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Life Insurance

Life insurance may secure the financial future for your family.  Life insurance ensures that your dependents will have the financial resources needed to maintain their lifestyle. It is important that you understand your needs and the choices available.

Life insurance can be used to accomplish a variety of financial goals, such as funding retirement or education expenses. However, it is important to remember that the main purpose of life insurance is financial protection for your family’s lifestyle.

If your primary goals are something other than protection, you should consider what other financial products are available to meet those goals.

Your personal insurance agent and company are good sources of general information about insurance.

For information regarding life insurance or annuities, please contact:

Mihir Nag, Ph.D. Life and Annuity Specialist 317-232-2420 mnag@idoi.in.gov

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Learning the Basics

The best way to make an informed decision about buying life insurance is to become familiar with the basics. There are three life insurance basics that all consumers should consider:

An important feature of life insurance is that there is no federal income tax on proceeds paid to beneficiaries.

Before buying life insurance, you should assemble personal financial information and review your family's needs. Factors to consider include:

One rule of thumb is to buy life insurance that is equal to several times your annual gross income, to allow your family the ability to continue their lifestyle for several years without hardship.

If you need to stop paying premiums, you may be able to 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.

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Getting Started

Before purchasing a policy, check the company's financial condition. You can do this by asking the agent. A number of insurance rating services rate the financial strength of companies. The A.M. Best ratings guide is available through the link on the IDOI website.

Collect the names of several agents (also called producers) through recommendations from friends, family and other sources. The following are some questions you may want to ask a potential agent:

The major association for agents is the National Association of Insurance and Financial Advisors, Inc. (NAIFA). Through NAIFA's local associations, agents can attend educational seminars and can stay informed of trends in the business.

The agent you have selected will meet with you to discuss your life insurance needs. He or she will ask questions about family income and your net worth. Using the information you already have assembled about your financial situation, you should be prepared to discuss your insurance options.

In this initial meeting, be prepared to answer questions about your health (for example, age, medical condition, medical history, family history, personal habits). It is important that you answer these questions carefully and truthfully. You may also have to have some level of medical checkup as part of the application process.

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Your Agent's Recommendations

Once you have discussed your financial needs and objectives with your agent, he or she will recommend the type of life insurance policy that will best suit your purposes. Most insurance companies provide a Buyers Guide to help you ask the right questions and select the proper life insurance for your needs.

Provisions or "riders" that provide additional benefits can be added to a policy. One such rider is a "waiver of premium for disability." With this rider, if you become totally disabled for a specified period of time, you do not have to pay premiums for the duration of the disability. Another rider, called an "accidental death benefit," provides for an additional benefit in case of death as a result of an accident.

A relatively new rider offered by some companies provides "accelerated benefits," also known as "living benefits." This rider allows you, under certain circumstances, to receive the proceeds of your life insurance policy before you die. Such circumstances include terminal or catastrophic illness, the need for long-term care or confinement to a nursing home.

Ask your agent for information about these and other policy riders.

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Guide to Annuities

Annuities are forms of financial protection.  An annuity is a contract written by a life insurance company to provide continuing income, typically for retirement. Payments, which are generally made on a monthly basis, are usually arranged to continue for as long as you live or for a stated period of time. Payments may begin at once or at some future date.

The annuity contract is often described as being the opposite of life insurance. It pays while you live; life insurance pays when you die. Actually, the two can complement each other. Instead of lump sum benefit payments, many life insurance beneficiaries choose to use their policy's proceeds to purchase an annuity.

You should tailor any decision to buy an annuity to your own needs. To do so, talk with a qualified life insurance agent or financial advisor.

Many people buy annuities to give them retirement income for the rest of their lives. An annuity contract can also be a means of building assets for other purposes with a more limited time span.

Annuities can be used to fund an Individual Retirement Account. They also may be used in Keogh-type retirement plans for the self employed.

Types of Annuities

There are two basic types of annuity contracts. The kind of annuity you choose to buy determines when benefit payments will begin.

Immediate annuities are generally purchased by people of retirement age. Such plans provide income payments at once or soon after purchase. They are usually purchased with a lump sum payment.

Deferred annuities are plans under which you arrange to have income payments start at some future date. Interest builds up on the money contributed. Such plans are often used by younger people to save money for retirement. These plans have become popular in good part because of the tax-deferred buildup during the accumulation period, the time during which you pay money into the annuity contract.

Under either form of deferred annuity, if you die before the annuity payments begin, the accumulated value of your contract is paid to your designated beneficiary.

You can also convert the cash value of your life insurance policy to an annuity. For example, if you are over 65 and your children are out of school and are financially self-sufficient, you may now feel you no longer need all of your life insurance coverage. Your life insurance policy probably contains an option allowing you to convert its cash value to a life-time income.

Some contracts let you borrow against your accumulated contract value. You may also be able to use the annuity as collateral for a bank loan.

With deferred annuities, insurance companies guarantee the interest that will be credited to your contract value. Every contract contains a long-term guarantee. The company, typically, credits interest at rates higher than the guarantee, as its investment results permit, and it may provide short-term guarantees at rates higher than the long-term guaranteed rate or rates.

With an immediate annuity, you will be told at the time of purchase exactly how much money you will get and when you will get it.

How About Taxes?

When you buy a deferred annuity, the interest credited to your contract builds up free of current income tax.

Once you start to receive a monthly payment, however, the government begins to tax the accumulated interest. Part of each payment will be interest and will be taxed as ordinary income. The other part is principal and is not taxable. This is true of both deferred and immediate annuities.

If you withdraw money from your annuity before age 59 1/2, the interest you have earned on your contributions must be withdrawn before the principal and is subject to personal income tax. In addition, there is a ten percent penalty tax on such premature withdrawals, except in certain circumstances, such as disability or death.

You may want to consult a tax advisor well in advance of retirement for more information about the taxation of retirement income. Also, the Internal Revenue Service has helpful booklets on the subject.

Most states require insurance companies to pay a tax, commonly at two percent, on the annuity premiums they receive. A company will either charge you for the tax separately or include it in the premium amount.

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