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Consumer Tips in Purchasing Life Insurance or an Annuity

Here are tips for consumers who are in the market for purchasing life insurance or an annuity:

Know what you need:

The classic and best reason for an individual to buy life insurance is for protection against dying too soon. The person buying life insurance should be primarily concerned with seeing that his or her survivors do not face a financial hardship. Life insurance is also purchased to pay estate taxes. Consider the number of people who are dependent upon you financially, if you will have substantial debts and taxes owed after your death, and if you have alternatives that could take care of some of these expenses. Business relationships often require life insurance or can benefit from it. Beware of anyone who tries to sell you life insurance as an "investment." Life insurance should be purchased for the protection it will give you, and at least part of the premium pays for that protection.

Annuities offer a secure way for consumers to make sure they do not outlive their money. They provide the purchaser with a regular income, either immediately or at some time in the future, for a specified period of time or for as long as he or she lives. Interest earned on an annuity is tax-deferred until it is actually withdrawn, either as a cash withdrawal or as part of periodic payments. In most cases, but not all, a death benefit is available for the beneficiary.

Death benefit proceeds from life insurance and annuities are paid directly to the designated beneficiary, thus avoiding probate in most cases.

Term life insurance:

Some consumer advocates feel that term insurance is the best life insurance buy. Term is different from "whole life" or "universal life" in that you do not build up equity, or cash value. In term, you just pay for the cost of insurance based on your age. Most term policies are renewable on an annual basis, and premiums typically increase annually. Some have level premiums or a decreasing death benefit for a stated period -- one, five, or 10 years, or even to a specified age. Ask yourself if the premium increases later, and you still need the insurance, will you still be able to afford it?

Whole life insurance:

Whole, or "ordinary," life insurance is usually sold with a level premium. In the early years of the policy, the annual premium will be higher than comparable term insurance; but because its premiums are level, premiums may eventually be less than term. Whole life policies build up a cash value that consumers can withdraw or borrow against. There are many variations of whole life. Premiums may be payable for a specified number of years on a limited-payment basis. Consumers also may have the option of a single premium -- paying all of the premiums at once with a single lump sum. Be careful of any life insurance plan that promises “vanishing premiums” or a premium-free policy over a specified period. There are no guarantees that the premiums will vanish.

Flexible premium universal life insurance:

Universal life insurance is flexible in nature in that you can choose, within limits, the premiums you will pay and the amount of insurance you want. Both can be changed at a later date depending on the policy values and your financial needs. However, since the policy value is “interest-sensitive,” which means the cash value grows in response to the general financial climate, if insufficient premiums are paid, the policy could lapse without value before it reaches a maturity date, or you could be charged much higher premiums to keep it in force. Companies must send you an annual report and notify you if you are in danger of losing your policy because of insufficient value.

Accelerated benefits:

Authorized Idaho life insurers can issue policies that include the possibility of accelerated benefits. Under this option, a consumer suffering from a terminal illness with only a short time to live can opt to receive discounted benefits prior to death.

Know the company you are buying from:

You can check the financial stability of any life insurance company through several reputable national rating companies. Some ratings are available at public libraries. The Idaho Department of Insurance’s staff can verify that a company is authorized to do business in Idaho, and you can also check here to see what kind of complaints have been filed by other consumers against a company. Information on ratings, complaints and licensing is available from the Department’s toll-free number at 1-800-721-3272.

Shop around for rates:

Life insurance is a competitive marketplace, and much of the competition focuses on price. Do not hesitate to seek premium quotes from several different companies to find out which one is likely to give you the best value for your money.

Shop for your own needs:

If term insurance fits, that is what you should shop for. If you want to lower your premium at all costs, you may want to consider using a direct writer, a company that cuts costs by operating without agents. Consider your own convenience, however: Do you want personal contact with an agent? Or if you buy an annuity, how fast can you get to your money in case of an emergency? If you are buying universal or whole life, how fast does your money accumulate? What will the cash value be in one year, three years, 10 years? What are the guaranteed values versus the projected values?

Update your coverage as your circumstances change:

Your situation may change dramatically from year to year. Review your net worth every few years and reconsider the prospects your survivors may face if you die.

Do not let yourself get fast-talked into changes:

Some life insurance policyholders in recent years have fallen victim to a practice called "twisting" or "churning." Churning occurs when your coverage is changed only to benefit the seller even though you may suffer a loss in the process. Churning often happens when people with cash-value policies are persuaded to convert their coverage to another policy, often one with a promise of better benefits. The problem is that the cash value of the original policy is raided in order to pay for the new policy. Luckless consumers may not realize until years later that the "higher" benefit policy is actually worth only a fraction of the value of the original policy. If you are offered a chance to turn in a small policy for a larger one without paying substantially more, WATCH OUT!

Never buy a policy you do not understand:

If you are given illustrations or booklets, save that material with your policy. If your agent or company cannot explain the policy terms to your satisfaction, shop elsewhere. Make sure you understand the guarantees in your policy (not just the agent's promises of returns) and the surrender penalties if you choose to drop the policy at any time. These costs are often hidden in a life insurance or annuity policy.

Never give an agent money

without getting a receipt. Never loan money to an agent without getting documentation signed by you and the agent regarding the loan amount and its terms and conditions.

Never sign

a form that includes blank spaces, even if the agent assures you they are merely a formality.

Review your policy:

If you decide to purchase a life insurance or annuity contract, review it carefully as soon as it is delivered. /Also review the application to make sure your answers were recorded correctly. For life policies you may also be given a Buyer’s Guide and policy summary at the time of delivery.For annuity policies the company or agent must provide disclosure information documents and a Buyer's Guide. If there is any part of the documents you do not understand, ask your agent or the company for an explanation. Always remember, in Idaho, you have 20 days to return your policy to the agent or the company for a full refund of the premium paid if you are not satisfied with it for any reason.

The Idaho Department of Insurance can help you:

If you have any questions or need additional information about your rights as an insurance consumer, call us at 208-334-4250 or our toll-free number at 1-800-721-3272.

Updated 1/13/12