is necessary to determine the current life insurance needs for a family or individual.
- Add in the longer term financial needs of the remaining family members, such as: children's expenses, income for the surviving spouse, mortgage and other debt payoffs, college education funds and an additional emergency fund.
Because life insurance needs change over time, your life insurance amount should be reevaluated periodically. Insurance experts recommend revisiting the coverage of your policy once every five years or whenever you experience a major life event such as a change in income or assets, marriage, divorce, the birth or adoption of a child, or a major purchase such as a house or business.
In theory, you should have a declining need for life insurance as you age because fewer people remain dependent upon you for income support. Exceptions would be protecting a business entity or paying taxes on a large estate for heirs. If the purpose of buying life insurance is to pay estate taxes, then you’ll need permanent life insurance, which is in-force as long as you live and pay the premiums.
Sunday, August 30, 2009
Does Family History Influence Life Insurance Premiums
Family picture by 'freyja'
Over the last few years life insurance companies in Canada have started to dissect family history when analyzing the risk of new life insurance applicants.
The most common family history questions surround the following conditions: diabeties, cancer, high blood pressure, stroke, heart disease, kidney disease, Huntington's Chorea, Alzheimer's disease, Motor Neuron disease including ALS or Lou Gehrig's disease, Parkinson, mental illness or Multiple sclerosis. It can seem like a long list but the following our a few important points to consider.
- Family history questions are limited to biological siblings or parents
- Family history questions have a much greater impact on Critical Illness insurance than Life insurance
- Family history issues will generally not result in an applicant getting a rated policy. A rated policy is where the insured pays a sur-charge for what the insurance company deems to be extraordinary risk. Applicants may also receive ratings for a variety of health, lifestyle and travel related issues.
A new development in the life insurance industry over the last decade has been the introduction of preferred rates.
Life Insurance in the United States through World War
Early Companies
The first American life insurance enterprises can be traced back to the late colonial period. The Presbyterian Synods in Philadelphia and New York set up the Corporation for Relief of Poor and Distressed Widows and Children of Presbyterian Ministers in 1759; the Episcopalian ministers organized a similar fund in 1769. In the half century from 1787 to 1837, twenty-six companies offering life insurance to the general public opened their doors, but they rarely survived more than a couple of years and sold few policies [Figures 1 and 2]. The only early companies to experience much success in this line of business were the Pennsylvania Company for Insurances on Lives and Granting Annuities (chartered 1812), the Massachusetts Hospital Life Insurance Company (1818), the Baltimore Life Insurance Company (1830), the New York Life Insurance and Trust Company (1830), and the Girard Life Insurance, Annuity and Trust Company of Pennsylvania (1836). [See Table 1.]
Despite this tentative start, the life insurance industry did make some significant strides beginning in the 1830s [Figure 2]. Life insurance in force (the total death benefit payable on all existing policies) grew steadily from about $600,000 in 1830 to just under $5 million a decade later, with New York Life and Trust policies accounting for more than half of this latter amount. Over the next five years insurance in force almost tripled to $14.5 million before surging by 1850 to just under $100 million of life insurance spread among 48 companies. The top three companies – the Mutual Life Insurance Company of New York (1842), the Mutual Benefit Life Insurance Company of New Jersey (1845), and the Connecticut Mutual Life Insurance Company (1846) – accounted for more than half of this amount. The sudden success of life insurance during the 1840s can be attributed to two main developments – changes in legislation impacting life insurance and a shift in the corporate structure of companies towards mutualization.
Married Women’s Acts
Life insurance companies targeted women and children as the main beneficiaries of insurance, despite the fact that the majority of women were prevented by law from gaining the protection offered in the unfortunate event of their husband’s death. The first problem was that companies strictly adhered to the common law idea of insurable interest which required that any person taking out insurance on the life of another have a specific monetary interest in that person’s continued life; “affection” (i.e. the relationship of husband and wife or parent and child) was not considered adequate evidence of insurable interest. Additionally, married women could not enter into contracts on their own and therefore could not take out life insurance policies either on themselves (for the benefit of their children or husband) or directly on their husbands (for their own benefit). One way around this problem was for the husband to take out the policy on his own life and assign his wife or children as the beneficiaries. This arrangement proved to be flawed, however, since the policy was considered part of the husband’s estate and therefore could be claimed by any creditors of the insured.
New York’s 1840 Law
This dilemma did not pass unnoticed by promoters of life insurance who viewed it as one of the main stumbling blocks to the growth of the industry. The New York Life and Trust stood at the forefront of a campaign to pass a state law enabling women to procure life insurance policies protected from the claims of creditors. The law, which passed the New York state legislature on April 1, 1840, accomplished four important tasks. First, it established the right of a woman to enter into a contract of insurance on the life of her husband “by herself and in her name, or in the name of any third person, with his assent, as her trustee.” Second, that insurance would be “free from the claims of the representatives of her husband, or of any of his creditors” unless the annual premiums on the policy exceeded $300 (approximately the premium required to take out the maximum $10,000 policy on the life of a 40 year old). Third, in the event of the wife predeceasing the husband, the policy reverted to the children who were granted the same protection from creditors. Finally, as the law was interpreted by both companies and the courts, wives were not required to prove their monetary interest in the life of the insured, establishing for the first time an instance of insurable interest independent of pecuniary interest in the life of another.
By December of 1840, Maryland had enacted an identical law – copied word for word from the New York statute. The Massachusetts legislation of 1844 went one step further by protecting from the claims of creditors all policies procured “for the benefit of a married woman, whether effected by her, her husband, or any other person.” The 1851 New Jersey law was the most stringent, limiting annual premiums to only $100. In those states where a general law did not exist, new companies often had the New York law inserted into their charter, with these provisions being upheld by the state courts. For example, the Connecticut Mutual Life Insurance Company (1846), the North Carolina Mutual Life Insurance Company (1849), and the Jefferson Life Insurance Company of Cincinnati, Ohio (1850) all provided this protection in their charters despite the silence of their respective states on the issue.
Mutuality
The second important development of the 1840s was the emergence of mutual life insurance companies in which any annual profits were redistributed to the policyholders rather than to stockholders. Although mutual insurance was not a new concept – the Society for Equitable Assurances on Lives and Survivorships of London had been operating under the mutual plan since its establishment in 1762 and American marine and fire companies were commonly organized as mutuals – the first American mutual life companies did not begin issuing policies until the early 1840s. The main impetus for this shift to mutualization was the panic of 1837 and the resulting financial crisis, which combined to dampen the enthusiasm of investors for projects ranging from canals and railroads to banks and insurance companies. Between 1838 and 1846, only one life insurance company was able to raise the capital essential for organization on a stock basis. On the other hand, mutuals required little initial capital, relying instead on the premium payments from high-volume sales to pay any death claims. The New England Mutual Life Insurance Company (1835) issued its first policy in 1844 and the Mutual Life Insurance Company of New York (1842) began operation in 1843; at least fifteen more mutuals were chartered by 1849.
Aggressive Marketing
In order to achieve the necessary sales volume, mutual companies began to aggressively promote life insurance through advertisements, editorials, pamphlets, and soliciting agents. These marketing tactics broke with the traditionally staid practices of banks and insurance companies whereby advertisements generally had provided only the location of the local office and agents passively had accepted applications from customers who inquired directly at their office.
Advantages of Mutuality
The mutual marketing campaigns not only advanced life insurance in general but mutuality in particular, which held widespread appeal for the public at large. Policyholders who could not afford to own stock in a proprietary insurance company could now share in the financial success of the mutual companies, with any annual profits (the excess of invested premium income over death payments) being redistributed to the policyholders, often in the form of reduced premium payments. The rapid success of life insurance during the late 1840s, as seen in Figure 3, thus can be attributed both to this active marketing as well as to the appeal of mutual insurance itself.
Regulation and Stagnation after 1849
While many of these companies operated on a sound financial basis, the ease of formation opened the field to several fraudulent or fiscally unsound companies. Stock institutions, concerned both for the reputation of life insurance in general as well as with self-preservation, lobbied the New York state legislature for a law to limit the operation of mutual companies. On April 10, 1849 the legislature passed a law requiring all new insurance companies either incorporating or planning to do business in New York to possess $100,000 of capital stock. Two years later, the legislature passed a more stringent law obligating all life insurance companies to deposit $100,000 with the Comptroller of New York. While this capital requirement was readily met by most stock companies and by the more established New York-based mutual companies, it effectively dampened the movement toward mutualization until the 1890s. Additionally, twelve out-of-state companies ceased doing business in New York altogether, leaving only the New England Mutual and the Mutual Benefit of New Jersey to compete with the New York companies in one of the largest markets. These laws were also largely responsible for the decade-long stagnation in insurance sales beginning in 1849 [Figure 3].
The Civil War and Its Aftermath
By the end of the 1850s life insurance sales again began to increase, climbing to almost $200 million by 1862 before tripling to just under $600 million by the end of the Civil War; life insurance in force peaked at $2 billion in 1871 [Figures 3 and 4]. Several factors contributed to this renewed success. First, the establishment of insurance departments in Massachusetts (1856) and New York (1859) to oversee the operation of fire, marine, and life insurance companies stimulated public confidence in the financial soundness of the industry. Additionally, in 1861 the Massachusetts legislature passed a non-forfeiture law, which forbade companies from terminating policies for lack of premium payment. Instead, the law stipulated that policies be converted to term life policies and that companies pay any death claims that occurred during this term period [term policies are issued only for a stipulated number of years, require reapplication on a regular basis, and consequently command significantly lower annual premiums which rise rapidly with age]. This law was further strengthened in 1880 when Massachusetts mandated that policyholders have the additional option of receiving a cash surrender value for a forfeited policy.
The Civil War was another factor in this resurgence. Although the industry had no experience with mortality during war – particularly a war on American soil – and most policies contained clauses that voided them in the case of military service, several major companies decided to ensure war risks for an additional premium rate of 2% to 5%. While most companies just about broke even on these soldiers’ policies, the goodwill and publicity engendered with the payment of each death claim combined with a generally heightened awareness of mortality to greatly increase interest in life insurance. In the immediate postbellum period, investment in most industries increased dramatically and life insurance was no exception. Whereas only 43 companies existed on the eve of the war, the newfound popularity of life insurance resulted in the establishment of 107 companies between 1865 and 1870 [Figure 1].
Tontines
The other major innovation in life insurance occurred in 1867 when the Equitable Life Assurance Society (1859) began issuing tontine or deferred dividend policies. While a portion of each premium payment went directly towards an ordinary insurance policy, another portion was deposited in an investment fund with a set maturity date (usually 10, 15, or 20 years) and a restricted group of participants. The beneficiaries of deceased policyholders received only the face value of the standard life component while participants who allowed their policy to lapse either received nothing or only a small cash surrender value. At the end of the stipulated period, the dividends that had accumulated in the fund were divided among the remaining participants. Agents often promoted these policies with inflated estimates of future returns – and always assured the potential investor that he would be a beneficiary of the high lapse rate and not one of the lapsing participants. Estimates indicate that approximately two-thirds of all life insurance policies in force in 1905 – at the height of the industry’s power – were deferred dividend plans.
Reorganization and Innovation
The success and profitability of life insurance companies bred stiff competition during the 1860s; the resulting market saturation and a general economic downtown combined to push the industry into a severe depression during the 1870s. While the more well-established companies such as the Mutual Life Insurance Company of New York, the New York Life Insurance Company (1843), and the Equitable Life Assurance Society were strong enough to weather the depression with few problems, most of the new corporations organized during the 1860s were unable to survive the downturn. All told, 98 life insurance companies went out of business between 1868 and 1877, with 46 ceasing operations during the depression years of 1871 to 1874 [Figure 1]. Of these, 32 failed outright, resulting in $35 million of losses for policyholders. It was 1888 before the amount of insurance in force surpassed that of its peak in 1870 [Figure 4].
Assessment and Fraternal Insurance Companies
Taking advantage of these problems within the industry were numerous assessment and fraternal benefit societies. Assessment or cooperative companies, as they were sometimes called, were associations in which each member was assessed a flat fee to provide the death benefit when another member died rather than paying an annual premium. The two main problems with these organizations were the uncertain number of assessments each year and the difficulty of maintaining membership levels. As members aged and death rates rose, the assessment societies found it difficult to recruit younger members willing to take on the increasing risks of assessments. By the turn of the century, most assessment companies had collapsed or reorganized as mutual companies.
Fraternal organizations were voluntary associations of people affiliated through ethnicity, religion, profession, or some other tie. Although fraternal societies had existed throughout the history of the United States, it was only in the postbellum era that they mushroomed in number and emerged as a major provider of life insurance, mainly for working-class Americans. While many fraternal societies initially issued insurance on an assessment basis, most soon switched to mutual insurance. By the turn of the century, the approximately 600 fraternal societies in existence provided over $5 billion in life insurance to their members, making them direct competitors of the major stock and mutual companies. Just 5 years later, membership was over 6 million with $8 billion of insurance in force [Figure 4].
Industrial Life Insurance
For the few successful life insurance companies organized during the 1860s and 1870s, innovation was the only means of avoiding failure. Aware that they could not compete with the major companies in a tight market, these emerging companies concentrated on markets previously ignored by the larger life insurance organizations – looking instead to the example of the fraternal benefit societies. Beginning in the mid-1870s, companies such as the John Hancock Company (1862), the Metropolitan Life Insurance Company (1868), and the Prudential Insurance Company of America (1875) started issuing industrial life insurance. Industrial insurance, which began in England in the late 1840s, targeted lower income families by providing policies in amounts as small as $100, as opposed to the thousands of dollars normally required for ordinary insurance. Premiums ranging from $0.05 to $0.65 were collected on a weekly basis, often by agents coming door-to-door, instead of on an annual, semi-annual, or quarterly basis by direct remittance to the company. Additionally, medical examinations were often not required and policies could be written to cover all members of the family instead of just the main breadwinner. While the number of policies written skyrocketed to over 51 million by 1919, industrial insurance remained only a fraction of the amount of life insurance in force throughout the period [Figures 4 and 5].
International Expansion
The major life insurance companies also quickly expanded into the global market. While numerous firms ventured abroad as early as the 1860s and 1870s, the most rapid international growth occurred between 1885 and 1905. By 1900, the Equitable was providing insurance in almost 100 nations and territories, the New York Life in almost 50 and the Mutual in about 20. The international premium income (excluding Canada) of these Big Three life insurance companies amounted to almost $50 million in 1905, covering over $1 billion of insurance in force.
The Armstrong Committee Investigation
In response to a multitude of newspaper articles portraying extravagant spending and political payoffs by executives at the Equitable Life Assurance Society – all at the expense of their policyholders – Superintendent Francis Hendricks of the New York Insurance Department reluctantly conducted an investigation of the company in 1905. His report substantiated these allegations and prompted the New York legislature to create a special committee, known as the Armstrong Committee, to examine the conduct of all life insurance companies operating within the state. Appointed chief counsel of the investigation was future United States Supreme Court Chief Justice Charles Evans Hughes. Among the abuses uncovered by the committee were interlocking directorates, the creation of subsidiary financial institutions to evade restrictions on investments, the use of proxy voting to frustrate policyholder control of mutuals, unlimited company expenses, tremendous spending for lobbying activities, rebating (the practice of returning to a new client a portion of their first premium payment as an incentive to take out a policy), the encouragement of policy lapses, and the condoning of “twisting” (a practice whereby agents misrepresented and libeled rival firms in order to convince a policyholder to sacrifice their existing policy and replace it with one from that agent). Additionally, the committee severely chastised the New York Insurance Department for permitting such malpractice to occur and recommended the enactment of a wide array of reform measures. These revelations induced numerous other states to conduct their own investigations, including New Jersey, Massachusetts, Ohio, Missouri, Wisconsin, Tennessee, Kentucky, Minnesota, and Nebraska.
New Regulations
In 1907, the New York legislature responded to the committee’s report by issuing a series of strict regulations specifying acceptable investments, limiting lobbying practices and campaign contributions, democratizing management through the elimination of proxy voting, standardizing policy forms, and limiting agent activities including rebating and twisting. Most devastating to the industry, however, were the prohibition of deferred dividend policies and the requirement of regular dividend payments to policyholders. Nineteen other states followed New York’s lead in adopting similar legislation but the dominance of New York in the insurance industry enabled it to assert considerable influence over a large percentage of the industry. The state invoked the Appleton Rule, a 1901 administrative rule devised by New York Deputy Superintendent of Insurance Henry D. Appleton that required life insurance companies to comply with New York legislation both in New York and in all other states in which they conducted business, as a condition of doing business in New York. As the Massachusetts insurance commissioner immediately recognized, “In a certain sense [New York’s] supervision will be a national supervision, as its companies do business in all the states.” The rule was officially incorporated into New York’s insurance laws in 1939 and remained both in effect and highly effective until the 1970s.
Continued Growth in the Early Twentieth Century
The Armstrong hearings and the ensuing legislation renewed public confidence in the safety of life insurance, resulting in a surge of new company organizations not seen since the 1860s. Whereas only 106 companies existed in 1904, another 288 were established in the ten years from 1905 to 1914 [Figure 1]. Life insurance in force likewise rose rapidly, increasing from $20 billion on the eve of the hearings to almost $46 billion by the end of World War I, with the share insured by the fraternal and assessment societies decreasing from 40% to less than a quarter [Figure 5].
Group Insurance
One major innovation to occur during these decades was the development of group insurance. In 1911 the Equitable Life Assurance Society wrote a policy covering the 125 employees of the Pantasote Leather Company, requiring neither individual applications nor medical examinations. The following year, the Equitable organized a group department to promote this new product and soon was insuring the employees of Montgomery Ward Company. By 1919, 29 companies wrote group policies, which amounted to over a half billion dollars worth of life insurance in force.
War Risk Insurance
Not included in Figure 5 is the War Risk insurance issued by the United States government during World War I. Beginning in April 1917, all active military personnel received a $4,500 insurance policy payable by the federal government in the case of death or disability. In October of the same year, the government began selling low-cost term life and disability insurance, without medical examination, to all active members of the military. War Risk insurance proved to be extremely popular during the war, reaching over $40 billion of life insurance in force by 1919. In the aftermath of the war, these term policies quickly declined to under $3 billion of life insurance in force, with many servicemen turning instead to the whole life policies offered by the stock and mutual companies. As was the case after the Civil War, life insurance sales rose dramatically after World War I, peaking at $117 billion of insurance in force in 1930. By the eve of the Great Depression there existed over 120 million life insurance policies – approximately equivalent to one policy for every man, woman, and child living in the United States at that time.
(Sharon Ann Murphy is a Ph.D. Candidate at the Corcoran Department of History, University of Virginia.)
References and Further Reading
Buley, R. Carlyle. The American Life Convention, 1906-1952: A Study in the History of Life Insurance. New York: Appleton-Century-Crofts, Inc., 1953.
Grant, H. Roger. Insurance Reform: Consumer Action in the Progressive Era. Ames, Iowa: Iowa State University Press, 1988.
Keller, Morton. The Life Insurance Enterprise, 1885-1910: A Study in the Limits of Corporate Power. Cambridge, MA: Belknap Press, 1963.
Kimball, Spencer L. Insurance and Public Policy: A Study in the Legal Implications of Social and Economic Public Policy, Based on Wisconsin Records 1835-1959. Madison, WI: University of Wisconsin Press, 1960.
Merkel, Philip L. “Going National: The Life Insurance Industry’s Campaign for Federal Regulation after the Civil War.” Business History Review 65 (Autumn 1991): 528-553.
North, Douglass. “Capital Accumulation in Life Insurance between the Civil War and the Investigation of 1905.” In Men in Business: Essays on the Historical Role of the Entrepreneur, edited by William Miller, 238-253. New York: Harper & Row Publishers, 1952.
Ransom, Roger L., and Richard Sutch. “Tontine Insurance and the Armstrong Investigation: A Case of Stifled Innovation, 1868-1905.” Journal of Economic History 47, no. 2 (June 1987): 379-390.
Stalson, J. Owen. Marketing Life Insurance: Its History in America. Cambridge, MA: Harvard University Press, 1942.
Table 1
Early American Life Insurance Companies, 1759-1844| Company | Year Chartered | Terminated | Insurance in Force in 1840 |
| Corp. for the Relief of Poor and Distressed Widows and Children of Presbyterian Ministers (Presbyterian Ministers Fund) | 1759 | ||
| Corporation for the Relief of the Widows and Children of Clergymen in the Communion of the Church of England in America (Episcopal Ministers Fund) | 1769 | ||
| Insurance Company of the State of Pennsylvania | 1794 | 1798 | |
| Insurance Company of North America, PA | 1794 | 1798 | |
| United Insurance Company, NY | 1798 | 1802 | |
| New York Insurance Company | 1798 | 1802 | |
| Pennsylvania Company for Insurances on Lives and Granting Annuities | 1812 | 1872* | 691,000 |
| New York Mechanics Life & Fire | 1812 | 1813 | |
| Dutchess County Fire, Marine & Life, NY | 1814 | 1818 | |
| Massachusetts Hospital Life Insurance Company | 1818 | 1867* | 342,000 |
| Union Insurance Company, NY | 1818 | 1840 | |
| Aetna Insurance Company (mainly fire insurance; separate life company chartered in 1853) | 1820 | 1853 | |
| Farmers Loan & Trust Company, NY | 1822 | 1843 | |
| Baltimore Life Insurance Company | 1830 | 1867 | 750,000 (est.) |
| New York Life Insurance & Trust Company | 1830 | 1865* | 2,880,000 |
| Lawrenceburg Insurance Company | 1832 | 1836 | |
| Mississippi Insurance Company | 1833 | 1837 | |
| Protection Insurance Company, Mississippi | 1833 | 1837 | |
| Ohio Life Ins. & Trust Co. (life policies appear to have been reinsured with New York Life & Trust in the late 1840s) | 1834 | 1857 | 54,000 |
| New England Mutual Life Insurance Company, Massachusetts (did not begin issuing policies until 1844) | 1835 | 0 | |
| Ocean Mutual, Louisiana | 1835 | 1839 | |
| Southern Life & Trust, Alabama | 1836 | 1840 | |
| American Life Insurance & Trust Company, Baltimore | 1836 | 1840 | |
| Girard Life Insurance, Annuity & Trust Company, Pennsylvania | 1836 | 1894 | 723,000 |
| Missouri Life & Trust | 1837 | 1841 | |
| Missouri Mutual | 1837 | 1841 | |
| Globe Life Insurance, Trust & Annuity Company, Pennsylvania | 1837 | 1857 | |
| Odd Fellow Life Insurance and Trust Company, Pennsylvania | 1840 | 1857 | |
| National of Pennsylvania | 1841 | 1852 | |
| Mutual Life Insurance Company of New York | 1842 | ||
| New York Life Insurance Company | 1843 | ||
| State Mutual Life Assurance Company, Massachusetts | 1844 |
About Life Insurance
Paying for life insurance hurts! But few can do without it. The key is to buy life insurance only for losses that you can not replace, such as your income. Avoid narrowly defined life insurance policies that only cover specific loss of life, such as accidents, plane crashes or cancer. You're better off with insurance for any loss of life for a small increase in premium.
Don't skimp on life insurance. But remember that people with no dependents may not need life insurance policies at all. To estimate the amount of a life insurance policy, use our life insurance calculator. Most life insurance consultants estimate five to ten times your annual income. Smoker life insurance costs two to three times as much as non-smoker.
Jane Bryant Quinn advises how to find the best term life insurance quotes in When Your Term Life Insurance Expires. Budget Life uses the Term4Sale database recommended by Ms.Quinn for term life insurance comparisons.
Make sure your policy has an option for accelerated death benefits. This option will enable you to access your life insurance policy if you contract a terminal illness.
Whole or Term Life Insurance?
Term life insurance: There really is no debate about whole life insurance vs term insurance. They are used for different purposes. Term life insurance covers a person against death for a specific term, for example, until children are grown, or until college is paid for, or until retirement. If no claim is made against the term life insurance policy, you don't receive any benefits after the policy expires, just like auto or homeowners insurance.
Whole life insurance, also called permanent insurance, lasts your whole life; it does not expire as long as you pay the premiums. It provides coverage similar to term life insurance, but it also provides an investment vehicle. A portion of the premium goes for the whole life insurance, while the rest goes into an investment account. This account can be an interest bearing account or a variable (stocks) investment account.
Which is better (our opinion)? A young family with large financial obligations is usually better off with a term life insurance policy. The substantially lower premiums enable them to purchase sufficient coverage to protect against loss of income. Any discretionary investment funds can be placed in other vehicles (mutual funds, money market accounts, etc.) that are likely to generate returns similar to or better than a life insurance policy. Whole life insurance is often purchased by people for tax and estate planning purposes. Recently, some advisors have started recommending life insurance as an investment. You should consult with your financial advisor.
About Budget Life
The following term life insurance companies head up the Budget Life Top 15: Ohio National Life Assurance Corporation, Transamerica Life Insurance Company, Savings Bank Life Insurance Company of MA, Western Reserve Life Insurance Company of OH, AXA Equitable Life Insurance Company, Genworth Life and Annuity Insurance Company. We use a third party database of the best term life insurance companies to rank in terms of lowest life insurance rates. We can also provide whole and term life insurance quotes online.
Term life insurance rates have been dropping steadily in response to increased competition. Term life insurance is a commodity, and improved access to online life insurance quotes information, such as at this Web site, is making it even more so. Whether to use life insurance as an investment is a separate decision; but for the lowest life insurance cost, which is term insurance, why pay more than you have to?
Budget Life also lets you obtain term life insurance quotes from independent agents. A life insurance agent who uses our database can ensure that you receive the lowest life insurance rates, rather than just a quote for one life insurance company. Term life insurance quotes are commodities, so be sure to get the best term life insurance rate. Some can also provide life insurance underwriting for impaired risk life insurance.
To some, life insurance seems like an unnecessary expense. But if you have people who depend on you -- and your income -- you need it.
The purpose of life insurance is to take care of your dependents. As such, it's an important part of your financial plan. How much life insurance do you need? Should you buy whole life or term? Is there a time when you don't need life insurance? This chapter will explain every aspect of a life insurance policy so you will be an educated consumer when you go shopping for one.
Major types of life insurance
If insurance terms leave you dazed and confused, here's a quick cheat sheet for four major types of policies. Keep in mind that definitions may vary slightly from company to company and from state to state:
Term insurance -- The simplest form of insurance. You purchase coverage for a specific price for a specified period. If you die during that time, your beneficiary receives the value of the policy. There is no investment component.
Whole life -- Similar to term, but you purchase the policy to cover your "whole life" not just a set period. Premiums remain level throughout the life of the policy, and the company invests at least a portion of your premiums. Some firms share investment proceeds with policyholders in the form of a dividend. Many companies will offer "a relatively low guaranteed rate of return," but in reality pay at a rate in excess of the guarantee.
Universal life -- You decide how much you want to put in over and above a minimum premium. The company chooses the investment vehicle, which is generally restricted to bonds and mortgages. The investment and the returns go into a cash-value account, which you can use against premiums or allow to build. With some policies, sometimes called Type I or Type A, the cash account goes toward the face value of the policy on the death of the policyholder. With a second variety, sometimes called Type II or Type B, the beneficiary receives the face value of the policy plus all or most of the cash account. While Type II is meant to provide a partial hedge against inflation, it demands higher premiums as you get older than Type I.
A variation of a universal policy, often called universal variable life, allows policyholders to choose investment vehicles.
Variable life -- With a variable policy, there is usually a wider selection of investment products, including stock funds. As with a universal policy, returns on investments can offset the cost of premiums or build in the account. And depending on the type of policy, the beneficiaries will either receive the face value of the policy or the face value plus all or part of the cash account.
Inflation and deflation
he main differences between inflation and deflation.
Introduction
Inflation is commonly understood as a situation of substantial and rapid general increase in the level of prices and consequent deterioration in the value of money over a period of time. Different economists have defined inflation differently. We may, thus, enlist a few important definitions as under which would give us a comprehensive idea about this intricate problem. Harry Johnson defines inflation as a sustained rise in prices. Crowther, similarly, defines inflation as "a state in which the value of money is falling, i.e., prices are rising".
Inflation versus Deflation
Both Inflation and Deflation are socially bad, but inflation may be considered to be the lesser of the two evils. Inflation is unjust in its effects on the following counts:
1. Inflation redistributes income in the favour of the rich and the profiteer class at the cost of the poor masses - the wage-earners and consumers.
2. Through its redistributive effects, inflation increases the inequality of income in the community by widening the gulf between higher income groups and lower income groups. The rich become richer and the poor become poorer during inflation.
3. Inflation is regressive in effect in the sense that it hits hard those who are already weak and cannot protect themselves. It is specially the middle class which suffers most due to inflation.
4. Inflation is unjust because it affects different classes of people in society in different ways and different degrees .if inflation were to affect everyone in the society in exactly the same manner and to the same degree, it would not alter the economic and social relationships in the community. But inflation takes away wealth from some people and transfers to others arbitrarily without taking into consideration the sound maxim of social equity.
5. Inflation is also unjust because it breaks public morale. From the point of view of social ethics, inflation is always demoralizing; it introduces the spirit of gambling. It promotes speculation, hoarding, and diverts business skill and efficiency from productive purposes to speculative purposes.
6. Inflation erodes real savings by deterioration in the value of money.
7. Inflation creates money illusion and generates artificial prosperity, which is not permanent.
On the other hand, Deflation is inexpedient and, therefore, not advisable. It is considered inexpedient for the following reasons;
1. Deflation means falling prices in general which adversely affect the marginal efficiency of capital. Consequently, investment volume tends to contract causing unemployment to increase.
2. Deflation paves the way for depression. In a depressionary phase, economic activity contracts, scale of production is curtailed, output shrinks, no new investment if forthcoming; on the contrary, investment is curtailed.
3. By reducing aggregate income, it also pauperizes every group in society. It inflicts on society the harsh punishment of mass unemployment. Volume of employment falls, money income of the community diminishes and, therefore, even though people's purchasing power is increased due to falling prices, they are unable to buy goods in the required quantity. Thus, aggregate demand falls, profit falls producers suffer heavy losses and curtail investment and output further, leading to a further decline in employment and income.
This clearly shows that through inflation is unjust, it is better than deflation. Prof. Keynes showed a preference for inflation, because it is the lesser of the two evils.
The following points bring out the fact that inflation is a lesser evil:
1. Inflation, though it redistributes income and wealth in the community in an unjust manner, does not reduce the national income of the community. Deflation, on the other hand, reduces the national income of the community and pauperizes society as a whole.
2. Deflation increases the level of unemployment in the economy, whereas inflation at least implies that all factors are employed in some way or another. Inflation is a post-full employment phenomenon; deflation is an under-employment phenomenon aggravating the problem of unemployment.
3. It is easy to control inflation by a clear money policy, coordinated by appropriate fiscal policy, but it is difficult to recover from deflation. Once a deflationary tendency starts, it increases business pessimism, the marginal efficiency of capital diminishes, and investment is contracted, and ultimately a severe depression sets in. Monetary policy becomes helpless here, and no amount of increase in the money supply can revive the price level and business expectations or marginal efficiency or capital in the economy during depression. On the other hand, an inflationary spiral can be reflated by controlling credit and money supply.
4. Prof. Keynes felt that a mild inflation could stimulate economic development. In his opinion, poverty in the midst of plenty can be overcome by raising the price level through the injection of more purchasing power by way of deficit financing of public investment programs.
Thus most economists including Prof. Keynes preferred inflation to deflation. But, at the same time Prof. Keynes recognized the dangers of inflation and suggests that it should not go out of control, since hyperinflation can be extremely bad.
Information on long term care insurance
Long-term care insurance: who needs it, when and why. Learn how it can forestall financial disaster, and what to seek in coverage.
Long term care insurance is a hot topic today, and it needs to be a thoughtful concern of those who are considering its purchase. The cost of any type of extended care rises every year and we know only too well that it will continue to do so.
Some people do not need to think about insuring themselves against a prolonged need for daily assistance. The very wealthy, who in 2001 can afford to pay $30,000-80,000 per year for care, should read no farther. At the other end of the spectrum, those with few assets and limited incomes will qualify for Medicaid very quickly and don’t require insurance either. Singles don’t have the need to protect their assets for a spouse and may opt to take their chances without insurance.
Bob, who was the younger of the two, suffered a stroke that left him unable to care for himself. Mary, a slight little lady, couldn’t care for him at home. The answer was a nursing home and the cost was in excess of $3,000 per month. (These are central Virginia amounts—that figure could be more than double in high cost areas.) Additionally, the monthly charge for the home care doesn’t include prescriptions, supplies or any medical procedures not performed in the nursing home.
Because of the value of their assets, Bob and Mary could not qualify for Medicaid. The monthly income for the two was low—social security and a small pension. Mary sold the farm equipment, one rental house and some land. However, the house was mortgaged and the equipment went at fire sale prices. The rental properties operated at negative cash flow, and Mary had those expenses in addition to Bob’s care.
Fortunately, there was timber that sold and brought in needed cash—it provided money for the nursing home for less than three years. That was a true case of money growing on trees, but most of us don’t have that kind of a resource. Bob died last spring although his day-to-day health was such he could have lived much longer. Mary commented, “Bob and his money ran out at the same time.”
At a time when Mary needed all her inner resources to cope with the illness of her spouse, she was called upon to juggle finances to simply stay afloat. Hearing the story should cause many to perform in-depth analyses of their financial situations. Not everyone has a million-dollar estate but they do have could easily be shrunk to nothing if long-term care is required for any extended period.
Another common factor in today’s society is for a couple to have children by prior marriages. This can further complicate the situation, especially if the estate value is skewed to one of the partners. The next generation may resent the assets of one being depleted to care for the other.
In spite of legislation that attempted to prohibit the advice, many professionals still advise clients to “spend down” their assets so that Medicaid will be available should long-term care be required. This is generally accomplished by gifting and can trigger gift taxes if the assets are considerable. In addition, if gifting within the family you can have the age-old problem of siblings who are resentful or who spend the gifts immediately even though it might have been the donor’s intention that the money be set aside for later care.
For those who opt for insurance, it’s expensive. Even in areas where the rates for healthcare are relatively low, the policies required to cover the expenses have high premiums. In high-cost areas, more coverage and higher expenses would be necessary. On the other hand, the insurance does more than guarantee care—it can give peace of mind and the knowledge that assets may be used for our enjoyment now, not hoarded against the day the dark clouds produce rain.
Whatever the individual circumstances, anyone who’s considering long-term care insurance should shop around; become familiar with the coverage offered by various policies and know what current nursing home or in-home care costs in your community. Coverage for in-home care should be included as the trend for leaving the elderly in their homes as long as possible is on the rise. There are various features in all the policies that protect the insured against inflation and those should also be thoroughly understood.
Shop till you drop is highly recommended here. This is insurance against a catastrophe, not for one. Hopefully, you’ll never need it, but if you are among those that need it for peace of mind and asset protection, shop now..
Types of life insurance
Description of several types of life insurance products including Single Premium Life, Term Life, Whole Life, Universal Life, and Variable Life policies
There are many types of life insurance products available to meet the differing needs of many individuals and families. It is often difficult to understand what kind of protection each policy offers. Learn more about the various types of life insurance products and to clarify the differences between these policies. In order to evaluate which life insurance policy will meet your particular needs, it is important to discuss the matter with an agent or advisor. There are numerous factors to evaluate before purchasing life insurance coverage. Some of the many things you should consider include your age, marital status, number and ages of your children, medical history, earning capability, debt ratio, and anticipated financial needs.
Single Premium Life insurance requires the insured to pay a one-time premium to receive a fully paid life insurance policy. There is usually a minimum death benefit that depends on the individual insured and the amount of the lump sum payment received for the policy. Normally, the full payment goes into a cash value account and the interest rate is applied to the cash value account annually. The interest rate may fluctuate from year to year but there is usually a guaranteed minimum interest rate amount. The insurance company typically charges an annual fee, which covers mortality risks and administrative costs. This policy is usually looked at as a long-term policy since insurance companies typically charge a large amount on a Single Premium Life insurance policy if the insured takes money out during the first few years. The insured may take out a loan against this type of policy and usually the terms are favorable to the insured. Most insurance companies try to structure these policies to meet federal tax law requirements so that death benefits are free from income tax to the beneficiary.
Term Life insurance provides a specific amount of life insurance coverage for a designated time period. Currently, the available policy lengths for Term Life insurance are one year, five years, ten years and fifteen years. If the insured person dies within the time frame in which the policy is in effect, the insurance company pays out the face value of the policy. If the insured person lives longer than the term of the policy, the policy expires and would pay nothing. Term Life insurance does not build any type of equity is often one of the least expensive types of insurance and is available in several forms. Term Life insurance is typically purchased as a means of temporary protection or when an individual can't afford the cost of other forms of Life insurance. Some people prefer to invest their own money elsewhere and feel they can obtain higher yields without having to use a Life insurance plan.
There are Renewable and Non-Renewable Term Life policies. Both of these types are fairly simple and can be dealt with quickly. With Renewable Term Life, one automatically re-qualifies and is able to continue the existing policy when the original term is up. Non-Renewable simply means that when the policy expires the individual must take another physical and answer more health questions in order to re-qualify for a new policy.
There are also Convertible and Non-Convertible Term Life policies available. With Convertible Term Life policies, the insured may switch his/her term policy into a permanent form of life insurance such as Whole Life, Universal Life or Variable Life. Non-Convertible simply means that one can't switch the policy to another form of life insurance.
Level and Decreasing Term Life insurance are often more difficult to understand and determine which is appropriate for one's needs. The selection of one over the other is entirely dependent on the individual's personal financial conditions and needs. Level Term insurance provides a designated dollar amount of coverage for the entire period of the policy. For example, a five-year Level Term policy for $100,000 will pay $100,000 at any time the insured dies within the policy's effective period. With Decreasing Term, the sum of money that will be paid upon the death of the insured is reduced gradually over the policy period. Less would be paid out as the policy ages. One reason to select Decreasing Term insurance may be that one's financial needs may be decreasing during the policy period. For example, if you were to purchase a 10-year Decreasing Term policy and were anticipating having your house paid off or your children out of college, you may not feel that you need as much Life insurance in the future as you do today.
Whole Life insurance provides coverage for the entire life of the person insured, regardless of how long you have the policy or how much has been collected in premium payments that keep the policy in force. Premiums may be paid throughout the insured's life or for a portion of his/her life (for example, 10 years or 20 years). Also, premiums may be paid in lump sums when the policy is taken out. The cash value portion of a Whole Life insurance policy belongs to the insured and may be taken out as policy loans or when the policy is cashed in. With Whole Life insurance, part of the premium payment goes toward the insurance portion of the policy, part of the premium payment goes toward administrative expenses and the remainder goes toward the investment or cash portion of the policy. The investment portion of the policy usually consists of stocks, bonds and/or mutual funds. Interest drawn on the investment portion of a Whole Life policy is usually tax-free until it is withdrawn.
Universal Life insurance is a variation of Whole Life insurance. The difference is that with Universal Life, the term life portion of the policy is separate from the investment or cash portion of the policy. Also, with Universal Life policies, the investment portion of the policy is invested in money market funds as opposed to stocks, bonds and mutual funds. The cash value portion of the policy is an accumulation fund that investment interest is credited to and death benefits are paid from. With Universal Life insurance, the insured can vary the amount of his/her annual death benefit and annual premium payments. Insured people may also make partial surrenders of the policy and/or take policy loans against the cash value of the policy. A partial surrender is when an insured withdraws some of the funds that have accumulated in the investment or cash portion of the policy.
There are two types of Universal Life insurance. Under Option A, there is a set death benefit for the insured regardless of premiums paid to keep the policy in force. Under Option B, the death benefit for insured is equal to a set amount plus the current cash value of the policy at the time of the insured's death. Option B usually pays out more than Option A following the death of an insured.
Variable Life insurance is also a form of Whole Life insurance. As with Whole Life and Universal Life insurance, part of the premium payment goes toward the term life portion of the policy, part to administrative expenses and part to the investment or cash value portion of the policy. There is a major difference between the investment portion of Variable Life and that of other forms of life insurance. With Variable Life, the insured person (you) is able to choose how to invest the funds in the investment portion of the policy. The insured may select from an array of investments such as stocks, bonds and mutual funds as long as they are within the insurance companies portfolio. Usually, there are a few times during the year that the insured person may modify his/her investment selections. Variable Life insurance is generally more expensive than other forms of Life insurance. Death benefits may fluctuate up or down depending on investment performance however, there is usually a minimum level for benefits so they will not drop below a certain level.
|
Subscribe to:
Posts (Atom)
