LEARNING THE BASICS

LEARNING THE BASICS

The best way to make an informed decision about buying life
insurance is to become familiar with the basics.

Why do I need life insurance?
Life insurance is an essential part of financial planning. One
reason most people buy life insurance is to replace income that
would be lost with the death of a wage earner. The cash provided
by life insurance also can help ensure that your dependents are
not burdened with significant debt when you die. Life insurance
proceeds could mean your dependents won't have to sell assets to
pay outstanding bills or taxes. An important feature of life
insurance is that no income tax is payable on proceeds paid to
beneficiaries.

How much life insurance do I need?
Before buying life insurance, you should assemble personal
financial information and review your family's needs. There are a
number of factors to consider when determining how much
protection you should have.

These include: any immediate needs at the time of death, such as
final illness expenses, burial costs and estate taxes;l funds for
a readjustment period, to finance a move or to provide time for
family members to find a job; and ongoing financial needs, such
as monthly bills and expenses, day-care costs, college tuition or
retirement. Although there is no substitute for a careful
evaluation of the amount of coverage needed to meet your needs,
one rule of thumb is to buy life insurance that is equal to five
to seven times your annual gross income.

What is term insurance?
Term insurance provides protection for a specific period of time.
It pays a benefit only if you die during the term. Some term
insurance policies can be renewed when you reach the end of a
specific period which can be from one to 20 years. The premium
rates increase at each renewal date. Many policies require that
evidence of insurability be furnished at renewal for you to
qualify for the lowest available rates.

What is permanent insurance?
Permanent insurance provides lifelong protection and is known by
a variety of names, described later. As long as you pay the
necessary premiums, the death benefit always will be there. These
policies are designed and priced for you to keep over a long
period of time. If you don't intend to keep the policy for the
long term, it could be the wrong type of insurance for you.

Most permanent policies including whole, ordinary, universal,
adjustable and variable life have a feature known as "cash value"
or "cash surrender value". This feature, which is not found in
most term insurance policies, provides you with some options:

You can cancel or "surrender" the policy "in total or in part"
and receive the cash value as a lump sum of money. If you
surrender your policy in the early years, there may be little or
no cash value.l If you need to stop paying premiums, you can use
the cash value to continue your current insurance protection for
a specific period of time or to provide a lesser amount of
protection to cover you for as long as you live. Usually, you may
borrow from the insurance company, using the cash value in your
life insurance as collateral. Unlike loans from most financial
institutions, the loan is not dependent on credit checks or other
restrictions. You ultimately must repay any loan with interest or
your beneficiaries will receive a reduced death benefit.

The cash values of many life insurance policies may be affected
by your company's future experience, including mortality rates,
expenses and investment earnings. Keep in mind that with all
types of permanent policies, the cash value of a policy is
different from the policy face amount. Cash value is the amount
available when you surrender a policy before its maturity or your
death. The face amount is the money that will be paid at death or
at policy maturity.

What are the types of permanent insurance?
There are many different types of permanent insurance. The major
ones are described below:

Whole Life or Ordinary Life
This is the most common type of permanent insurance. The premiums
for a whole life policy must be paid periodically in the amount
indicated in the policy. These premium amounts generally remain
constant over the life of the policy.

Universal Life or Adjustable Life
This variation of permanent insurance allows you, after your
initial payment, to pay premiums at any time, in virtually any
amount, subject to certain minimums and maximums. You also can
reduce or increase the amount of the death benefit more easily
than under a traditional whole life policy. (To increase your
death benefit, you usually will be required to furnish the
insurance company with satisfactory evidence of your continued
good health.)

Variable Life
This type of permanent policy provides death benefits and cash
values that vary with the performance of an underlying portfolio
of investments. You can choose to allocate your premiums among a
variety of investments which offer varying degrees of risk and
reward stocks, bonds, combinations of both, or accounts that
provide for guarantees of interest and principal. You will
receive a prospectus in conjunction with the sale of a variable
product.

The cash value of a variable life policy is not guaranteed, and
the policyholder bears that risk. However, by choosing among the
available fund options, the policyholder can create an asset
allocation that meets his or her objectives and risk tolerance.
Good investment performance will lead to higher cash values and
death benefits. On the other hand, poor investment performance
will lead to reduced cash values and death benefits.

Some policies guarantee that death benefits cannot fall below a
minimum level. There are both universal life and whole life
versions of variable life.


What are the advantages and disadvantages of term and permanent
insurance?

Term Insurance

Advantages
Initially, premiums are generally lower than those for permanent
insurance, allowing you to buy higher levels of coverage at
a younger age when the need for protection often is greatest.l
It's good for covering specific needs that will disappear in
time, such as mortgages or car loans.

Disadvantages
Premiums increase as you grow older.l Coverage may
terminate at the end of the term or may become too expensive to
continue.l Generally, the policy doesn't offer cash value or
paid-up insurance.

Permanent Insurance

Advantages
As long as the necessary premiums are paid, protection is
guaranteed for your entire life.l Premium costs can be fixed or
flexible to meet personal financial needs.l Policy accumulates a
cash value that you can borrow against. (Loans must be paid back
with interest or your beneficiaries will receive a reduced death
benefit.) You can borrow against the policy's cash value to pay
premiums or use the cash value to provide paid-up insurance. The
policy's cash value can be surrendered' in total or in part ' for
cash or converted into an annuity. (An annuity is an insurance
product that provides an income for a person's life-time or for a
specific period of time.)l A provision or "rider" can be added to
a policy that gives you the option to purchase additional
insurance without taking a medical exam or having to furnish
evidence of insurability. (For more information on riders, see
page 19.)

Disadvantages
Required premium levels may make it hard to buy enough
protection.l It may be more costly than term insurance if you
don't keep it long enough.