Do I really need life insurance?
You don't need life insurance as long as no one else is financially dependent on you. But examine this question carefully. If you have children and their financial well-being would be materially affected by your death, you probably need life insurance. If you're married but childless, you might still want coverage. The same might be true if you feel your parents will someday depend on you financially. The larger the financial load you carry, and the more people depend on you in this way, the more you need life insurance.

How much life insurance do I need?
A fairly good rule of thumb offered by the National Insurance Consumer Organization is that you need coverage equal to at least seven years of current annual income, assuming you are married and have two or more children. Another way to determine the amount of life insurance to buy is to think about how much you will need to pay for major debts or expenditures, such as your mortgage, other loans, and college for your children. If, for example, you'd like your spouse to have enough of a life insurance death benefit to be able to pay off half of your mortgage and pay for half of your children's college education, then simply add half of your mortgage amount to half of their estimated college costs and buy that amount of life insurance. Of course, you can always ask an insurance agent, financial planner or other expert to help you determine how much life insurance coverage is adequate. But since many of them work on commission, be sure that you're not pushed into buying too much coverage.

When should life insurance be purchased on my spouse's life?
If you're married and both you and your spouse work, each of you should probably have an individual life insurance policy. Creating a single irrevocable life insurance trust to hold the policies could provide some important tax benefits if the value of your estate exceeds $675,000 for 2001. The single irrevocable life insurance trust provides a tool to insure a spouse without correspondingly increasing the federal estate taxes to the children and grandchildren. This approach also allows the surviving spouse and family members to offset the financial consequences due to the loss of a spouse's income or contributions to the family as a homemaker. This arrangement is both income tax-free and estate tax-free, and the trust makers get full value for the premium dollars they spend on their coverage. Life insurance should be purchased on your life or your spouse's life individually whenever there is a need to provide an income stream or principal amount to the survivor.

Is it a good idea to buy life insurance on our children?
Most parents need life insurance, but, for children, life insurance is usually a waste of money. What secures a child's future is life insurance on the parents and the child's own college-savings fund. Some parents are persuaded to save for college in a cash-value, kid-insurance policy. But the cost of the needless life insurance greatly slashes the return on investment. For a larger college fund, put money into a growth mutual fund instead. You may want to consider buying a small term life insurance policy to cover burial expenses if you think it might be difficult to pay the $5,000 to $10,000 cost of a funeral.

As a single person, do I really need life insurance to pay funeral expenses and take care of my debts?
If you're single, you may need life insurance for a variety of reasons. However, the old industry sales pitch that you need insurance to pay for your funeral and retire your debts if you die prematurely is not among them. Your parents, other relatives, or friends will probably be willing to pay for your funeral in the unlikely event you die with no assets. As for your debts, unless you cosigned a loan with parents, partners, or friends, no one else will be responsible for paying them. If you have any assets, the creditors will sell them to pay your debts. Otherwise, the creditors will simply take the loss.

Is it best to buy life insurance through my employer's group plan or by myself?
Many large employers provide some life insurance for employees. A typical plan pays a $50,000 or $100,000 death benefit, or an amount equal to one or two years of your salary. If you need more and are younger than the average employee where you work, you might be better off buying directly from an insurance company rather than through your employer. However, if you are older than the average employee where you work, the opposite is true. That's because group term life is rated based on the ages of all the employees in the group and each employee is then charged according to that rate, regardless of age. If your employer charges the same amount to all employees, you might save money by buying directly from an insurer if you're in your 20s, 30s or possibly even in your 40s. If you're older, the insurance offered through your employer's group plan may be the cheapest you can get.

What is a life insurance policy's free look provision?
Just as one federal law provides consumers with a three-day "cooling off" period to back out of certain types of contracts, another federal law provides you with time to back out of a new life insurance policy. A life insurance policy is required to specify that the owner has a 10-day 'free look.' This allows the owner to examine the policy after delivery and have the premium refunded if he or she decides to surrender the policy. Because of the complexity of insurance policies, the owner may need some time after receipt of the policy to understand any inappropriate features. Alternatively, the 10-day period may allow the owner to compare other competing policies and find a better bargain.

What is the 30-day grace period on a life insurance policy?
The 30-day grace period is required by law to be in every life insurance policy sold. It allows the insured to pay the policy premium any time during the 30 days following the due date of the premium without incurring a policy lapse. After the 30-day period expires with the premium still unpaid, the company may require evidence of good health before accepting the payment and reinstating the policy, since it has technically lapsed.

Is term insurance the best way to buy life insurance?
Your choice of life insurance depends on how much coverage you need, how much premium you can afford and whether you want life insurance only for its death benefit or also for its savings potential. Term insurance pays off only if you die; cash-value insurance combines a death benefit and an investment fund. For short-term protection, from one to 10 years, buy term insurance. It will give you the most protection for the least money. Term coverage starts with low premiums, which are either adjusted annually or can be locked in for periods of 10, 15 or 20 years. The longer the lock, the higher the premium. Permanent insurance, by contrast, lets you lock in one premium rate for your lifetime. Whole life, the most widely known type of permanent life insurance, gets its name from that fact, although it is also true for other permanent policies. Part of your premiums are invested and build up a cash reserve with tax-deferred earnings you can draw from. However, cash-value premiums are much higher than term premiums. Many people believe that the best approach is to buy the cheapest term policy you can find and invest the difference between the term premium and cash-value policy premium in stocks, bonds or mutual funds. This strategy could work well if you have the discipline to stick with a savings program and the market performs as it has in the past. By the time you retire, you would have had the insurance protection you needed at a low price without the high commissions associated with cash-value insurance. And you will have built a sizable investment portfolio. Such an important decision, however, should be undertaken only after a complete analysis of the potential results that includes a consideration of taxes and possible down markets. Nothing is as simple as "buy term and invest the difference" purports to be.

Why does my insurance agent discourage me from buying a term life insurance policy?
The cheapest life insurance that most people can buy is term insurance. It covers them for a specified period of time, usually from one to 20 years. If the policyholder dies within that term, the insurer pays the beneficiaries the face value of the policy. If the holder outlives the term and doesn't renew the insurance, the company gets to keep all the premiums that were paid and usually doesn't have to pay out a nickel. Term life insurance gives you the most coverage for your money when you're young. But don't be surprised if insurance agents discourage you from purchasing it. Agents often don't like to sell term insurance because the commissions on such policies are much lower than the commissions on other types of insurance policies. Be wary of an insurance agent who seems bent on trying to talk you out of buying term insurance. There's a chance he or she may be more interested in collecting a fatter commission check than providing you with the most coverage at the best price. The fact of the matter is that you may not need an agent at all. The SafeTNet insurance information Web site lists dozens of sites that will provide a free online quote for term insurance -- and then happily sell you some.

What's the difference between term life insurance and cash-value life insurance?
All life insurance is either term insurance or cash-value insurance. Term insurance insures your life only for a specified term. For example, you could choose a five-, 10- or 20-year term. You make your premium payments, but the policy will only pay off if you die. Term policies don't build up any cash value. If you outlive the term you choose, the insurer gets to keep all the premiums you have paid and won't owe either you or your beneficiaries a nickel -- which explains why term insurance is the most affordable protection you can buy. Cash-value insurance is more expensive than term insurance, at least when you first take the policy out. However, the premiums you pay are used to make investments, so the policy gradually builds up a cash value that you can eventually either withdraw or (sometimes) borrow against. An analogy that's often used to differentiate term coverage from cash-value insurance is that having term insurance is like renting a house while having cash-value coverage is like buying a home with a mortgage.

How does the extended term value provision in my cash-value life insurance policy work?
All cash-value life insurance policies must include a provision that allows you to convert the built-up cash value of your plan into a paid-up term coverage for a limited number of years depending on age and cash value available. This option is typically called extended term value. Say your cash-value policy has lapsed, and now you want to purchase a term-life policy. If you exercise your extended term value rights, the insurer could use the built-up cash value of your old policy to provide term coverage at the same face amount for the number of years purchased afforded by the policy's cash value.

What is annually renewable term life insurance?
If you buy an annually renewable term life policy, your coverage will remain in force as long as you continue making annual premium payments. But unlike some other types of term coverage, premiums for an annually renewable term policy typically rise year after year, because your chances of dying rise as you grow older. Group term life insurance policies are annually renewable plans, as are many individual term plans.

What is a level premium term life insurance policy?
Most types of term life insurance policies are annually renewable -- in other words, they can be renewed annually as long as you keep making payments, but those payments will rise as the years go by. Some people don't like the idea of paying much higher rates in the future, so they opt for a level premium term life insurance policy instead. These policies initially cost more than annually renewable policies, but the premium is fixed over the life of the policy.

What's the difference between annual renewable term life insurance and level premium term life?
Term life insurance is relatively inexpensive insurance you purchase for a certain period of time, such as 10 or 20 years. If you die within that time period, a death benefit is paid to your beneficiary. If you outlive the term, the insurer keeps all of your premiums and no death benefits are paid unless the policy has been renewed.
There are two basic types of term policies to choose from. Annual renewable term is coverage that doesn't require you to take a medical exam each year to renew it. Each year when you renew, your premiums will usually increase somewhat. A level premium policy lasts for a fixed number of years (commonly, 10 or 20 years) and allows you to lock in a premium for that period. After that 10- to 20-year term is up, you usually have to pass a medical exam in order to renew at attractive rates; otherwise, your premium will increase dramatically. Although the annual renewable policy will cost you less today, in the long run the 10- or 20-year level premium policy may be less expensive.
However, level premium policies are becoming harder to find. A growing number of insurance companies are charging more for them, or phasing them out entirely.

What features should I look for in term life insurance?
There are several features you should look for when evaluating a term life insurance policy.

1. Frequency of premium adjustments. You can choose an annual premium that will remain fixed for the life of the policy or an adjustable plan that calls for payments to go up at certain intervals (such as once every five years). A fixed premium ensures that your payments will remain the same, and you won't have to go through medical evaluations as frequently to get the best rate. But you'll pay more for the policy in the early years than you would if you selected a plan with an adjustable premium. And if you want to change your amount of coverage, you'd be throwing money away if you dump a policy with a long-term premium guarantee.
2. Guaranteed renewability. This feature guarantees that the policy cannot be canceled because of poor health. Insist on it.
3. Insurer's financial stability. Favor a company that gets top ratings from insurance-rating firms. You can find ratings from both Standard & Poor's and Duff & Phelps on the Insurance News Network Web site. State regulators or even other insurers often come to the rescue when an insurance company fails, but there's no sense in taking unneeded risk.

How does a convertibility provision in a term life insurance policy work?
When you buy a term life insurance policy, you insure your life only for a specified period of time -- say, five or 10 years. If you die within the term you specify, the insurer will pay death benefits to your beneficiaries or your estate. If you outlive the term, the insurer will keep all your premiums and won't owe anyone a nickel. Some term life insurance policies, however, have a convertibility feature that allows you to convert your term life policy into a cash-value policy without having to take a physical. By converting to a cash-value policy, you may also ensure that your beneficiaries will collect death benefits regardless of when you die. Including a convertibility feature in your term life policy may raise your annual premiums, but it's a nice option to have-especially if your health eventually deteriorates while you still have term coverage and no other insurer will provide you with cash-value coverage at reasonable rates.

What is a cafeteria (Section 125) plan?
A cafeteria plan, also known as a Section 125 plan, is an employee benefit plan governed by the provisions of Section 125 of the Internal Revenue Code. Its purpose is to provide a method for allowing the employee to choose from among a menu of choices (hence the name) those benefits the employee desires to utilize. The benefits may be fully or partially paid for by the employer. If the employee is required to pay for some or all of the benefits, he or she typically pays for them on a pre-tax basis. Employee paid pretax accounts are sometimes called "Flexible Spending Accounts" or "FSAs".

How does a cafeteria plan work?
In a cafeteria plan, the employee redirects a part of compensation to the various cafeteria plan accounts, which also has the effect of reducing taxable income by these amounts. The cafeteria plan accounts may include up to $50,000 in group term life insurance, child care reimbursement, medical expense reimbursement, medical, disability, vision, and dental insurance. If any contributions to the accounts are not used by the end of the plan year, the employee forfeits these unused amounts. Also, the employee cannot change the salary reductions during the plan year, except for changes in family status, birth, death, adoption, divorce, substantial change in insurance plans offered, or a change in job status of either spouse. For the medical expense reimbursement account, the employer is also at risk in a cafeteria plan. When an employee submits a voucher for an allowed medical expense, the employer must reimburse the expense even if the employee's account does not yet have a sufficient balance to reimburse the expense. If the employee terminates employment before he or she has had time to repay the employer's advance with plan contributions, the employer may lose the money advanced.

What is universal life insurance?
Universal life is one of the most flexible types of life insurance you can buy. Insurers who offer these policies let you decide how much to pay into them every year, subject to specified minimums and maximums. The insurer will recommend a target premium, which is the amount you would have to pay to keep the policy in force to age 100. But you're always free to pay less or more. A universal life policy also lets you choose how large a death benefit you want your premium to buy. For example, you could choose a level death benefit and greater cash values or a rising death benefit and lower cash values. You can also take money out of a universal life policy without treating the money as a loan.

What is variable life insurance?
Variable life insurance is a variation of whole life insurance that allows the cash value of a policy to be invested in stock, bond or money market portfolios. Investors can elect to move from one portfolio to another or can rely on the company's professional money managers to make such for them. As with whole life, the annual premium is fixed, but part of it is earmarked for the investment portfolio. Earnings from a variable account are tax-deferred until distributed. Income is then taxed only to the extent that it exceeds the total premiums paid into the policy.

What is whole life insurance?
When most people think of life insurance, they think of a traditional whole life policy. These are certainly the simplest policies to understand: You pay a fixed premium every year based on your age and other factors, you earn interest on the policy's cash value as the years roll by, and your beneficiaries get a fixed benefit after you die. Whole life policies are for insurance buyers who want permanent, fixed premium insurance. You pay the premium, get a death benefit, and earn tax-deferred interest at a reasonable rate, mush like a long term bond. The policy remains unchanged for life and, if you live that long, endows age 95 or 100. The cash value will provide an extra source of retirement money. Since the policy is whole life, it must offer the option of not paying premiums by using the cash value to buy a smaller 'paid up' policy.

What is permanent life insurance?
Permanent life insurance provides a death benefit for the life of the insured. If you buy a permanent life insurance policy, you could pay premiums every year until you reach the age of 100. How long you pay depends on the type of permanent policy you buy. The most widely known type of permanent insurance, whole life, as its name implies, requires payment of premium over your lifetime. Your "lifetime" ends at age 95 or 100 for most permanent policies. Permanent life insurance may be issued as a participating policy, which offers the opportunity for dividends to (1) reduce premiums, (2) purchase paid-up additions (i.e., increase the death benefit) and (3) increase cash value by accumulating interest. You may withdraw the cash value by borrowing from the policy. The insurance company may charge you interest on the loan. If you cancel the policy, the insurance company pays you the cash surrender value, which is the cash value less any charges and loans outstanding.

How does second-to-die life insurance differ from whole life and term?
The key difference between a second-to-die life insurance policy and traditional whole life and term policies is that a second-to-die policy insures two lives rather than one. If you have a traditional whole life or term policy that insures only your own life, the policy will pay off as soon as you pass away. A second-to-die policy can be either a whole life or term policy, but the benefits won't be paid until the second policyholder dies as well. When an insurance company writes a second-to-die policy, it knows that it probably won't have to pay off any time soon because the payout won't be triggered until two people (rather than one) pass away. As a result, insurers charge much lower rates for second-to-die whole life or term coverage than for policies that insure only one life.

What is a combination or blended whole life policy and how does it relate to term life?
A combination life insurance policy, sometimes called a blended whole life policy, combines whole life and term insurance. A typical combination policy might start out at 60% whole life and 40% term. Dividends the policy pays are automatically used to buy additional whole life coverage, which gradually replaces the term insurance. You pay lower premiums than for regular whole life coverage, but you earn lower cash values in the earlier years of the policy. After several years have passed, the growing portion of the combination policy that provides whole life coverage will have completely replaced the term insurance. Combination policies often appeal to people who want life insurance for their old age, but also want to keep their premiums fixed -- and unusually low -- while they're still young.

What is a variable whole life policy?
A variable whole life policy guarantees the premiums, sales and surrender charges, and mortality costs associated with the policy. The cash value, however, is not guaranteed and will increase or decrease daily depending upon investment results. The policy has the potential for both an increasing or decreasing cash value and an increasing or decreasing death benefit.

What are the non-forfeiture options in a permanent or cash-value life policy?
Non-forfeiture provisions are required to be in every permanent life insurance policy sold. They protect the policyholder in three ways by: 1) determining a policy's cash surrender value; 2) allowing a lapsed policy to continue to provide death protection at the net rates for term insurance, and 3) allowing the policy holder to buy a paid-up policy for a reduced face amount using the cash value in the policy

What does it mean when a life insurance agent refers to a substandard risk?
Substandard risk is insurance industry jargon for a condition that prevents a person from meeting the normal requirements of a standard insurance policy. Around 3% of life insurance policy applications are turned down on the basis of being substandard risks. Eight out of 10 of the turndowns are due to physical factors such as heart condition, obesity, and high blood pressure. The other 20% involve occupational hazards, excessive traveling, foreign residence or less common medical problems. One major source of coverage for such people is group insurance policies, which do not require individual assessment of insurability. If you are considered a substandard risk but are not eligible for a group life insurance plan, you might find an insurer willing to provide you with an individual policy without requiring a medical exam if you look hard enough. However, don't be surprised if the limits of the policy are relatively low, the premiums are unusually high, or both.

If I have been told I am uninsurable, is it still possible for me to purchase life insurance?
Just as you can be turned down for auto insurance, so can you be turned down for life insurance. Applications can be rejected for a variety of reasons, although most rejections are based on something worrisome about the applicant's current health or medical history. If you are denied life insurance, ask the insurer why your application was rejected. It's possible the insurer simply made a mistake or misinterpreted something on your application. Next, request a copy of your medical information file from the Medical Information Bureau, P.O. Box 105, Essex Station, Boston, MA 02112. The bureau keeps medical records on more than 10 million Americans, much as credit bureaus keep records on consumers' credit histories. If there's a mistake on your MIB records, you have the right to correct it. Finally, if one insurer turns you down, keep looking elsewhere. Some insurance companies understand certain medical conditions better than others, and some firms actually specialize in policies for people who have had trouble getting coverage elsewhere. An independent insurance agent, who works with several different insurers instead of only one, will be happy to help you with your search.

If I am rated uninsurable today and am unable to obtain life insurance, can I, at some later date, become insurable?
Even if every insurer you contact says that you are uninsurable, you may become insurable later. You could eventually recover from a medical problem that prevents you from getting a life insurance policy today. Or an insurer might change its policies concerning who is eligible for coverage. Your chances of getting life insurance may also improve if you go to work for a company that offers a life insurance plan to all of its workers, because the insurer can spread its risks over hundreds or even thousands of employees and typically offers insurance to the few with special medical problems.

What is mortgage life insurance and do I need it?
Many lenders and insurance companies offer mortgage life insurance that will pay your mortgage off if you die. For most homeowners, this is a lousy deal. Mortgage life insurance is just too expensive. If you want to make sure your heirs have enough money to pay your home-loan off when you die, it would be much cheaper to purchase term life insurance for the number of years your mortgage will last. You can consider buying mortgage insurance if you're in poor health, your medical problems prevent you from getting an inexpensive term life policy, and the insurer who offers the mortgage life insurance does not require that you take a physical examination. Otherwise, you should probably skip mortgage insurance.

Do life insurance proceeds go through probate?
Whether proceeds from your life insurance policy will have to go through probate depends on who you have named as your beneficiary. If you name an individual (other than yourself) or a trust as the beneficiary of the policy, the money is transferred outside of probate directly to the beneficiary, saving time and money in the process. If your goal is to make those proceeds available to your family to cover expenses, this would be the way to go. Conversely, if you have named your estate as the beneficiary of the policy or have chosen no beneficiary at all, the proceeds will become part of your estate and must go through probate. The insurer will issue the check to the probate court, which will then distribute the proceeds, net of probate fees and attorney fees, according to your will.

Do I have to wait before I can collect the proceeds of my late spouse's life insurance?
If you're married and your spouse dies, it's important to file any necessary life insurance claims as quickly as possible. No waiting period is required. Although the value of the death benefit is counted as part of the estate's value for tax purposes, life insurance payments pass to the beneficiary outside of probate. Life insurance companies also usually pay routine death benefits within weeks. This money provides a necessary financial cushion for the survivor.

Do I have to take the proceeds of a life insurance death benefit in a lump sum?
If someone dies and you are the beneficiary of their life insurance policy, you can usually accept the proceeds in one of three ways. Get a lump sum, take it in fixed payments over a specified period of time, or use it to establish an annuity that will pay you a certain amount of money (usually monthly) for the rest of your life. Lump-sum payments-getting the whole amount at once-are usually appropriate for small policies and/or for those beneficiaries who are capable of investing wisely or who can rely on competent investment advisers. Lump-sum payouts occur automatically when insurance proceeds are payable into a trust. If you don't need all the money right away or wouldn't know where to invest it all, you may instead be able to take the benefits in fixed payments for a specified number of years-say, 10 or 20-or "annuitize" the payments to guarantee monthly or annual payments for the rest of your life. Those alternatives might also make more sense if you'd be tempted to take a lump-sum payout and spend it all on a fancy vacation or an extravagant purchase.

When does it make sense to take the death benefits from a life insurance policy in fixed payments?
If someone dies and you are the beneficiary of their life insurance policy, you usually don't have to accept the money in a lump sum. One alternative would be to accept the payout in fixed installments -- perhaps monthly or quarterly -- for a specified number of years. You can opt to have the insurance company distribute the proceeds and interest thereon over a fixed period of time, usually in installment payments of a fixed amount paid at stated intervals until the money is used up. You should make certain that you can change your mind and withdraw the entire sum at a later date. If you have not received the entire payment and have not exercised the power to withdraw a lump sum by the time of your own death, the unpaid balance will be payable at your election to your estate or to some other beneficiary. You could even ask the insurer to make fixed payments to you that represent only the interest on the full value of the benefit, with the principal payable to your estate or to a beneficiary of your own when you die.

When does it make sense to annuitize the proceeds of a loved one's life insurance policy?
When someone dies and leaves you as the beneficiary of their life insurance proceeds, you can usually choose to "annuitize" the payment -- in other words, collect the money in equal payments monthly, quarterly or annually for the rest of your life. The size of the payments would be based on the size of the death benefit itself and your life expectancy. However, there are usually better alternatives than annuitizing the proceeds, such as investing the money in mutual funds. An investment in bond funds, for example, can provide the same income stream as an annuity, but without the very conservative assumptions used by the insurance company to secure its profit or the inflexibility inherent in annuitizing the annuity.

Is there an insurance product I can use to put away money for retirement?
A flexible-premium life insurance policy may be a good savings alternative, especially if you also need life insurance. If the funds you put into the policy are within certain Internal Revenue Service limits, you can access this money free of income tax with a combination of withdrawals and policy loans at your retirement. The interest earned by the policy will accumulate on a tax-deferred basis similar to an IRA. In addition, it will provide life insurance protection for your beneficiaries.

Is life insurance a good way to build a reserve for investing?
Regardless of which type of life insurance you buy, just remember that it's insurance, first and foremost. It should not be considered an investment. According to "Money Troubles: Legal Strategies to Cope with Your Debts" (Nolo Press, Berkeley, Calif.), "Yes, this is a cash equivalent. (Why do you think they call it 'cash value'?) But no, it is not suitable for use as reserves, because of potentially large surrender penalties, tax risks, and other restrictions."

What's the difference between term life insurance and cash-value life insurance?
All life insurance is either term insurance or cash-value insurance. Term insurance insures your life only for a specified term. For example, you could choose a five-, 10- or 20-year term. You make your premium payments, but the policy will only pay off if you die. Term policies don't build up any cash value. If you outlive the term you choose, the insurer gets to keep all the premiums you have paid and won't owe either you or your beneficiaries a nickel -- which explains why term insurance is the most affordable protection you can buy. Cash-value insurance is more expensive than term insurance, at least when you first take the policy out. However, the premiums you pay are used to make investments, so the policy gradually builds up a cash value that you can eventually either withdraw or (sometimes) borrow against. An analogy that's often used to differentiate term coverage from cash-value insurance is that having term insurance is like renting a house while having cash-value coverage is like buying a home with a mortgage.

How does the extended term value provision in my cash-value life insurance policy work?
All cash-value life insurance policies must include a provision that allows you to convert the built-up cash value of your plan into a paid-up term coverage for a limited number of years depending on age and cash value available. This option is typically called extended term value. Say your cash-value policy has lapsed, and now you want to purchase a term-life policy. If you exercise your extended term value rights, the insurer could use the built-up cash value of your old policy to provide term coverage at the same face amount for the number of years purchased afforded by the policy's cash value.

What are the non-forfeiture options in a permanent or cash-value life policy?
Non-forfeiture provisions are required to be in every permanent life insurance policy sold. They protect the policyholder in three ways by: 1) determining a policy's cash surrender value; 2) allowing a lapsed policy to continue to provide death protection at the net rates for term insurance, and 3) allowing the policy holder to buy a paid-up policy for a reduced face amount using the cash value in the policy

What is the reduced paid-up value option in my cash-value life insurance policy?
If you have a cash-value life insurance policy but don't want to make premium payments anymore, you can use the cash value of your insurance to purchase a fully paid policy by exercising your policy's reduced paid-up value rights. Say your current policy would pay a $100,000 benefit upon your death. Rather than continuing to pay annual premiums, you could use the policy's current cash value to purchase a fully paid policy that provides less coverage. The new policy might only pay $50,000 upon your death, but you would never have to make another premium payment.

What is the purpose of my cash-value life insurance policy's reinstatement right?
Most cash-value life insurance policies provide you with a reinstatement right. It gives you a window of time after a policy has lapsed to reinstate the coverage by paying the past-due premiums and interest. For example, say your policy lapsed because you forgot to send in a payment while you were on vacation or tending to the needs of a sick relative. You could automatically reinstate your coverage by paying your premium, plus any penalties and interest charges. Many other types of insurance coverage also provide reinstatement rights.

What is the surrender right provision in my cash-value life insurance policy?
All cash-value life insurance policies include a "surrender right," which entitles you to give the policy back to the insurer for its current cash value. Say you suddenly need cash or simply don't need your policy any more because you have obtained adequate coverage through some other source. If you surrendered the policy, your current insurer would cancel the insurance and send you a check for its cash value.

How can I find out how much cash value my insurance policy builds up every year?
After you have purchased a life insurance policy, you should check on the amount of cash value it builds up every year by asking your agent or the insurer for an in-force policy illustration, sometimes called a point-in-time illustration. Compare the illustration with the projections that the agent or company gave you when you first purchased the policy. An in-force policy illustration contains at least a table showing you guaranteed cash values, estimated cash values, cash surrender values and death benefit for the remaining years of the policy. These figures provide you with an update of how well your estimated cash values and/or death benefits are doing relative to the original projections. If the values do not keep pace with the original projections, discuss with your insurance agent the reasons for the differences. Companies send statements each year on the anniversary of the policy with this information.

What are the benefits of borrowing against an insurance policy?
Borrowing against the built-up value of a cash-value life insurance policy can provide several benefits that borrowing money from a bank cannot. Rates on insurance policy loans are usually lower than on bank loans, no credit check is required, and loan approval is virtually guaranteed because you are essentially borrowing against money that belongs to you. Perhaps the biggest disadvantage to borrowing against your insurance policy is that it reduces the amount of money your heirs will get if you die before you have a chance to repay the loan. There's also the irritation of knowing that you're paying interest to the insurance company for money that's yours anyway.

Are there special tax rules for loans I take out against my life insurance policy?
On a life insurance loan, where proceeds are used for a deductible (non-personal) purpose, you may claim a deduction in the year in which the interest is paid. Thus, if the proceeds are used to buy investment property such as stocks and bonds, the interest is deductible. Investment interest is deductible only to the extent of your net investment income (investment income less expenses other than interest expense). Any amount disallowed under this rule may be carried forward to future years. The interest must actually be paid to the insurance company. You may not claim a deduction when the insurance company simply adds the interest to your debt. Note that you may not deduct your payment of interest on an insurance loan after you assign the policy to someone else.

Does it make sense to borrow against my life insurance policy to fund a college education?
If paying for your child's college education threatens to put you in the poor house, consider borrowing against the cash value of any life insurance policy you hold. Before you borrow, though, think about your life insurance needs as well as your need for college cash. You might not want to borrow the maximum amount and then die, leaving your survivors with significantly less money to go on without you.

I have established a life insurance policy as a retirement planning vehicle. How do I access my money at retirement?
After you retire, there are several ways to turn the built-up cash value of your life insurance into cash. 1) You can withdraw your "basis" free of tax. Your basis is the amount of premiums you paid, less any withdrawals you have made. 2) You can take a policy loan. Loans are not generally taxable because they are seen as an advance of the death benefit. 3) You can combine both techniques. Often, a combination of withdrawing your basis down to zero and then borrowing the remainder offers the best method of accessing your life insurance cash value at retirement. If you lapse the policy with the basis withdrawn and a full loan outstanding, there will likely be a significant tax bill, so be careful and consult with those who understand the method and its risks. You'll probably want to discuss your options with a financial planner or similar professional.

How does second-to-die life insurance differ from whole life and term?
The key difference between a second-to-die life insurance policy and traditional whole life and term policies is that a second-to-die policy insures two lives rather than one. If you have a traditional whole life or term policy that insures only your own life, the policy will pay off as soon as you pass away. A second-to-die policy can be either a whole life or term policy, but the benefits won't be paid until the second policyholder dies as well. When an insurance company writes a second-to-die policy, it knows that it probably won't have to pay off any time soon because the payout won't be triggered until two people (rather than one) pass away. As a result, insurers charge much lower rates for second-to-die whole life or term coverage than for policies that insure only one life.

Is there a difference between a joint-life insurance policy and a second-to-die life insurance policy?
Many people confuse "joint-life" insurance policies with "second-to-die" policies. Although both types of policies insure more than one person, there are major differences between how the policies work and the reasons why different consumers choose one type of policy over the other. Joint-life policies name two or more people as the insured parties, with the death benefit payable upon the first death among the insured parties. Most often a joint-life policy involves spouses or business partners providing for the security of the survivor. Last survivor policies, or second-to-die policies, pay the death benefit only when the survivor dies. Such policies are popular for several purposes, the primary one being estate settlement for couples." In short, a joint-life policy pays off as soon as the first person dies; a last survivor or second-to-die policy pays off only when the last person dies.

Who should own second-to-die insurance?
A second-to-die life insurance policy insures two lives rather than one. Under a second-to-die policy, no benefits are paid when one of the two die. Instead, the benefit is paid only after the second one dies. Relatively affluent couples can benefit from a second-to-die policy. If a couple wants such insurance, they can create a separate irrevocable life insurance trust to purchase the policy. By placing the insurance in the trust, they will ensure that the insurance proceeds paid to the trust will be totally free of federal estate taxes. Second-to-die insurance is also popular among small business owners who want to make sure that their children will have enough money to keep the firm going after both parents have died.

What tax advantages does a life insurance policy have over other investments?
First, your beneficiaries receive the proceeds of your life insurance free of income tax. However, if you die owning the policy, the proceeds are included in your taxable estate. There are three circumstances under which your estate won't owe any federal death tax: 1) if your estate is worth less than $675,000 in 2001 (including the life insurance), 2) if your estate is going to your spouse, or 3) if the policy is owned by another entity, such as an irrevocable life insurance trust.
Second, the interest paid on the cash value of a life insurance policy accumulates in the policy tax-deferred. That's a plus if you are in a high tax bracket. Insurance policy dividends are not taxed until they exceed the policy's premiums. Until then, they're treated as a return of the money you paid in. If you cash in your policy, you'll be taxed only to the extent to which the cash value exceeds all the premiums you paid, minus any dividends not used to buy more insurance.

Is life insurance subject to federal estate tax?
If you die owning a life insurance policy, the proceeds go into your taxable estate. But there is no federal death tax if your estate is worth less than $1,000,000 for 2002; if your estate goes to your spouse; or if, before you died, you gave the policy to someone else, like your children in a trust. (But the proceeds will be taxed to your estate if you die within three years of making the gift.) State inheritance taxes may be due on estates worth less than the federal estate tax thresholds.

Do I have to pay federal income taxes on the death benefits I received from my father's life insurance policy?
If someone dies and you get a lump-sum payment from their life insurance policy, you usually won't have to pay any federal income taxes on the proceeds. The tax-free exclusion also covers death benefit payments made under endowment contracts, workers' compensation insurance contracts, employers' group insurance plans, or accident and health insurance contracts.

Is the death benefit from a life insurance policy that is part of my tax-deferred retirement plan payable to my beneficiaries free of income tax?
Many people choose a life insurance policy as one of the investments in their qualified retirement plan. If you're among them, you should be aware of how the proceeds of the insurance policy will be taxed when you die. The proceeds in excess of the cash value will be tax-free. The cash value will be taxed as income in respect of a decedent. To illustrate, say the life insurance policy in your qualified plan has a $100,000 death benefit and the cash value is $25,000. When you die, your beneficiaries will receive $75,000 completely free of taxes. The remaining $25,000 will be subject to income tax.

How should I provide for the payment of estate taxes?
Owning a life insurance policy is a good way to help pay estate taxes when you die, because the death benefit can be used to pay the bill from the Internal Revenue Service. If medical or other problems prevent you from obtaining insurance, there are other ways to provide for the payment of estate taxes that may be levied when you die. Typically, the other methods involve moving assets out of your estate through gifts, exchanges and sales. When the purchase of life insurance is not an option for the payment of estate taxes, an individual can establish an irrevocable trust and begin to fund it with cash or other assets for the benefit of the ultimate beneficiaries. If the funding is done on a lump-sum basis, it is often limited to a person's exemption equivalent amount -- $1,000,000 for 2002. In addition, a taxpayer is eligible to make a $11,000 annual contribution for each beneficiary of an irrevocable trust under the federal gift tax annual exclusion exception. A person can also establish a family limited partnership or limited liability company. By funding these entities with assets, it is possible to make gifts of family partnership or limited liability company interests. Through the use of minority and lack of marketability discounts, which can range up to 80% or more and are commonly in the 35% to 40% range, significant gifts can be made at a low gift-tax cost. Other types of trusts, including personal residence trusts and grantor retained income trusts, can also be used to make gifts to your heirs.