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Life Insurance  (Top of Page)

  • Many financial experts consider life insurance to be the cornerstone of sound financial planning. It can be an important tool in the following situations:

    • Replace income for dependents: If people depend on your income, life insurance can replace that income for them if you die. The most commonly recognized case of this is parents with young children. However, it can also apply to couples in which the survivor would be financially stricken by the income lost through the death of a partner, and to dependent adults, such as parents, siblings or adult children who continue to rely on you financially. Insurance to replace your income can be especially useful if the government- or employer-sponsored benefits of your surviving spouse or domestic partner will be reduced after your death.

    • Pay final expenses: Life insurance can pay your funeral and burial costs, probate and other estate administration costs, debts and medical expenses not covered by health insurance.

    • Create an inheritance for your heirs: Even if you have no other assets to pass to your heirs, you can create an inheritance by buying a life insurance policy and naming them as beneficiaries.

    • Pay federal “death” taxes and state “death” taxes: Life insurance benefits can pay estate taxes so that your heirs will not have to liquidate other assets or take a smaller inheritance. Changes in the federal “death” tax rules between now and January 1, 2011 will likely lessen the impact of this tax on some people, but some states are offsetting those federal decreases with increases in their state-level “death” taxes.

    • Make significant charitable contributions: By making a charity the beneficiary of your life insurance, you can make a much larger contribution than if you donated the cash equivalent of the policy’s premiums.

    • Create a source of savings: Some types of life insurance create a cash value that, if not paid out as a death benefit, can be borrowed or withdrawn on the owner’s request. Since most people make paying their life insurance policy premiums a high priority, buying a cash-value type policy can create a kind of “forced” savings plan. Furthermore, the interest credited is tax deferred (and tax exempt if the money is paid as a death claim).

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  • In most cases, if you have no dependents and have enough money to pay your final expenses, you don’t need any life insurance.

    If you want to create an inheritance or make a charitable contribution, buy enough life insurance to achieve those goals.

    If you have dependents, buy enough life insurance so that, when combined with other sources of income, it will replace the income you now generate for them, plus enough to offset any additional expenses they will incur to replace services you provide (for a simple example, if you do your own taxes, the survivors might have to hire a professional tax preparer). Also, your family might need extra money to make some changes after you die. For example, they may want to relocate, or your spouse may need to go back to school to be in a better position to help support the family.

    You should also plan to replace “hidden income” that would be lost at death. Hidden income is income that you receive through your employment but that isn’t part of your gross wages. It includes things like your employer’s subsidy of your health insurance premium, the matching contribution to your 401(k) plan, and many other “perks,” large and small. This is an often-overlooked insurance need: the cost of replacing just your health insurance and retirement contributions could be the equivalent of $2,000 per month or more.

    Of course, you should also plan for expenses that arise at death. These include the funeral costs, taxes and administrative costs associated with “winding up” an estate and passing property to heirs. At a minimum, plan for $15,000.

    Other sources of income

    Most families have some sources of post-death income besides life insurance. The most common source is Social Security survivors’ benefits.

    Social Security survivors’ benefits can be substantial. For example, for a 35-year-old person who was earning a $36,000 salary at death, maximum Social Security survivors’ monthly income benefits for a spouse and two children under age 18 could be about $2,400 per month, and this amount would increase each year to match inflation. (It drops slightly when the survivors are a spouse and one child under 18, and stops completely when there are no children under 18. Also, the surviving spouse’s benefit would be reduced if he or she earns income over a certain limit.)

    Many also have life insurance through an employer plan, and some from another affiliation, such as through an association they belong to or a credit card. If you have a vested pension benefit, it might have a death component. Although these sources might provide a lot of income, they rarely provide enough. And it probably isn’t wise to count on death benefits that are connected with a particular job, since you might die after switching to a different job, or while you are unemployed.

    A multiple of salary?

    Many pundits recommend buying life insurance equal to a multiple of your salary. For example, one financial advice columnist recommends buying insurance equal to 20 times your salary before taxes. She chose 20 because, if the benefit is invested in bonds that pay 5 percent interest, it would produce an amount equal to your salary at death, so the survivors could live off the interest and wouldn’t have to “invade” the principal.

    However, this simplistic formula implicitly assumes no inflation and assumes that one could assemble a bond portfolio that, after expenses, would provide a 5 percent interest stream every year. But assuming inflation is 3 percent per year, the purchasing power of a gross income of $50,000 would drop to about $38,300 in the 10th year. To avoid this income drop-off, the survivors would have to “invade” the principal each year. And if they did, they would run out of money in the 16th year.

    The “multiple of salary” approach also ignores other sources of income, such as those mentioned previously.

    A simple example

    Suppose a surviving spouse didn’t work and had two children, ages 4 and 1, in her care. Suppose her deceased husband earned $36,000 at death and was covered by Social Security but had no other death benefits or life insurance. Assume the surviving spouse is 36.

    Assume that the deceased spent $6,000 from income on his own living expenses and the cost of working. Assume, for simplicity, that the deceased performed services for the family (such as property maintenance, income tax and other financial management, and occasional child care) for which the survivors will need to pay $6,000 per year. Assume that the survivors will have to buy health insurance to replace the coverage the deceased had at work, and that this will cost $12,000 per year.

    Taken together, the survivors will need to replace the equivalent of $48,000 of income, adjusted each year for an assumed 4 percent inflation.

    Thanks to Social Security, the survivors would need life insurance to replace only about $1,700 per month of lost wage income (adjusted for inflation) for 14 years until the older child reaches 18; Social Security would provide the rest. The survivors would need life insurance to replace about $2,100 per month (adjusted for inflation) for three more years when the non-working surviving spouse has only one child under 18 in her care.

    The life insurance amount needed today to provide the $1,700 and $2,100 monthly amounts is roughly $360,000. Adding $15,000 for funeral and other final expenses brings the minimum life insurance needed for the example to $375,000.

    What’s left out?

    The example leaves out some potentially significant unmet financial needs, such as

    • The surviving spouse will have no income from Social Security from age 53 until 60 unless the deceased buys additional life insurance to cover this period. It could be assumed that the surviving spouse will obtain a job at or before this time, but she could also become disabled or otherwise unable to work. If life insurance were bought for this period, the additional amount of insurance needed would be about $335,000.

    • Some people like to plan to use life insurance to pay off the home mortgage at the primary income earner’s death, so that the survivors are less likely to face the threat of losing their home. If life insurance were bought for this goal, the additional amount of insurance needed is the amount of the unpaid balance on the mortgage.

    • Some people like to provide money to pay to send their children to college out of their life insurance. We may assume that each child will attend a public college for four years and will need $15,000 per year. However, college costs have been rising faster than inflation for many decades, and this trend is unlikely to slow down. If life insurance were bought for this goal, the additional amount of insurance needed would be about $200,000.

    • In the example, no money is planned for the surviving spouse’s retirement, except for what the spouse would be entitled to receive from Social Security (about $1,200 per month). It could be assumed that the surviving spouse will obtain a job and will either participate in an employer’s retirement plan or save with an IRA, but she could also become disabled or otherwise unable to work. If life insurance were bought to provide the equivalent of $4000 per month starting at age 60 until 65 and $3,000 per month from 65 on (because at 65 Medicare will make carrying private health insurance unnecessary), the additional amount of insurance needed would be about $465,000.

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  • There are two major types of life insurance—term and whole life. Whole life is sometimes called permanent life insurance, and it encompasses several subcategories, including traditional whole life, universal life, variable life and variable universal life. In 2003, about 6.4 million individual life insurance policies bought were term and about 7.1 million were whole life.

    Life insurance products for groups are different from life insurance sold to individuals. The information below focuses on life insurance sold to individuals.


    Term Insurance is the simplest form of life insurance. It pays only if death occurs during the term of the policy, which is usually from one to 30 years. Most term policies have no other benefit provisions.

    There are two basic types of term life insurance policies—level term and decreasing term.

    • Level term means that the death benefit stays the same throughout the duration of the policy.

    • Decreasing term means that the death benefit drops, usually in one-year increments, over the course of the policy’s term.

    In 2003, virtually all (97 percent) of the term life insurance bought was level term.

    Whole Life/Permanent

    Whole life or permanent insurance pays a death benefit whenever you die—even if you live to 100! There are three major types of whole life or permanent life insurance—traditional whole life, universal life, and variable universal life, and there are variations within each type.

    In the case of traditional whole life, both the death benefit and the premium are designed to stay the same (level) throughout the life of the policy. The cost per $1,000 of benefit increases as the insured person ages, and it obviously gets very high when the insured lives to 80 and beyond. The insurance company could charge a premium that increases each year, but that would make it very hard for most people to afford life insurance at advanced ages. So the comapny keeps the premium level by charging a premium that, in the early years, is higher than what’s needed to pay claims, investing that money, and then using it to supplement the level premium to help pay the cost of life insurance for older people.

    By law, when these “overpayments” reach a certain amount, they must be available to the policyowner as a cash value if he or she decides not to continue with the original plan. The cash value is an alternative, not an additional, benefit under the policy.

    In the 1970s and 1980s, life insurance companies introduced two variations on the traditional whole life product—universal life insurance and variable universal life insurance.

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  • You can buy life insurance either as an “individual” or as part of a “group” plan.

    Individual Policy

    When you buy an individual policy, you choose the company, the plan, and the benefits and features that are right for you and your family. You might be able to buy the policy from the same agent or company representative who sells you property and liability insurance for your home, auto or business. And although you won’t qualify for any discounts by buying your life insurance and other insurance from the same representative, working with a single advisor for all your insurance needs can make your financial life simpler.

    Individual policies are typically sold through insurance agents or brokers. If you buy a policy through an agent or broker, you will pay a commission, also called a “load,” that is built into the premium rate. The commission compensates the agent or broker for the time spent advising you on how much and what type of life insurance to buy, for facilitating the application process, and for any further service that’s needed in future years to keep the policy up-to-date (such as changing beneficiary designations, arranging policy loans or coordinating your financial plans with your lawyer and accountant).

    There are two other ways to buy individual life insurance. In Connecticut, Massachusetts and New York, you can buy it from a savings bank. Or you can buy a policy directly from an insurance company or from a fee-only financial advisor—what’s known as a “no load” or “low load” policy. Although there is no sales commission on these policies, the company will still have charges built into the premium to cover its marketing expenses, application processing expenses and subsequent services. Finding an insurance company that will sell you a no-load policy isn’t easy; typing in “no load life insurance” on Internet search engines will in many cases lead you to an agent or broker.

    Group Policy

    You might have life insurance automatically from your employer; many large companies do this. Your employer also might offer you the chance to buy additional life insurance under a group policy. And you might be eligible to buy life insurance under a group policy from a union or trade association or other group you belong to (such as a college alumni association or an automobile club).

    Compared to buying an individual life insurance policy, there are several advantages to buying life insurance under a group policy:

    • Group purchase can sometimes offer you a lower rate for a given death benefit either because the employer or other group sponsor subsidizes the premium or because the rates are averages weighted by people younger than you.

    • There are virtually no health qualifications for getting the group coverage.

    • Premium payment is usually by payroll deduction (for employer-based group coverage) or linked with other payments (e.g., credit card bills), lowering the chance of missing a payment.

    Most employer group plans are term insurance, but if you leave that employer your state may require that you be allowed to convert the policy to a form of whole life insurance with the same insurance company that provides the group life insurance. You would then pay premiums directly to the company and keep the insurance in force. This can be an advantage if you are older, or have experienced deteriorating health, as it gives you the opportunity to qualify for whole life insurance without having a medical exam.

    Credit Life Insurance

    Credit cards and lending institutions may offer life insurance to pay off your outstanding loans in the event of your death. This is generally made available in two ways

    • As part of the loan at no extra charge. In this case the cost of the life insurance is borne by the lender and is included in its interest rate or other finance charges. If you have this type of credit life insurance, you don’t need separate life insurance to pay off that loan if you die.

    • As an option at an extra charge. In this case, you should usually reject the optional coverage, provided that you have some other life insurance (group or individual) that can be designated to pay off the loan if you die. If you’re under age 50 and you don’t have other insurance that could pay off this loan, consider buying individual life insurance for this purpose as the rates will probably be better. At 50 or over (or younger with health issues), if you have no other life insurance for this purpose, the optional credit life insurance is likely to be cheaper than individual life insurance.

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  • A beneficiary is the person or entity you name in a life insurance policy to receive the death benefit. You can name:

    • One person
    • Two or more people
    • The trustee of a trust you’ve set up
    • A charity
    • Your estate

    If you don’t name a beneficiary, the death benefit will be paid to your estate.

    Two “levels” of beneficiaries

    Your life insurance policy should have both “primary” and “contingent” beneficiaries. The primary beneficiary gets the death benefits if he or she can be found after your death. Contingent beneficiaries get the death benefits if the primary beneficiary can’t be found. If no primary or contingent beneficiaries can be found, the death benefit will be paid to your estate.

    As part of naming beneficiaries, you should identify them as clearly as possible and include their social security numbers. This will make it easier for the life insurance company to find them, and it will make it less likely that disputes will arise regarding the death benefits. For example, if you write "wife [or husband] of the insured" without using a specific name, an ex-spouse could claim the death benefit. On the other hand, if you have named specific children, any later-born or adopted children will not receive the death benefit—unless you change the beneficiary designation to include them.

    Besides naming beneficiaries, you should specify how the benefits are to be handled if one or more beneficiaries can’t be found. For example, suppose you have two children and you name each one to receive half of the death benefit. If one of the children dies before you do, do you want the other child to get the entire death benefit, or the deceased child’s heirs to get his or her share?

    If the death benefit goes to your estate, probate proceedings could delay distributing the money, and the cost of probate could diminish the amount available to your heirs.

    Choosing beneficiaries, and keeping those choices up-to-date, is an important part of owning life insurance. The birth or adoption of a child, marriage or divorce can affect your initial choice. Review your beneficiary designation as new situations arise in order to make sure your choice is still appropriate.

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  • Term insurance comes in two basic varieties—level term and decreasing term. These days, almost everyone buys level term insurance. The terms “level” and “decreasing” refer to the death benefit amount during the term of the policy. A level term policy pays the same benefit amount if death occurs at any point during the term.

    Common types of level term are:

    • yearly- (or annually-) renewable term
    • 5-year renewable term
    • 10-year term
    • 15-year term
    • 20-year term
    • 25-year term
    • 30-year term
    • term to a specified age (usually 65)

    Yearly renewable term, once popular, is no longer a top seller. The most popular type is now 20-year term. Most companies will not sell term insurance to an applicant for a term that ends past his or her 80th birthday.

    If a policy is “renewable,” that means it continues in force for an additional term or terms, up to a specified age, even if the health of the insured (or other factors) would cause him or her to be rejected if he or she applied for a new life insurance policy.

    Generally, the premium for the policy is based on the insured person’s age and health at the policy’s start, and the premium remains the same (level) for the length of the term. So, premiums for 5-year renewable term can be level for 5 years, then to a new rate reflecting the new age of the insured, and so on every five years. Some longer term policies will guarantee that the premium will not increase during the term; others don’t make that guarantee, enabling the insurance company to raise the rate during the policy’s term.

    Some term policies are convertible. This means that the policy’s owner has the right to change it into a permanent type of life insurance without additional evidence of insurability.

    “Return of Premium”

    In most types of term insurance, including homeowners and auto insurance, if you haven’t had a claim under the policy by the time it expires, you get no refund of the premium. Your premium bought the protection that you had but didn’t need, and you’ve received fair value. Some term life insurance consumers have been unhappy at this outcome, so some insurers have created term life with a “return of premium” feature. The premiums for the insurance with this feature are often significantly higher than for policies without it, and they generally require that you keep the policy in force to its term or else you forfeit the return of premium benefit. Some policies will return the base premium but not the extra premium (for the return benefit), and others will return both.

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    • Whole or ordinary life: This is the most common type of permanent insurance policy. It offers a death benefit along with a savings account. If you pick this type of life insurance policy, you are agreeing to pay a certain amount in premiums on a regular basis for a specific death benefit. The savings element would grow based on dividends the company pays to you.

    • Universal or adjustable life: This type of policy offers you more flexibility than whole life insurance. You may be able to increase the death benefit, if you pass a medical examination. The savings vehicle (called a cash value account) generally earns a money market rate of interest. After money has accumulated in your account, you will also have the option of altering your premium payments – providing there is enough money in your account to cover the costs. This can be a useful feature if your economic situation has suddenly changed. However, you would need to keep in mind that if you stop or reduce your premiums and the saving accumulation gets used up, the policy might lapse and your life insurance coverage will end. You should check with your agent before deciding not to make premium payments for extended periods because you might not have enough cash value to pay the monthly charges to prevent a policy lapse.

    • Variable life: This policy combines death protection with a savings account that you can invest in stocks, bonds and money market mutual funds. The value of your policy may grow more quickly, but you also have more risk. If your investments do not perform well, your cash value and death benefit may decrease. Some policies, however, guarantee that your death benefit will not fall below a minimum level.

    • Variable-universal life: If you purchase this type of policy, you get the features of variable and universal life policies. You have the investment risks and rewards characteristic of variable life insurance, coupled with the ability to adjust your premiums and death benefit that is characteristic of universal life insurance.

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  • A permanent life policy provides lifelong insurance protection. The policy pays a death benefit if you die tomorrow or if you live to be a hundred. There is also a savings element that will grow on a tax-deferred basis and may become substantial over time. Because of the savings element, premiums are generally higher for permanent than for term insurance. However, the premium in a permanent policy remains the same, while term can go up substantially every time you renew it.

    There are a number of different types of permanent insurance policies, such as whole (ordinary) life, universal life, variable life, and variable/universal life. In a permanent policy, the cash value is different from its face value amount. The face amount is the money that will be paid at death. Cash value is the amount of money available to you. There are a number of ways that you can use this cash savings. For instance, you can take a loan against it or you can surrender the policy before you die to collect the accumulated savings.

    There are unique features to a permanent policy such as:

    • You can lock in premiums when you purchase the policy. By purchasing a permanent policy, the premium will not increase as you age or if your health status changes.

    • The policy will accumulate cash savings. Depending on the policy, you may be able to withdraw some of the money. You also may have these options:

      • Use the cash value to pay premiums. If unexpected expenses occur, you can stop or reduce your premiums. The cash value in the policy can be used toward the premium payment to continue your current insurance protection – providing there is enough money accumulated.

      • Borrow from the insurance company using the cash value in your life insurance as collateral. Like all loans, you will ultimately need to repay the insurer with interest. Otherwise, the policy may lapse or your beneficiaries will receive a reduced death benefit. However, unlike loans from most financial institutions, the loan is not dependent on credit checks or other restrictions.

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  • You should consider term life insurance if:

    • You need life insurance for a specific period of time. Term life insurance enables you to match the length of the term policy to the length of the need. For example, if you have young children and want to ensure that there will be funds to pay for their college education, you might buy 20-year term life insurance. Or if you want the insurance to repay a debt that will be paid off in a specified time period, buy a term policy for that period.

    • You need a large amount of life insurance, but have a limited budget. In general, this type of insurance pays only if you die during the term of the policy, so the rate per thousand of death benefit is lower than for permanent forms of life insurance. If you are still alive at the end of the term, coverage stops unless the policy is renewed. Unlike permanent insurance, you will not build equity in the form of cash savings.

    If you think your financial needs may change, you may also want to look into “convertible” term policies. These allow you to convert to permanent insurance without a medical examination in exchange for higher premiums.

    Keep in mind that premiums are lowest when you are young and increase upon renewal as you age. Some term insurance policies can be renewed when the policy ends, but the premium will generally increase. Some policies require a medical examination at renewal to qualify for the lowest rates.

    You should consider permanent life insurance if:

    • You need life insurance for as long as you live. A permanent policy pays a death benefit whether you die tomorrow or live to be 100.

    • You want to accumulate a savings element that will grow on a tax-deferred basis and could be a source of borrowed funds for a variety of purposes. The savings element can be used to pay premiums to keep the life insurance in force if you can’t pay them otherwise, or it can be used for any other purpose you choose. You can borrow these funds even if your credit is shaky. The death benefit is collateral for the loan, and if you die before it’s repaid, the insurance company collects what is due the company before determining what’s goes to your beneficiary.

    Keep in mind that premiums for permanent policies are generally higher than for term insurance. However, the premium in a permanent policy remains the same no matter how old you are, while term can go up substantially every time you renew it.

    There are a number of different types of permanent insurance policies, such as whole (ordinary) life, universal life, variable life, and variable/universal life.

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  • Roughly 1,000 life insurance companies sell life insurance in the U.S., but many are members of groups of companies and so aren’t really competitors with each other. Having separate companies enables a group to offer its products through separate distribution channels, to more efficiently meet the regulatory requirements of particular states, or to achieve other organizational goals. There are an estimated three hundred company groups.

    Moreover, not every group has a company licensed to operate in each state. As a general rule, you should buy from a company licensed in your state, because then can you rely on your state insurance department to help if there’s a problem. And if the insurance company becomes insolvent, your state’s life insurance guaranty fund will help only policyholders of companies it has licensed. To find out which companies are licensed in any state, contact that state’s state insurance department.

    There are several other points to keep in mind when selecting a life insurance company:

    • Product: most, but not all, companies offer a broad range of policies and features, so choose a company that offers the product and features that meet your needs.

    • Identity: life insurance company names can be confusing, and different companies can have similar names. Life insurance company names often use words that suggest financial strength (such as Guaranty, Reserve, or Security), financial sophistication (such as Bankers, Financial, or Investors), maturity (such as First, Pioneer, or Old), dependability (such as Assurance, Reliable, Trust), fairness (such as Beneficial, Equitable, or Peoples), breadth of operations (such as Continental, National, or International), government (such as American, Capital, or Republic), or well-known and respected Americans (such as Jefferson, Franklin, or Lincoln). Be sure you know the full name, home office location, and affiliation (if any) of any company you are considering.

    • Financial Solidity: life insurance is a long-term arrangement. There is no guarantee for life insurance policyholders similar to that provided for bank accounts by the Federal Deposit Insurance Corporation (FDIC). Select a company that is likely to be financially sound for many years, by using ratings from independent rating agencies.

    • Market ethics: some life insurance companies subscribe to the principles and codes of conduct of the Insurance Marketplace Standards Association, a nonprofit organization that promotes ethical conduct in life insurance marketing.

    • Advice and service: for many people, life insurance is a strange, complex product, so that it helps to deal with a representative with whom you can communicate and who is attentive to your needs. This might be connected to the selection of a life insurance company because some agents represent only one or a very few life insurance companies.

    • Claims: you may want to check a national claims database to see what complaint information it has on a company. Also, your state insurance department will be able to tell you if the insurance company you are considering doing business with had many consumer complaints about its service relative to the number of policies it sold.

    • Premium and cost: The premium is the amount you pay the company for the life insurance contract with all of its benefits. Even for a given death benefit and type of insurance (e.g., term life), the premium can vary widely among companies, either because some companies’ policies have features that others don’t, or because some charge more than others for the same coverage. So the first step in comparing policies is to make sure you compare similar insurance plans, based on
      -Your age
      -The type of policy and policy features
      -The amount of insurance you are purchasing

    The premium for the policy isn’t the same as the cost of the protection portion of the policy. One policy might have a higher premium but also offer more benefits (for example, it might pay policy dividends) than another. Or both might promise dividends, but in different amounts at different points in time. In each case, the higher-premium policy might have a lower cost of protection. How can you tell what a policy’s cost is? Companies should tell you a policy’s Net Payment Cost Index and its Surrender Cost Index. Use the Surrender Cost Index if you’re thinking of keeping the insurance only for a specific period of time; use the Net Payment Cost Index if you expect to keep the policy indefinitely. Generally, the lower the cost index, the better.

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  • Four independent agencies—A.M. Best, Fitch, Moody’s and Standard & Poor’s—rate the financial strength of insurance companies. Each has its own rating scale, its own rating standards, its own population of rated companies, and its own distribution of companies across its scale. Each agency uses numbers or plusses and minuses to indicate minor variations in rating from another rating class.

    The agencies disagree often enough so that you should consider a company’s rating from two or more agencies before judging whether to buy or keep a policy from that company. Moreover, agencies will announce changes of ratings on any day. It’s probably prudent to check annually on the ratings of any company you’re interested in.

    Some points for using the ratings:

    • Don’t rely only on what the insurance companies say about their ratings from these agencies. Companies are likely to highlight a higher rating from one agency and ignore a lower one from another agency, or to select the most favorable comments from a rating agency’s report.

    • To use the ratings from more than one independent agency, you need to understand that each agency’s rating code is different from the others. For example, an A+ from A.M. Best is the next-to-top rating of its 15 categories, but an A+ from Fitch or S&P is their 5th-highest rating (out of 24 categories for Fitch, and out of 19 categories for S&P). Moreover, Moody’s doesn’t have an A+ rating.

    However, the ratings can be classified into “secure” and “vulnerable” mega-categories. Here, as of August 2008, are the rating scales for each of the “secure” rating classes, and all the “vulnerable” classes combined (source, except for Weiss: The Insurance Forum, September 2008 issue).

    Rating Agency Category Description # of companies in category % of rated companies
    in category
    A.M. Best A++ Superior 37 3.8
      A+ Superior 149 15.4
      A Excellent 194 20.1
      A- Excellent 285 29.5
      B++ Very good 128 13.3
      B+ Very good 99 10.3
      B and lower Vulnerable 63 6.5
    Fitch AAA Exceptionally strong 10 3.2
      AA+ Very strong 46 14.5
      AA Very strong 50 15.8
      AA- Very strong 56 17.7
      A+ Strong 64 20.2
      A Strong 45 14.2
      A- Strong 16 5.0
      BBB+ Good 17 5.4
      BBB Good 5 1.6
      BBB- Good 2 1.9
      BB+ and lower Vulnerable 2 0.6
    Moody's Aaa Exceptional 6 3.2
      Aa1 Excellent 11 5.9
      Aa2 Excellent 36 19.1
      Aa3 Excellent 51 27.1
      A1 Good 19 10.1
      A2 Good 15 8.0
      A3 Good 10 5.3
      Baa1 Adequate 12 6.4
      Baa2 Adequate 1 0.5
      Baa3 Adequate 12 6.4
      Ba1 and lower Vulnerable 15 7.9
    S & P AAA Extremely strong 21 5.8
      AA+ Very strong 23 6.4
      AA Very strong 69 19.1
      AA- Very strong 49 13.6
      A+ Strong 38 10.5
      A Strong 77 21.3
      A- Strong 29 8.0
      BBB+ Good 19 5.3
      BBB Good 9 2.5
      BBB- Good 10 2.8
      BB+ and lower Vulnerable 17 4.8
    *2004 figures; updated information not available
    **As of March 25, 2003

    Ratings Agency Contact Information

    View Our List of Research & Rating Links

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  • When you’re considering buying life insurance, it’s important to choose an agent or broker who can help you. Buying life insurance can be complicated or confusing. The key to buying the right amount and the right type of policy at a good rate is a good agent or broker. You should choose one who:

    • Understands your financial situation, including your attitudes about risk, your income and estate tax “brackets,” and your other financial assets and obligations, as well as your personal situation (that is, your age, marital status, dependents, etc.)

    • Explains, in terms you can easily understand, issues, options and planned use of life insurance in your financial program

    • Provides you with a personalized written document that
      -records the facts of your current financial and personal situation and
      -describes the features of the life insurance and how it fits into your situation

    • Doesn’t pressure you into a decision, but works with you until you’re ready and convinced that you are doing what is best for you

    • Is prepared to review with you periodically—perhaps every three years or so—whether the product continues to be suitable for your needs and circumstances

    • Is licensed by your state insurance department.

    If you don’t have an agent or broker who fits this description, ask your lawyer, accountant, friends, relatives and business associates for the names of insurance agents or brokers with an excellent reputation. You can also use this link: http://www.life-line.org/find_agent.html to connect with the nearly 70,000 members of the National Association of Insurance and Financial Advisors (NAIFA), who subscribe to the organization’s Code of Ethics ( http://www.naifa.org/about/ethics.cfm ).

    An agent or broker who has one or more professional financial services designations has demonstrated a commitment to specialized education in the field. Designations you might see include the following:

    Designation Full name of designation Issuing Institution Institution’s Web site
    Chartered Life Underwriter
    Chartered Financial Consultant
    The American College www.theamericancollege.edu
    CFP Certified Financial Planner Certified Financial Planner Board of Standards, Inc. www.cfp.net
    Registered Representative or Registered Principal National Association of Securities Dealers, Inc www.nasd.com

    The Compensation Issue

    Like everyone else, agents and brokers get paid for their services, which are enriched by their education and experience. Most agents and brokers are paid by commission, but some work on a fee basis. Typically, the largest part of the compensation is paid at the time you purchase the annuity, since most of the agent’s or broker’s work occurs at that time or just before it. As with any professional service, you should understand how your agent or broker will be compensated and how that might affect the purchase recommendation.

    The bottom line? The best way to protect yourself is to make sure you understand what you’re buying and the nature of the product’s limitations, penalties or fees if you want to drop the policy.

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  • There are ways to save money when buying life insurance, but they don’t always entail paying a lower premium immediately. As your top priority, look for a policy that meets your needs. Buying the wrong benefits for a low premium is a waste, not a saving. Beyond that, here are some ways to maximize your life insurance dollars.

    Before you buy

    Once you’ve determined what type of life insurance product to buy:

    • Focus on financially sound companies: Dozens of companies sell life insurance. Limit yourself to companies with high ratings from two or more independent rating agencies. A low premium from a shaky company isn’t a good buy.

    • Shop around to get a sense of the premium you’re likely to pay: Quote services on the Internet may serve this purpose, or you can ask an agent or broker to get you a premium estimate.

      As part of this research, determine which rate class you’ll fit into. Most companies that sell individual life insurance have several different price classes—usually called “preferred (non-tobacco),” “standard (non-tobacco),” “preferred (tobacco),” and “standard (tobacco).” A small percentage of people have health conditions or histories that disqualify them for even “standard” rates. Many in this group will be offered insurance at “impaired risk” or “nonstandard” rates.

    • Look into group insurance: Consider participating in your employer-sponsored life insurance program, even if you have to contribute to it financially. Employers often subsidize their group insurance costs, so it can be less expensive than individual life insurance. You might obtain coverage up to a certain level without providing evidence of good health, an advantage for some people. You’ll probably pay premiums through payroll deduction, which can be a nice convenience. However, make sure to compare group and individual rates, as depending on your age and health status, group insurance may or may not provide a savings. In comparing group to individual life insurance, remember that if you have over $50,000 of group life insurance, IRS tables determine how much it costs to provide the amount over $50,000 and charges you taxable income for that cost.

    • Take care of yourself: Find out into which rate class you’ll be grouped and, if necessary, consider making some lifestyle changes—don’t smoke, maintain a healthy weight and exercise regularly—to qualify for a more favorable rate class.

    When you're ready to buy

    • Shop around to get a good rate: Life insurance is a very competitive business, and you’ll find differences of hundreds of dollars (for annual premiums) even among financially strong companies for essentially the same policy.

    • Consider the net cost index: How can you compare two policies, one with premiums that start lower than the other but later are higher than the other? Or one with low premiums and a low cash value, the other with higher premiums and a higher cash value? Use a net cost index—a standard method for collapsing these variables into one number. The lower the number, the better, but ignore small differences (since the indexes are approximations based on assumptions, small differences might not signal true differences in values). The agent or broker with whom you’re dealing, or the company from which you’re considering buying a policy, will provide these index numbers.

    • Be aware of premium discounts for particular amounts of insurance: Most companies offer rate discounts for specified insurance amounts. For example, you might actually pay a smaller premium for $250,000 of life insurance than for $200,000, or for $500,000 of life insurance than for $450,000, because a discount “kicks in” at the higher insurance amount.

    • Beware of “fractional premiums: Typically, you can pay your life insurance premium once a year, once every half-year, once a quarter, or once a month. Although paying quarterly or monthly might seem to be easier to fit into your budget, some companies levy high charges for paying premiums frequently. Others levy quite small charges to do this. If a company levies high charges for paying more frequently, try budgeting so that you can pay your premium only once or twice a year.

    • If you’re buying a term policy, look for renewal guarantees: A renewal guarantee gives you the right to start a new term after the current one ends, paying a higher premium based on your current age, but without requiring you to undergo a new health exam or submit any other “evidence of insurability.” Without the guarantee, you’d have to shop for life insurance all over again, and if your health has deteriorated, you might have to pay much more or not get it at all.

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  • “Burial insurance” usually refers to a whole life insurance policy with a death benefit of from $5,000 to $25,000. As its nickname implies, people buy this type of policy to provide money for funeral and burial costs for themselves and/or family members. It is possible to buy a policy after answering a few health-related questions on the application and with no medical exam.

    Premiums are payable weekly or monthly. The premium is usually collected at the policyowner’s home or workplace, and the premium is usually a small round number, such as $2 or $3 per week; the death benefit is whatever that premium will buy given the insured’s current age. For example, a $3 per week premium might buy a $6,000 death benefit for a 36-year-old man or an $18,000 death benefit for a 9-year-old boy.

    Burial policies may be designed to cover one person or everyone in a family.

    Under some state laws, funeral homes may be licensed to sell burial insurance, but it is mainly sold through brokers and agents of insurance companies licensed to sell life insurance.

    An approach that is similar to burial life insurance (and sometimes called burial or “pre-need” insurance) is pre-payment of your funeral arrangements. Under this program, you may select the funeral home, type of service, casket (or cremation), flowers, headstone, burial plot, the cost of digging and filling the grave, and other items, and lock in the prices for them by paying in advance.

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  • Quite possibly. Here are 10 reasons to own life insurance after your kids have left home:

    • To meet goals: If your children are in college and/or not completely financially independent, life insurance can help “finish the job.” Although you may have saved enough for tuition, the kids’ living expenses (e.g., room and board, laundry, entertainment/activity costs, etc.) continue, but not Social Security benefit payments for the surviving spouse and children—they stop when the kids leave high school.

    • To support other dependents: If you have parents, disabled adult children, or others who depend on you for financial support, life insurance would continue this support if you die before they do.

    • To cover the Social Security “blackout period: A recent study showed that 5 percent of married women ages 51-64 were poor, but 20 percent of widows that age were poor. This happens because many people don’t plan for life insurance to pay income to the surviving spouse after their kids are grown. As noted above, Social Security pays nothing from when the youngest child leaves high school until the surviving spouse applies for benefits based on the deceased spouse’s record (minimum age for eligibility is 60). This interval is called the “blackout period.”

    • To offset reduced Social Security survivor’s benefits: If a survivor begins receiving Social Security survivor benefits earlier than the full-benefit age (66-67, depending on when the survivor was born), the Social Security benefit amount is permanently reduced. Moreover, because of the deceased’s early death, he or she didn’t get salary increases that might have boosted Social Security benefits further. A life insurance policy can help offset the effect of these “lost” raises.

    • To offset other “lost” retirement savings: Also, because of the deceased’s early death, he or she didn’t get salary increases that might have boosted employer pension benefits and/or IRA contributions. A life insurance policy can help offset the effect of these reduced retirement savings.

    • To meet commitments based on two incomes: Most two-earner couples make financial commitments (e.g., home mortgage, loans, leases, etc.) based on their combined income. Life insurance on each earner enables the survivor to continue to meet those commitments.

    • To pay unplanned expenses caused by an early death: Young people don’t generally plan to have savings available to pay for funeral and burial costs, final medical expenses, estate administration and transfer costs, and federal and state income and estate taxes. Life insurance can cover these costs, which can easily reach tens of thousands of dollars.

    • To create a financial “safety net”: Conventional wisdom says each household should have an “emergency fund” equal to about half a year’s income, to meet surprise unavoidable outlays. If the household does not already have an emergency fund, the post-death family will be even more financially vulnerable without one. Furthermore, it might also be somewhat more difficult for the survivors to obtain credit. Life insurance can solve this problem.

    • To offset lost income if a spouse dies after beginning Social Security retirement benefits: When a couple retires and begins receiving Social Security retirement benefits, each one receives an income. The earner with the larger pre-retirement income gets a benefit based on that income, and the person with the smaller (or no) pre-retirement income gets either a benefit based on his or her own earnings record or half of the spouse’s Social Security benefit, whichever is greater. When one spouse dies, the larger retirement benefit continues but the second benefit stops—in effect, a 33 percent income reduction. Life insurance can offset this income drop.

    • To provide bequests to heirs and charities: If you want to be sure that your heirs and/or favorite charities get money after your death, you can designate some or all of your life insurance benefits to go to them. This is particularly useful if, without the life insurance, your executor would have to liquidate other assets to meet this objective.

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  • The main reason for buying life insurance on anyone’s life is to replace income “lost” or pay for expenses caused by the death of the insured person. If your child dies, there’s no lost income, but there will be funeral, burial and related expenses that could run to thousands of dollars, which might cause a financial hardship to the parents of the deceased child.

    Another reason for buying life insurance on a child’s life is to guard against the possibility that, when the child is older, he or she might not be able to buy life insurance because of intervening illness or other circumstance.

    Still another reason for buying life insurance on a child’s life is part of a program to teach the child financial responsibility. Typically the insurance is whole life insurance, ownership of which is transferred to the child when he or she turns 21.

    Most insurance advisors recommend that families spend their insurance budget to buy life and disability income insurance on the parents first, before considering insurance on children’s lives. Death of a parent, particularly an income-earner, could have financial consequences that are devastating compared to the financial effects from a child’s death.

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  • The last thing you want to happen after you die is for your beneficiaries to be unable to locate and submit a claim on your life insurance. To prevent this, you should have copies of your life insurance records in at least two places. This is to make it less likely that you’ll lose them (to fire, flood, accidental discarding, etc.) and more likely that, after your death, your beneficiaries will find them.

    What information should I keep?

    For each individual life insurance policy on your life, you should record the following information:

    • The full name of the life insurance company that issued the policy
    • The city and state of the home office of the company that issued the policy
    • The name and U.S. headquarters of the group, if the issuing company belongs to a group of companies
    • The policy number
    • The date the policy was issued
    • The amount of the death benefit
    • The name and address of the agent/broker who sold you the policy
    • The type of policy (e.g., term, whole life, etc.)
    • The location of the original life insurance policy

    You might have life insurance automatically from your employer. Your employer also might offer you the chance to buy additional life insurance under a group policy. And you might be eligible to buy life insurance under a group policy from your union or trade association or other group you belong to (such as a college alumni association or an automobile club). For each of these life insurance benefits, you should record the following information:

    • The name of the employer or group that sponsors the insurance
    • The office or person to contact when it’s time to file a claim
    • The certificate number (comparable to the policy number under an individual policy)
    • The date the insurance was started
    • The amount of the death benefit

    Sometimes financial programs that are mainly designed for income or other purposes have death benefits as additional features. This might include pensions, annuities, workers compensation programs, disability insurance, travel accident insurance, etc. For each such program, you should record the following information:

    • The type of policy that has a death benefit as part of its features
    • The full name of the life insurance company that issued the policy
    • The city and state of the home office of the company that issued the policy
    • The policy number
    • The date the policy was issued
    • The amount of the death benefit
    • The name and address of the agent/broker who sold you the policy
    • The location of the original insurance policy

    Credit cards and lending institutions may offer life insurance to pay off your outstanding loans in the event of your death. For each life insurance benefit on your life dedicated to paying off a loan, you should record

    • The full name of the lending institution through which you obtained the life insurance
    • The loan number and issue date of the loan
    • The name of the person or office to contact when it’s time to file a claim
    • The policy number of the life insurance policy that pays off the loan

    Where should I keep the information?

    Keep one set of these records in your home, in a place where others who need this information are likely to find it (and after you put the information there, tell the people who’ll need it where it is). This might be with your other financial records (such as income tax, checking account, investment records), with your other legal papers (such as a copy of your will, living will, health care proxy, etc.), or anywhere your survivors are likely to look for them.

    Keep another set of these records “off site”—that is, outside of your home, perhaps in a safe deposit box, or with a professional or a relative who can be counted on to produce them when they’re needed.

    On each page, record the date on which the information was last updated. That way, if the copy in your home differs from the one in the safe deposit box, it’s easy to tell which is the more current.

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  • You should review all of your insurance needs at least once a year. If you have a major life change, you should contact your insurance agent or company representative. The change in your life may have a significant impact on your insurance needs. Life changes may include:

    • Marriage or divorce
    • A child or grandchild who is born or adopted
    • Significant changes in your health or that of your spouse/domestic partner
    • Taking on the financial responsibility of an aging parent
    • Purchasing a new home
    • A loved one who requires long-term care
    • Refinancing your home
    • Coming into an inheritance

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  • If unexpected expenses come up and you can’t pay your life insurance premium, you should know the possible consequences. The effect depends on the type of policy and coverage you have and the policy terms and conditions.

    Term: If you stop paying premiums, your coverage lapses.

    Permanent: If you have this type of policy, you will have the following choices:

    • Cash out the policy: This means that you can stop paying the premium and collect the available cash savings. You will no longer be covered by life insurance, but you will at least save some of the proceeds of the policy. You may, however, have to pay taxes on some of the cash value if the sum exceeds what you have paid in premiums.

    • Non-forfeiture options: There may be a “reduced paid-up” option. This means that you can stop paying premiums completely in return for a reduced death benefit and no cash saving. You may also be able to convert the permanent policy to an extended term policy for a time period based on the accumulated cash savings in the policy.

    • Policy will lapse: If this happens, see if the policy can be reinstated. Some insurers may allow this if you do it within five years of lapsing. You will most likely have to pass a physical examination for the reinstated policy and pay back the premiums you would have paid plus interest. Annual premiums for the reinstated policy may be lower than those for a new, comparable policy.

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  • To begin the claims process:

    • Get several copies of the death certificate.

    • Call your insurance agent. He or she can help you fill out the necessary forms and act as an intermediary with the insurance company. (Don’t keep life insurance policies in your safe deposit box. In most states, safe deposit boxes are sealed temporarily upon the death of the owner, which can delay the settlement. ) If you don’t have an insurance agent, or don’t know who the deceased's agent was, contact the company directly.

    • Submit a certified copy of the death certificate from the funeral director with the policy claim. Once the claim is submitted, a settlement should be issued to you shortly. Once a life insurance claim is submitted, you must determine how the proceeds will be distributed. These are some of the options available:

      • Lump sum -- You receive the entire death benefit in a single amount.

      • Specific income provision -- The company pays you both principal and interest on a predetermined schedule.

      • Life income option -- You receive a guaranteed income for life. The amount of income depends on the death benefit, your gender and your age at the time of the insured's death.

      • Interest income option -- The company holds the proceeds and pays you interest on them. The death benefit remains intact and goes to a secondary beneficiary upon your death.

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  • If a family member dies and you are unable to locate his or her life insurance policies, there is, unfortunately, no national or statewide database of all life insurance policies that you can consult. However, you can try to determine:

    • which insurance company might have issued the policy
    • which agent or broker might have sold or serviced the policy
    • whether the deceased might have had insurance through an employer, union or trade association, or other group to which he/she belonged.

    Here are some strategies that might turn up useful information:

    • Look for insurance-related documents: Search through files, bank safe deposit boxes, and other storage places to see if there are any insurance-related documents. Also, look through address books to see if the names of any insurance agents or companies are listed. An agent or company who sold the deceased their auto or home insurance may know about the existence of a life insurance policy.

    • Contact current and prior financial advisors: Contact current or prior attorneys, accountants, investment advisors, bankers, business insurance agents/brokers and others who might have known about the deceased’s life insurance.

    • Review life insurance applications: The application for each policy is attached to that policy. So if you can find any of the deceased’s life insurance policies, look at the applications for them. The application will have a list of all other life insurance policies owned at the time of the application.

    • Contact previous employers: Former employers may have a record of a past group policy or policies.

    • Check bank books and canceled checks: See if any checks have been made out to life insurance companies over the years.

    • Check the mail for a year following the death of the policyholder: Look for premium notices or dividend notices. If a policy has been paid up, there will no notice of premium payments due. However, the company may still send an annual notice regarding the status of the policy or it may pay or send notice of a dividend.

    • Review the deceased’s income tax returns for the past two years: Look for interest income from and interest expenses paid to life insurance companies. Life insurance companies pay interest on accumulations on permanent policies and charge interest on policy loans.

    • Contact all relevant state insurance departments: The National Association of Insurance Commissioners has a “Life Insurance Company Location System” to help you find state insurance department personnel who might help identify companies that might have written life insurance on the deceased. To access that service, go to the NAIC's Life Insurance Company Location System.

    • Check with the state's unclaimed property office: If a life insurance company knows that an insured client has died but can’t find the beneficiary, it must turn the death benefit over to the state in which the policy was bought as “unclaimed property.” If you know (or can guess) where the policy was bought, you can contact the state comptroller’s department to see if it has any unclaimed money from life insurance policies belonging to the deceased.

    • Contact a private service that will search for “lost life insurance”: Several private companies will, for a fee, contact insurance companies for you to find out if the deceased was insured. This service is often provided through their Web sites.

    • Do you think the life insurance might have been bought in Canada?: If so, you might contact the Canadian Life and Health Insurance Association (phone: 1-800-268-8099; Web site: www.clhia.ca).

    • Try the MIB database: There is a database of all applications for individual life insurance that were processed during the last 12 years. There is a $75 charge per search. Many searches are not successful: a random sample of searches found only 1 match in every 4 tries. For more information, go to MIB's Consumer Protection page.

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  • For more detail on life insurance, you can contact:

    • American Council of Life Insurers
      1001 Pennsylvania Avenue
      N.W., Washington, D.C. 20004-2599

    • Life and Health Insurance Foundation for Education

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Life Insurance Settlements  (Top of Page)

  • An offer for a policy is affected by a number of factors such as your life expectancy, future premiums due on the policy, whether or not there is a loan on the policy, and the market conditions for your policy. We always try to make the most competitive offer possible. You are never under any obligation or pressure from Whittaker & Associates to sell your policy.

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  • Most individual and group life insurance policies with a face value of $100,000 or greater can be sold. The policy must not contain a restriction prohibiting transfer of ownership rights and all parties must agree to the transfer of ownership.

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  • No, the person who buys the rights to your policy is responsible for the payment of the premiums.

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  • The entire process usually takes between 3 and 6 weeks, depending on the amount of cooperation from your health care providers and your life insurance company.

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Annuities  (Top of Page)

  • Annuities can serve many useful purposes.

    If you are in a saving-money stage of life, a deferred annuity can:

    • Help you meet your retirement income goals: Employer-sponsored plans such as a 401(k), 403(b) or Keogh are an important part of planning for retirement. However, contributions to these plans and to IRAs are limited, and they might not add up to enough for the retirement income you need, especially if you started saving for retirement late or had contributions interrupted—perhaps due to job changes and/or family responsibilities. Moreover, your social security and defined-benefit pension (if you have one) may provide less than you need to retire. Remember that the purchasing power of defined-benefit pension income is eroded by inflation.

    • Help you diversify your investment portfolio: Investment experts routinely advise that, to get the best return for a given level of risk, you should diversify your investments among a number of asset classes. Fixed annuities, in particular, offer a unique asset class—an investment that is guaranteed not to decrease and that will actually increase at a specified interest rate (and, often, potentially more). The guarantees are supported by the claims-paying ability of the insurer.

    • Help you manage your investment portfolio: Investment experts routinely advise that, whenever your investments in various asset classes get too far from the percentage allocations you prefer, you “rebalance” to the original formulation, by shifting funds from the classes that have grown faster to the ones that have grown more slowly. If you do this with mutual funds, you pay capital gains taxes; if you do it in a variable annuity, you don’t pay capital gains taxes. When you eventually withdraw money from the annuity (which could be many years after the rebalancing), you pay tax then at the ordinary income rate.

    If you are in a need-income stage of life, an immediate annuity can:

    • Help protect you against outliving your assets: Social security pays retirement income for as long as you live, as do defined-benefit pension plans. But the only other source of income available that continues indefinitely is an immediate annuity.

    • Help protect your assets from creditors: Generally the most that creditors can access is the payments from an immediate annuity as they’re made, since the money you gave the insurance company now belongs to the company. Some state statutes and court decisions also protect some or all of the payments from those annuities.

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  • Both annuities and life insurance should be considered in your long-term financial plan. While both include death benefits, you buy life insurance in the event you die too soon and an annuity in case you live too long. In other words, life insurance provides economic protection to your loved ones if you die before your financial obligations to them are met, while annuities guard against outliving your assets.

    There are two main types of annuities—deferred and immediate—and two main types of life insurance—term and whole life. The chart below compares them.

      Life Insurance Annuities
      Term life Whole life Deferred annuities Immediate
    Main reason for buying it Provide income for dependents Provide income for dependents or meet estate planning needs To accumulate money in a tax-deferred product To assure you don’t “outlive your income”
    Pays out when You die You die, borrow the cash value or surrender the policy You make withdrawals One period after you buy the annuity, stops paying when you die*
    Typical form of payment Single sum Single sum Single sum or income Lifetime income
    Buyer’s age when it is typically bought 25-50 30-60 40-65 55-80
    Accumulates money tax-deferred? No Yes Yes Yes, but only in the early payout years
    Pays a death benefit? Yes Yes Yes *payments continue if the annuity has a guaranteed-period option that hasn’t expired at the annuitant’s death
    Are benefits taxable income when received? No No, unless a cash value withdrawal exceeds the sum of premiums Yes, but only the part derived from investment income Yes, but only the part derived from investment income

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  • Unlike a 401(k) or an IRA, there are no limits on the amount that you can invest in an annuity. Whether you’re considering a deferred or immediate annuity, the amount of money you should consider putting into an annuity depends on:

    • Your immediate actual and potential financial needs
    • Your long-term financial goals
    • Your current savings/investment portfolio
    • The range of alternatives available to you

    Of these, the most important is your immediate actual and potential financial needs. If you’re buying a deferred annuity and you have a sudden need for cash, you can usually withdraw a small amount without penalty. However, you’ll likely pay a penalty if you make a large withdrawal within a few years after you’ve bought the annuity. If you’re buying an immediate annuity, you usually can’t get any more than the regular payments, no matter how badly you need cash. However, if you have other sources of cash that are sufficient for any emergency or unforeseen needs, then the immediate needs criterion is satisfied and the other criteria become more important.

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  • Deferred Annuity

    Annuities can be purchased through insurance agents, financial planners, banks and life insurance carriers. However, only life insurance companies issue policies.

    Here is a closer look:


    Agents are insurance professionals who are licensed by your state insurance department. Some agents work exclusively for one insurance company, while others represent several.

    If you decide to use an insurance agent, find one who is knowledgeable about annuities and has a reputation for excellent customer service. The agent should be able to advise you and answer all your questions. If you are thinking about buying a variable annuity, the agent should also have a license to sell variable annuity products. Since variable annuities are considered securities, you should receive a prospectus describing the investment alternatives available to you.

    Banks and brokerage firms

    Products developed by life insurance companies are often marketed through banks and stock brokerage firms. Make sure the person who sells you the annuity is a licensed life insurance agent. In the case of a variable annuity, the agent should also be a licensed securities dealer. If you buy an annuity through a bank or brokerage firm, you should ask about the types of annuities the insurer issues and the financial strength of the insurance company.

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  • The annuity business, like the insurance industry itself, is very competitive. There are hundreds of insurers and many different types of products available to you. Before buying an annuity, contact your state insurance department to see whether it offers an annuity buyers guide for your state.

    There are four important things to consider:

    • Financial Solidity: Select a company that is likely to be financially sound for many years, by using ratings from independent rating agencies.

    • State insurance department license to do business: Make sure that the insurer you select is licensed to issue annuities in your state. Ask whether the specific type of annuity you are considering is available in your state.

    • Service: Expect excellent customer service. Your insurance company representative should answer your questions promptly and provide useful information that addresses your concerns. This way, you can make a well-informed decision on the annuity that best meets your needs and objectives.

    • Choice of investments and riders: Some insurers offer annuities with an array of investment choices and a large variety of riders. Compare these options. Some options may increase the price of the annuity. Decide on an annuity that best meets your needs.

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  • Most state insurance departments require insurance companies to provide a "free-look" period after you have purchased the policy. It is typically a 10-day span in which you can pull out of the contract and obtain a refund based on contract terms or state law. You should use this time to review the policy, ask your insurance agent or stockbroker any additional questions and make a final decision as to whether the annuity you selected was right for you.

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  • If you take money out of an annuity, there may be a penalty called a surrender fee or a withdrawal charge. This fee is higher if you withdraw funds within the first years of an annuity contract. The penalty, however, drops gradually each year. Since immediate annuities are purchased to provide income, they usually can’t be “surrendered” and will therefore not be subjected to a fee.

    A typical surrender fee schedule could be:

    • 7 percent if you withdraw funds in the first year,
    • 6 percent in the second year,
    • 5 percent in the third year,
    • 4 percent in the fourth year,
    • 3 percent in the fifth year,
    • 2 percent in the sixth year,
    • 1 percent in the seventh year,
    • and zero in the eighth year and beyond.

    The purpose of the fee is to allow the insurer enough time to recover its expenses, largely commissions, in setting up the annuity contract. It also serves to discourage annuity buyers from using deferred annuities as short-term investments for quick cash.

    Some contracts may permit you to pull out a portion of the funds annually, usually up to 10 percent without a surrender charge. If this option is important to you, ask your insurance agent or company representative about this before deciding to invest your money in a specific annuity. Also, ask if there may be any other fees or charges.

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  • Fixed vs. variable annuities

    In a fixed annuity, the insurance company guarantees the principal and a minimum rate of interest. In other words, as long as the insurance company is financially sound, the money you have in a fixed annuity will grow and will not drop in value. The growth of the annuity’s value and/or the benefits paid may be fixed at a dollar amount or by an interest rate, or they may grow by a specified formula. The growth of the annuity’s value and/or the benefits paid does not depend directly or entirely on the performance of the investments the insurance company makes to support the annuity. Some fixed annuities credit a higher interest rate than the minimum, via a policy dividend that may be declared by the company’s board of directors, if the company’s actual investment, expense and mortality experience is more favorable than was expected. Fixed annuities are regulated by state insurance departments.

    Money in a variable annuity is invested in a fund—like a mutual fund but one open only to investors in the insurance company’s variable life insurance and variable annuities. The fund has a particular investment objective, and the value of your money in a variable annuity—and the amount of money to be paid out to you—is determined by the investment performance (net of expenses) of that fund. Most variable annuities are structured to offer investors many different fund alternatives. Variable annuities are regulated by state insurance departments and the federal Securities and Exchange Commission.

    Types of fixed annuities

    An equity-indexed annuity is a type of fixed annuity, but looks like a hybrid. It credits a minimum rate of interest, just as a fixed annuity does, but its value is also based on the performance of a specified stock index—usually computed as a fraction of that index’s total return.

    A market-value-adjusted annuity is one that combines two desirable features—the ability to select and fix the time period and interest rate over which your annuity will grow, and the flexibility to withdraw money from the annuity before the end of the time period selected. This withdrawal flexibility is achieved by adjusting the annuity’s value, up or down, to reflect the change in the interest rate “market” (that is, the general level of interest rates) from the start of the selected time period to the time of withdrawal.

    Other types of annuities

    All of the following types of annuities are available in fixed or variable forms.

    Deferred vs. immediate annuities: A deferred annuity receives premiums and investment changes for payout at a later time. The payout might be a very long time; deferred annuities for retirement can remain in the deferred stage for decades.

    An immediate annuity is designed to pay an income one time-period after the immediate annuity is bought. The time period depends on how often the income is to be paid. For example, if the income is monthly, the first payment comes one month after the immediate annuity is bought.

    Fixed period vs. lifetime annuities: A fixed period annuity pays an income for a specified period of time, such as ten years. The amount that is paid doesn’t depend on the age (or continued life) of the person who buys the annuity; the payments depend instead on the amount paid into the annuity, the length of the payout period, and (if it’s a fixed annuity) an interest rate that the insurance company believes it can support for the length of the pay-out period.

    A lifetime annuity provides income for the remaining life of a person (called the “annuitant”). A variation of lifetime annuities continues income until the second one of two annuitants dies. No other type of financial product can promise to do this. The amount that is paid depends on the age of the annuitant (or ages, if it’s a two-life annuity), the amount paid into the annuity, and (if it’s a fixed annuity) an interest rate that the insurance company believes it can support for the length of the expected pay-out period.

    With a “pure” lifetime annuity, the payments stop when the annuitant dies, even if that’s a very short time after they began. Many annuity buyers are uncomfortable at this possibility, so they add a guaranteed period—essentially a fixed period annuity—to their lifetime annuity. With this combination, if you die before the fixed period ends, the income continues to your beneficiaries until the end of that period.

    Qualified vs. nonqualified annuities: A qualified annuity is one used to invest and disburse money in a tax-favored retirement plan, such as an IRA or Keogh plan or plans governed by Internal Revenue Code sections, 401(k), 403(b), or 457. Under the terms of the plan, money paid into the annuity (called “premiums” or “contributions”) is not included in taxable income for the year in which it is paid in. All other tax provisions that apply to nonqualified annuities also apply to qualified annuities.

    A nonqualified annuity is one purchased separately from, or “outside of,” a tax-favored retirement plan. Investment earnings of all annuities, qualified and non-qualified, are tax-deferred until they are withdrawn; at that point they are treated as taxable income (regardless of whether they came from selling capital at a gain or from dividends).

    Single premium vs. flexible premium annuities: A single premium annuity is an annuity funded by a single payment. The payment might be invested for growth for a long period of time—a single premium deferred annuity—or invested for a short time, after which payout begins—a single premium immediate annuity. Single premium annuities are often funded by rollovers or from the sale of an appreciated asset.

    A flexible premium annuity is an annuity that is intended to be funded by a series of payments. Flexible premium annuities are only deferred annuities; that is, they are designed to have a significant period of payments into the annuity plus investment growth before any money is withdrawn from them.

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  • You can think of a lifetime annuity as investment vehicle that functions as a personal pension plan. Sometimes referred to as “single life,” “straight life,” or “non-refund,” these are a form of immediate annuity that provides income for your entire life. The payments can be increased to cover a second person. This is called a “Joint and Survivor” annuity. While most provide income for life, some may offer the option of payments for a fixed number of years.

    A lifetime annuity could serve as a retirement income supplement to Social Security checks, 401(k) retirement plans, company pension funds, etc. Lifetime annuities provide income for as long as you live - even after all the money you contributed is exhausted. They can be useful for those who want the certainty and security of establishing a regular and guaranteed income stream. If, however, you die before all the funds in your account have been used up, the payment option to your beneficiaries will be determined by the choice you made when you purchased the annuity. In some cases, no payouts will be made to your dependents or other beneficiaries. Instead, you will be getting an income that you can’t outlive.

    A straight life annuity makes sense for someone who needs the most retirement income possible and does not plan to use the money invested for dependents or other beneficiaries.

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  • Deferred Annuity

    This type of annuity is good for long-term retirement planning for the following reasons:

    • Payments on income taxes are deferred until you withdraw the money.

    • Unlike a 401(k) or an IRA, there are no limits on your annual annuity contributions.

    • There is a death benefit. If you die before collecting on the annuity, your heirs get the amount you contributed, plus investment earnings, minus whatever cash withdrawals you made.

    Immediate Annuity

    This allows you to convert a lump sum of money into an annuity so that you can immediately receive income. Payments generally start about a month after you purchase the annuity. This type of annuity offers financial security in the form of income payments for the rest of your life. In other words, you cannot outlive it.

    Immediate annuities allow you to:

    • Supplement your current income. If you are nearing retirement, you may consider transferring another savings or investment account into an immediate annuity. You can also move the proceeds from a deferred annuity into an immediate annuity.

    • Pay taxes only on the portion of your immediate annuity payments that is considered earnings. You are not taxed on the portion that is principal. The principal is the initial deposit made with funds that have already been taxed.

    Like deferred annuities, immediate annuities can be fixed or variable. Fixed immediate annuity income payments are pegged to the amount you contribute, your age and the interest rate at the time of purchase. Those payments to you will not go up or down. Variable immediate annuity payments vary with the investments you chose.

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  • Fixed annuities pay a “fixed” rate of return. When you receive payments, the monthly payout is a set amount and is guaranteed. Fixed annuities may be a good choice for:

    • Conservative investors who value safety and stability.

    • Those nearing retirement who want to shelter their assets from the volatility of the stock or bond market

    With variable annuities, you can invest in a variety of securities including stock and bond funds. Stock market performance determines the annuity's value and the return you will get from the money you invest. The amount of risk you are willing to assume should influence the kind of funds you select.

    You may want to consider a variable annuity if you are:

    • Comfortable with fluctuations in the stock market and want your investments to keep pace with inflation over a long period of time.

    • Young and want to prepare financially for retirement by reaping the gains in the stock or bond market over the long term.

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  • You should review your annuity portfolio as often as you would your other investments. Depending on the type of annuity, you should review it at least once a year. Of course, a major change in your family such as a serious illness, a new baby or even starting a business should trigger a call to your insurance agent or company representative to discuss changes in your financial planning. If you change your plans, find out whether this will cost you anything and if so, how much.

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  • For more annuity information, contact your life insurance agent or financial planner. You may also want to contact the following organizations:

    • American Council of Life Insurers
      101 Constitution Avenue, NW, Suite 700
      Washington, D.C., 20001

    • American Association of Retired Persons (AARP)
      601 E. Street NW
      Washington, DC 20049

    • National Association of Securities Dealers, Inc.
      1735 K. Street NW
      Washington, DC 20006-1506

    • National Association of Variable Annuities
      11710 Plaza America Drive, Suite 100
      Reston, VA 20190

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  • An important decision in purchasing an annuity is deciding how you want to be paid. You can select annuity payouts for a set period of time or continue for your lifetime. With some options, a beneficiary can be designated to receive payments upon your death. You have several choices including:

    Straight life

    You will get income for your entire life - even after all the money you put into the annuity has been used up. However, if you die before the money in your account has been used up, nobody, not even your dependents, will collect payouts. The straight life annuity might be right for you if you need to maximize the amount of income you receive and either don’t have dependents or are not planning to use the annuity for the purposes of estate planning.

    Joint and survivor

    This type of annuity pays you as long as you live. After your death, it will pay the joint annuitant for the rest of his or her life. You can choose the benefit your survivor will get upon your death, but this option reduces the payout amount you get.

    Refund annuity

    This payout option is gaining in popularity. It provides income for life. If, however, you die before you receive an amount equal to all of the premiums you paid, your beneficiary gets the portion you had not yet collected.

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  • If you cannot find your annuity policy, there is no need to panic. For starters, most insurers issue quarterly or yearly statements. If you have not received one or need to reach the insurer immediately, contact the agent or financial planner who sold you the annuity. You may also want to review your canceled checks to see where you wrote the check.

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Health Insurance  (Top of Page)

  • There are essentially two types of health insurance plans: indemnity plans (fee-for services) or managed care plans. The differences include the choice of providers, out-of-pocket costs for covered services and how bills are paid. There is no one “best” plan for everyone. Some plans are better than others for your or your family’s health care needs, but no one plan will pay for all the costs associated with your medical care.

    Here is a brief description of the types of available health insurance plans: Indemnity Plans; Managed Care Options; and Government-sponsored Health Insurance

    A. Indemnity Plans

    Cafeteria/Flexible Spending Plans are employer-sponsored plans that allow the employee to design his or her own employee benefit package, choosing between one or more employee benefits and cash. Several types of Flexible Benefits or Cafeteria Plans are used by employers, including a pre-tax conversion plan, multiple option pre-tax conversion plan, medical plans plus flexible spending accounts, and employer credit cafeteria plans. For more information about these choices, contact your employee benefits department.

    Indemnity Health Plans allow you to choose your health care providers. You can go to any doctor, hospital or other provider for a set monthly premium. The plan reimburses you or your health care provider on the basis of services rendered. You may be required to meet a deductible and pay a percentage of each bill. However, there is also often an annual limit on out-of-pocket expenses, so that once an individual or family reaches the limit, the insurance covers the remaining eligible medical expenses in full. Indemnity plans sometimes impose restrictions on covered services and may require prior authorization for hospital care or other expensive services.

    “Basic and Essential” Health Plans provide limited health insurance benefits at a considerably lower cost. When buying such a plan, it is extremely important to read the policy description carefully because these plans don’t cover some basic treatments, such as chemotherapy, certain prescriptions and maternity care. Furthermore, rates vary considerably because, unlike indemnity plans or a managed care option, premiums are community rated and are based on age, gender, health status, occupation or geographic location.

    Health Savings Accounts (HSA) are a recent alternative to traditional health insurance plans. HSAs are basically a savings product designed to offer individuals a different way to pay for their health care. HSAs enable you to pay for current health expenses and save for future qualified medical and retiree health expenses on a tax-free basis. Instead of paying a premium, you establish a tax-free savings account that covers your out-of-pocket medical expenses. This means that you own and control the money in your HSA. You make all decisions about how to spend the money without relying on a third party or a health insurer. You also decide what types of investments to make with the money in the account in order to make it grow. However, if you sign up for an HSA, you are generally required to buy a High Deductible Health Plan as well.

    High-Deductible Health Plans (HDHP) are sometimes referred to as catastrophic health insurance coverage. An HDHP is an inexpensive health insurance plan that kicks in only after a high deductible is met of at least $1,000 for an individual or $2,000 for a family.

    B. Managed Care Options

    Health Maintenance Organizations (HMOs) offer access to an extensive network of participating physicians, hospitals and other health care professionals and facilities. You choose a primary care doctor from a list provided by the HMO and this doctor coordinates your health care. You must contact your primary care doctor to be referred to a specialist. Generally, you pay fewer out-of-pocket expenses with an HMO, but you are often charged a fee or co-payment for services such as doctor visits or prescriptions.

    Point-of-Service (POS) plans are an indemnity-type option in which the primary care doctors in the POS plan usually make referrals to other providers within the plan. If a doctor makes a referral out of the plan, the plan pays all or most of the bill. However, if you refer yourself to an outside provider, the service is covered by the plan, but you will be required to pay co-insurance.

    Preferred Provider Organizations (PPO) charge on a fee-for-service basis. The participating doctors, hospitals and health care providers are paid by the insurer on a negotiated, discounted fee schedule. Costs are lower if you use in-network healthcare services, but you have the option of going out-of-network. If you choose an out-of-network provider, you are generally required to pay the difference between what the provider charges and what the plan pays.

    C. Government-sponsored Health Insurance

    Medicaid is a federal/state public assistance program created in 1965. It is administered by the states for people whose income and resources are insufficient to pay for health care or private insurance. All states have Medicaid programs, though eligibility levels and coverage benefits vary.

    Medicare is a federal government program for people 65 and older, or those with certain disabilities, that pays part of the costs associated with hospitalization, surgery, doctors’ bills, home health care and skilled-nursing care.

    State Children’s Health Insurance Program (SCHIP) is administered at the state level and provides health care to low-income children whose parents do not qualify for Medicaid. SCHIP may be known by different names in different states.

    Military Health Care includes TRICARE/CHAMPUS (Civilian Health and Medical Program of the Uniformed Services) and CHAMPVA (Civilian Health and Medical Program of the Department of Veterans Affairs) as well as care provided by the Department of Veterans Affairs (VA).

    State-specific Plans are available for low-income uninsured individuals. These plans are known by different names in different states.

    Indian Health Service (IHS) is a Department of Health and Human Services program offering medical assistance to eligible American Indians at HIS facilities. In addition, the HIS helps pay the cost of selected health care services provided at non-HIS facilities.

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  • Yes. Here are a few:

    • Auto Insurance

    • Disability Income Insurance

    • Homeowners Insurance

    • Long-Term Care Insurance (LTC)

    • Workers Compensation Insurance pays for medical care and physical rehabilitation following an injury on the job, and helps to replace lost wages while you are unable to work. State laws, which vary significantly, govern the amount of benefits paid and other compensation provisions.

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  • Yes, there are certain types of policies that can be issued to meet very specific or unique situations. Talk to your agent or insurance company representative before purchasing any of these policies to ensure that they meet your specific needs and to determine the cost implications as these policies can be expensive. Here are a few.

    • COBRA (Consolidated Omnibus Budget Reconciliation Act) allows you and your dependents to continue in your employer’s group health plan after you retire, quit, are fired or laid off, or if you are working reduced hours. You may choose to continue in the group health plan for a limited time and pay the full premium, which includes the share your employer paid on your behalf. Coverage is available for up to 18 months, or 36 months for dependents in certain circumstances. If you opt for COBRA benefits, you must also fill out the appropriate forms, provided by the employer’s benefits department, within 60 days of leaving your job or you may be denied coverage.

      As you must pay the full premium, COBRA coverage can be expensive, but may be worth considering if you have a pre-existing condition that would make it hard to get health coverage elsewhere.

    • Critical Illness Policies either pay out a lump sum or provide income in the event you are diagnosed with certain specified conditions such as cancer, a heart attack, renal failure or Alzheimer’s disease. Once known as “cancer insurance”, t is an indemnity type policy that pays out a predetermined sum even if you subsequently make a full recovery. This type of policy often comes with significant restrictions, such as:

      -a waiting period after diagnosis to receive payment
      -specific criteria to meet to receive payment
      -riders that must be purchased
      -limitations on pre-existing conditions

    • Life Insurance Riders are separate plans purchased with a set premium and are attached to your primary life insurance coverage to provide additional benefits. These riders provide various forms of additional protection tailored to you’re your needs. Riders are available for waiver of premium, disability, guaranteed insurability, cost of living, long term care and accelerated death benefits. The qualifying conditions are explained in the rider explanation form that you receive at the time of application.

    • Medical Expense Policies for College Students are available through colleges or universities. If the college-sponsored plan is inadequate for your needs, if you are no longer eligible for coverage under your parents’ plan or if you attend a school outside the HMO or PPO region of your parents’ plan, some companies offer special health insurance policies designed only for students. These plans vary according to the state in which you live, but they generally cover college students of all ages, offer a choice of deductibles, doctors and hospitals, and provide year-round coverage that stays with the college student even if she/he changes or leaves school.

    • Medigap is health insurance sold by private insurance companies to fill the gaps in the original Medicare plan coverage. In order to qualify for Medigap, you must already be eligible for Medicare. Medigap policies help pay some of the health care costs that the original Medicare Plan doesn’t cover. If you are in the original Medicare Plan and have a Medigap policy, then Medicare and your Medigap policy will pay both their shares of covered health care costs. There is a choice of up to 12 different standardized Medigap policies (Medigap Plans A through L). Participants pay the monthly Medicare Part B premium as well as a premium to the Medigap insurance company. If you are married, you and your spouse must each buy separate Medigap policies. It is important to compare Medigap policies because costs can vary significantly from one company to another.

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  • If you are unsatisfied with how your insurance company is handling your claim, you have several options:

    • Talk to the agent or company representative who sold you the policy: Let the agent know that you are dissatisfied and explain the specifics of your problem.

    • Contact the claims manager of the company: Provide a written explanation of your problem with copies of supporting documentation. Remember to send only a copy and not any original documentation. If you are insured with a smaller company, consider writing directly to the president. Going to the top can sometimes speed the process.

    • Contact your state insurance department: Insurance is a regulated industry and your state department of insurance should be able to help you resolve your problem.

    • Consult an attorney: If you have tried all four of the above tips and still cannot resolve the claim, you have the option of talking to an attorney. You may have to pay a consultation fee for your initial visit, so make sure you know how much this will cost. Meet with an attorney who has solid references or get the name of someone from your local bar association. Prepare for the visit by bringing a copy of your insurance policy and other relevant documents. Get the fee structure in writing before you decide to pursue the case.

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  • Yes, employer-sponsored health insurance plan premiums can be considerably lower priced than those for an individual health insurance plan because the plan is group rated and your employer contributes toward the cost. If your employer gives you a choice of plans, you need to understand your choices and pick the plan best suited for you and your family.

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  • Whether your employer gives you a choice of plans or you need to purchase your own coverage, it is crucial that you understand your health insurance choices and pick the insurance that is best for you and your family.

    Here are some questions you should ask yourself when choosing a health insurance plan:

    How affordable is the cost of care?

    • What is the monthly premium I will have to pay?
    • Should I try to insure most of my medical expenses or just the large ones?
    • What deductibles will I have to pay out-of-pocket before insurance starts to reimburse me?
    • After I have met my deductible, what percentage of my medical expenses are reimbursed?
    • How much less am I reimbursed if I use doctors outside the insurance company’s network?

    Does the insurance plan cover the services I am likely to use?

    • Are the doctors, hospitals, laboratories and other medical providers that I use in the insurance company’s network?
    • If I want to use a doctor outside the network, will the plan permit it?
    • How easily can I change primary-care physicians if I want to?
    • Do I need to get permission before I see a medical specialist?
    • What are the procedures for getting care and being reimbursed in an emergency situation, both at home or out of town?
    • If I have a preexisting medical condition, will the plan cover it?
    • If I have a chronic condition such as asthma, cancer, AIDS or alcoholism, how will the plan treat it?
    • Are the prescription medicines that I use covered by the plan?
    • Does the plan reimburse alternative medical therapies such as acupuncture or chiropractic treatment?
    • Does the plan cover the costs of delivering a baby?

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    • How have independent government and non-government organizations rated the plan? For example, the National Committee for Quality Assurance (http://www.ncqa.org) issues a Consumer Assessment of Health Plans (CAHPS) report for every medical plan and facility.

    • What kind of accreditation has the plan received from groups such as NCQA or the Joint Commission on Accreditation of Healthcare Organizations (JCAHO) (http://www.jcaho.org)?

    • How many patient complaints were filed against the plan last year and how many were upheld by state regulatory agencies like the state insurance commission or the state medical licensing board?

    • How many members drop out of the plan each year? State insurance departments keep track of “disenrollment rates.”

    • Do the doctors, pharmacies and other services in the plans offer convenient times and locations?

    • Does the plan pay for preventive health care such as diet and exercise advice, immunizations and health screenings?

    • What do my friends and colleagues say about their experiences with the plan?

    • What does my doctor say about his or her experience with the plan?

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  • If you switch employers, you have the right to carry your group health insurance coverage with you to a new job for up to 18 months under the Consolidated Omnibus Budget Reconciliation Act (COBRA).

    You must pay the full premium, but at group rates that are far cheaper than the individual rates you would pay for similar coverage. Health insurance under COBRA is available if you are in the following situations:

    • You leave a company and become unemployed or self-employed for up to 18 months.

    • You are a widow or widower or child of an employee who dies while working for the same company for three years or more.

    • You are the divorced spouse or child of an employee who has left the company he or she was employed at for at least three years.

    • You are the child of an employee who left a job and have not yet reached age 23.

    NOTE: If you need COBRA benefits, you must fill out the appropriate forms from your employer’s benefits department within 60 days of leaving your job. If you do not act within that time, you may be denied coverage.

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  • Yes. If you are unemployed, self-employed, or decide to return to school you may want to buy an individual health insurance policy.

    Here are a number of options that you may consider:

    • Ask your insurance company if you can convert its group policy to an individual policy. You will pay a higher rate than you did before and your benefits may be limited, but the terms will still probably be better than if you buy your own policy.

    • If you are married, see if your spouse’s employer will add you to its group plan.

    • Try to join a group health plan through a trade association or alumni group or professional association may offer reasonable rates. You can also find a group plan designed specifically for freelance workers. If you are over age 50, you can join the American Association of Retired Persons (AARP), which offers an extensive plan. Even some credit card companies offer health insurance coverage.

    • It is possible also to buy an individual policy. The rates may be high and coverage limited, but it is important that you be protected against financial catastrophe if you, or your family, are hit with a major illness or injury. If you are self-employed, most of the health insurance premium will be tax-deductible.

    To find the best policy, contact a health insurance agent or broker who will help you find the contract that gives you the most for your money.

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  • Prices are set and determined by insurance companies, generally on a state-by-state basis. Premiums for group policies cannot vary based on your health status, age, gender or other factors unless you are purchasing a "Basic and Essential" health plan.

    However, there are some options available that can help you reduce the cost of your health insurance although most of these options will increase your out-of-pocket expenses and should be carefully considered and used only in appropriate situations.

    For example:

    • Instead of insuring most of your medical expenses, choose to insure only the large, catastrophic ones. (See "Basic and Essential" health plan

    • Reduce your monthly premium by increasing your deductible and paying more out-of-pocket before the insurance kicks in.

    • If you are in a POS or PPO plan, use only in-network doctors and services.

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  • Co-insurance or a co-pay is a percentage of each claim above the deductible paid by the insured. For a 20 percent health insurance co-insurance clause, for example, you would pay the deductible plus 20 percent of the covered losses. After the insurer pays 80 percent of the losses up to a specified ceiling, the insurer will start paying 100 percent of the losses.

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  • Community ratings laws have been enacted in several states, requiring health insurers to accept all applicants for coverage and to charge all applicants the same premium for the same coverage, regardless of age or health. Premiums are based on the rate determined by the health and demographic profile of the geographic region.

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  • A deductible is the amount of loss paid by you before the insurance kicks in. Either a specified dollar amount, a percentage of the claim amount, or a specific amount of time must elapse before benefits are paid. The bigger the deductible, the lower the premium charged for the same coverage.

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  • Family coverage is defined as the contract holder and his or her dependents. Dependents include a spouse and unmarried dependent children including legally adopted children, step-children and children of a domestic partner if the child depends on the contract holder for his or her support. Some states also include unmarried domestic partners under the definition of family.

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  • HIPAA established national standards for the portability of insurance and set security standards for electronic health care information. HIPAA regulates the availability and breadth of group and individual health insurance plans, amending both the Employee Retirement Income Security Act and the Public Health Service Act. HIPAA prohibits any group health plan from creating eligibility rules or assessing premiums for individuals in the plan based on health status, medical history, genetic information or disability. It does not apply to private individual insurance. It also limits restrictions that a group health plan can place on benefits for preexisting conditions. HIPAA also includes rules aimed at increasing the efficiency of the health care system by creating standards for the use and dissemination of health care information. The final rule adopting HIPAA standards for security was published in the Federal Register on February 20, 2003. This rule specifies a series of administrative, technical, and physical security procedures for covered entities to use to assure the confidentiality of electronic protected health information.

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  • Managed care plans have agreements with certain doctors, hospitals, and health care providers (in-network) to provide a range of services to plan members at reduced cost. Generally, you have less paperwork and lower out-of-pocket costs if you stay in-network. However, you give up some flexibility. If you decide to go out-of-network—i.e., use a health care provider that is not part of the managed care plan—you will generally pay more for your health care services because you are required to pay the difference between in-network and out-of-network costs.

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  • Managed Care Plans include HMOs and PPOs. These plans are an arrangement between an employer or insurer and selected providers to provide comprehensive health care at a discount to members of the insured group and to coordinate the financing and delivery of health care. Managed care uses medical protocols and procedures agreed on by the medical profession to be cost effective, also known as medical practice guidelines.

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  • A preexisting condition is a medical condition diagnosed before joining a new plan. Many insurance plans will not cover preexisting conditions and some will cover them only after a waiting period. However, in 1997, Congress passed the Health Insurance Portability and Accountability Act (HIPPA), which mandates that preexisting conditions be covered without a waiting period when an individual who has been insured during the previous 12 months joins a new group plan.

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  • Under managed care plans such as HMOs or POS plans, the first contact for health care is the primary care physician—often a family doctor, internist or pediatrician. A primary care physician monitors your health and treats most basic health problems. In many plans, the insured must have a referral from the primary care doctor in order to receive covered care from a specialist.

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Disability Insurance  (Top of Page)

  • If you were disabled and unable to work as a result of an accident or illness, what would you and your family do for income?

    Disability income insurance, which complements health insurance, can replace lost income. Forty-three percent of all people age 40 will have a long-term (lasting 90 days or more) disability event by age 65.

    There are three basic ways to replace income:

    • Employer-paid disability insurance: This is required in most states. Most employers provide some short-term sick leave. Many larger employers provide long-term disability coverage as well, typically with benefits of up to 60 percent of salary lasting from five years to age 65, and in some cases extended for life.

    • Social Security disability benefits: This can be paid to workers whose disability is expected to last at least 12 months and is so severe that no gainful employment can be performed.

    • Individual disability income insurance policies: Other limited replacement income is available for workers under some circumstances from workers compensation (if the injury or illness is job-related), auto insurance (if disability results from an auto accident) and the Department of Veterans Affairs.

      For most workers, even those with some employer-paid coverage, an individual disability income policy is the best way to ensure adequate income in the event of disability. When you buy a private disability income policy, you can expect to replace from 50% to 70% of income. Insurers won’t replace all your income because they want you to have an incentive to return to work. However, when you pay the premiums yourself, disability benefits are not taxed. (Benefits from employer-paid policies are subject to income tax.)

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  • There are two types of disability policies: Short-Term Disability (STD) and Long-Term Disability (LTD):

    • Short-Term Disability policies (STD) have a waiting period of 0 to 14 days with a maximum benefit period of no longer than two years.

    • Long-Term Disability policies (LTD) have a waiting period of several weeks to several months with a maximum benefit period ranging from a few years to the rest of your life.

    Disability policies have two different protection features that are important to understand.

    • Noncancelable means the policy cannot be canceled by the insurance company, except for nonpayment of premiums. This gives you the right to renew the policy every year without an increase in the premium or a reduction in benefits.

    • Guaranteed renewable gives you the right to renew the policy with the same benefits and not have the policy canceled by the company. However, your insurer has the right to increase your premiums as long as it does so for all other policyholders in the same rating class as you.

    In addition to the traditional disability policies, there are several options you should consider when purchasing a policy:

    • Additional purchase options: Your insurance company gives you the right to buy additional insurance at a later time.

    • Coordination of benefits: The amount of benefits you receive from your insurance company is dependent on other benefits you receive because of your disability. Your policy specifies a target amount you will receive from all the policies combined, so this policy will make up the difference not paid by other policies.

    • Cost of living adjustment (COLA): The COLA increases your disability benefits over time based on the increased cost of living measured by the Consumer Price Index. You will pay a higher premium if you select the COLA.

    • Residual or partial disability rider: This provision allows you to return to work part-time, collect part of your salary and receive a partial disability payment if you are still partially disabled.

    • Return of premium: This provision requires the insurance company to refund part of your premium if no claims are made for a specific period of time declared in the policy.

    • Waiver of premium provision: This clause means that you do not have to pay premiums on the policy after you’re disabled for 90 days.

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  • Key things to look for when you shop around

    • The definition of disability: Some policies pay benefits if you are unable to perform the customary duties of your own occupation. Others pay only if you are unable to perform any job suitable for your education and experience. Some policies define disability in terms of your own occupation for an initial period of two or three years and then continue to pay benefits only if you are unable to perform any occupation. "Own occupation" policies are more desirable, but more expensive.

    • Benefit period: The benefit period is the amount of time you will receive monthly benefits during your life. Experts usually recommend that the policy you buy pay you benefits until at least age 65, at which point Social Security disability will take over. If you are young, you may consider buying a policy offering lifetime benefits because it will still be relatively inexpensive.

    • A policy that will replace from 60 percent to 70 percent of your total taxable earnings: A higher replacement percentage, if available, is more expensive. Evaluate your other sources of income before deciding how much disability coverage you need.

    • Coverage for disability resulting from either accidental injury or illness: An accident-only policy is less expensive but does not provide adequate protection. Ideally, both accident and illness coverage should be purchased.

    • A cost-of-living increase in benefits: You are buying a policy today that may not pay benefits for a decade or more. Should you need those benefits, you will want them to have kept pace with increases in the cost of living. (Some companies also offer "indexed" benefits, keeping pace with inflation after benefit payments begin.)

    • A policy paying "residual" or partial benefits: This type of policy is available so that you can work part-time and still receive a benefit making up for lost income. A standard feature in some policies, and added by a rider to others, a residual benefits policy pays partial benefits based on loss of income without an initial period of total disability.

    • Transition benefits: Offered by some companies, it can offset financial loss during a post-disability period of rebuilding a business or professional practice.

    • Ongoing coverage: A non-cancelable policy which will continue in force as long as the premiums are paid; neither the benefit nor the premium can change. A guaranteed renewable policy keeps the same benefits but may cost more over time since the insurer can increase the premium if it is increased for an entire class of policyholders.

    • Financial stability: Check the financial ratings of an insurer.

      View Our List of Research & Rating Links

    • Waiting period: Every disability policy imposes a waiting period, also known as the elimination period. This is the number of days you must be disabled before receiving benefits. If you are disabled during the elimination period, you will not receive any benefits, even though you are not able to work. If the elimination period is short, such as 30 or 60 days, the premium will be higher. A longer elimination period may strain your finances more when you need it, but you will be charged a lower premium. Most experts recommend that you select an elimination period of 60 to 90 days. The first check is usually paid 30 days after the waiting period.

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  • Disability premiums are based on your age, sex, occupation and the amount of potential lost income you are trying to protect. In general, the lower the chance that your occupation puts you in harm’s way, the lower the premium. The higher the chance of injury, the bigger the premium. So, for instance, an accountant working in an office would have much lower disability premiums than a construction worker.

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  • There are two ways to keep the cost of disability insurance down:

    • Electing a longer waiting period before benefits begin: If you have enough resources to cover expenses during the first three months of disability, your premiums will be lower than with coverage that starts after 30 days.

    • Electing a shorter benefit period: In this case, benefits are payable to age 65—the age at which you would normally retire—instead of for a lifetime. However, choosing a benefit period of two-to-five years, ending before normal retirement age, could be penny-wise and pound-foolish. You might save money on premiums, but you could be without coverage when you need it most. Disability of long duration poses the greatest financial hardship.

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  • Most employers offer some kind of disability insurance, but you should find out exactly what your employer offers before you have to file a claim. Most allow some short-term sick leave, which might last from a few days to as much as six months. In some states, such as Hawaii, New Jersey, New York and Rhode Island, state law requires employers to provide disability benefits for up to 26 weeks.

    Check with your benefits department to see if you are covered and if so, how long you must wait before benefits begin and how long payments will last while you are still disabled. Also, ask if your employer’s disability plan takes other disability programs, such as Social Security, into account when calculating your disability pay.

    No laws require employers to offer long-term disability (LTD) coverage, but about half of large and mid-sized employers offer it to their workers. Typical group long-term disability benefits replace about 60 percent of the worker’s usual salary. These benefits usually start when short-term benefits are exhausted and continue from five years to life. Usually, group long-term disability insurance is fully paid for by employers, with no contribution expected from employees. When you receive employer-paid disability income, you must pay federal and state income tax on the benefits, unless your company pays it for you.

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  • For more information on disability insurance, you can contact:

    • Life and Health Foundation for Education
      2175 K Street, NW, Suite #250
      Washington, DC 20037
      (202) 464-5000

    • America’s Health Insurance Plans
      601 Pennsylvania Avenue, NW
      South Building
      Suite 500
      Washington, DC 20004

    • Department of Veteran Affairs
      245 West Houston Steet
      New York, NY 10014

    • Social Security Administration
      Office of Public Inquiries
      6401 Security Blvd.
      Room 4-C-5 Annex
      Baltimore, MD 21235-6401

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Long Term Care Insurance  (Top of Page)

  • If you’re under 55, it’s unlikely. Even over 55, only a small percentage of the population will need long-term care before they are in their 70s or 80s.

    However, according to research published in the journal Inquiry by Kemper, Komisar, and Alecxih, most people who turn 65 in 2005 will, in their lifetime, need some level of long-term care.

      1 2 3 4 5 6
    LTC need: None Some 1 year or less 1-2 years 2-5 years More than 5 years
    Men 42% 58% 19% 10% 17% 11%
    Women 21% 79% 16% 13% 22% 28%

    Columns 3 through 6 show the distribution of people in column 2. Note that this study defines LTC need as having one or more ADL limitations, four IADL limitations, or using formal LTC services other than post-acute care under Medicare. As such, it indicates somewhat greater usage of LTC services than most long-term care insurance policies would pay for.

    Recent trends suggest that 50 percent or more of the people who might have gone into a nursing home for long-term care will in the future go into an assisted living facility. Assisted living facilities generally cost less than nursing homes. For example, in mid-2005, a MetLife Mature Market Institute survey found a national average daily cost of assisted living facilities of $100, with a range from $55 to $155 across the U.S.

    The good news is that people are living healthier longer—that, in other words, the need for long-term care is diminishing and, when it occurs, the onset of need for long-term care is, on average, occurring later and later in life and starting closer to death (so that future periods of long-term care needs may be shorter than at present). In part, this is due to the adoption of better prevention strategies and better medical practices. Even so, if you do need long-term care services, they can be expensive.

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  • If you need long-term care services and have to pay to obtain them, what financial resources could you call on? Do you have enough to pay for four or more years in a nursing home, an assisted living facility, or home health care?

    If you’re over 65, don’t rely on Medicare or private health insurance. Medicare doesn’t pay for custodial care, and private health insurance rarely pays any of the cost of long-term care.

    If you expect to have very little money when you need long-term care services, you might qualify for Medicaid, a government program that pays the medical and long-term care expenses of poor people. If you expect to be in that situation, you probably shouldn’t buy long-term care insurance, because your state’s Medicaid program will pay your long-term care expenses. Buying long-term care insurance would only save the state—not you—money. The exception is if you live in California, Connecticut, Indiana, or New York, states that have a Partnership for Long-Term Care program. For residents of these four states, buying long-term care insurance does offer an additional benefit.

    If you expect to have a lot of money when you need long-term care services, you also probably shouldn’t buy long-term care insurance. Instead, you should plan to pay for the care “out of pocket”—that is, as a regular expense. One financial advisor suggested in a newspaper interview that if your net worth is in the $1.5 million range, not including the value of your home, you could safely skip buying long-term care insurance and treat long-term care expenses, if they arise, as you do your other bills.

    If you fall in-between these two categories, owning long-term care insurance, like all other insurance coverages, offers peace-of-mind benefits as well as financial ones. For example, a recent survey of people age 50 and over asked how confident they were that they could pay for long-term care services if they needed them. Among those with long-term care policies, 52 percent said they were very confident and another 40 percent said they were somewhat confident. Among those who didn’t own a long-term care policy, only 8 percent were very confident and only 27 percent were somewhat confident.

    But if you’re under 85—and especially if you’re under 65—that doesn’t mean you should ignore the topic of long-term care insurance because

    • You might already be unable to buy long-term care insurance. Wakely Consulting Group, an actuarial firm, studied applicants for long-term care insurance in 2003-2004; the findings: 11 percent of applicants in their 50s, 19 percent in their 60s and 43 percent in their 70s were rejected.

    • A Milliman & Robertson actuary estimated that 15 to 25 percent of the over-65 age group are uninsurable for long-term care.

    • A report from the Henry J. Kaiser Foundation indicates that over five million people ages 18-64 need some type of long-term care.

    • The latest data from the National Center for Health Statistics (for 1999) reported that roughly 160,000 of the people living in nursing homes were under age 65 (nearly 10 percent of the total). Of those receiving home health care services, roughly 400,000 were under 65 (about 30 percent of the total).

    So, unless you have so little money that you will qualify for Medicaid, or so much money that you can pay the bills out of your own pocket, you should consider buying long-term care insurance.

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  • The fact that you might need long-term care doesn’t mean that you have to pay someone to provide it. Many people who need help get it for free from a relative or friend, usually at home. In a recent survey of people over 50, roughly 90 percent said they expect to be the primary caregiver if their spouse or partner needs long-term care.

    But even unpaid caregivers need a break from time to time, or have full- or part-time jobs that prevent them from caregiving throughout the day. If you do pay someone to provide assistance with ADLs, the cost of long-term care depends on three factors – the general level of charges in your part of the country, the specific expense rate for the services you need, and how long the need for care lasts.

    In August 2005, the average cost for a month in a semiprivate room in a nursing home ranged from a low of $3,000 in Shreveport, LA, to a high of $9,250 in New York City, according to a survey by the MetLife Mature Market Institute (MMI). A year-long stay translates to $36,850 in Shreveport and $112,400 in New York City.

    The MMI also surveyed covered costs of Assisted Living and Home Health Care. In August 2005, the lowest average monthly base rate for an Assisted Living facility was $1,650 in Jackson, MS area and the highest was $4,300 in the Stamford, CT. area.

    In August 2005, the lowest average hourly rate for a home health aide was $12 in Shreveport, and the highest was $23 in Rochester, MN. If you need a home health aide around-the-clock, these rates translate to a daily rate ranging from $288 to $552, or a monthly rate of $8,640 to $16,550.

    Finally, don’t forget that long-term care costs, like most health care costs, are rising faster than the general rate of inflation. The bottom line? A four-year-or-longer stay in a nursing home could cost $200,000 to $450,000 or more (in today’s dollars). If you can’t pay this out of your own pocket and aren’t poor enough to qualify for Medicaid, you should consider buying long-term care insurance.

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  • In general, it's a good idea to buy long-term care insurance before you’re 60, for two reasons:

    • The younger you are, the less likely it is that you’ll be rejected when you apply for the policy. If you apply in your 50s, there’s a one in ten chance you’ll be rejected. If you apply in your 60s, the chance of rejection is two in ten. If you apply in your 70s, the chance of rejection is four in ten.

    • The younger you are, the lower the premium will be for a given set of benefits and features. Once the premium is set, it stays at that amount for the life of the policy, unless the claims for the group of people who have bought that type of policy require that rates for the group be raised.

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  • There are various questions and issues to keep in mind when choosing a long-term care policy.

    Where may care occur?

    The best policies pay for care in a nursing home, assisted living facility, or at home. Benefits are typically expressed in daily amounts, with a lifetime maximum. Some policies pay half as much per day for at-home care as for nursing home care. Others pay the same amount, or have a "pool of benefits" that can be used as needed.

    Under what conditions will the policy begin paying benefits?

    The policy should state the various conditions that must be met.

    • The inability to perform two or three specific "activities of daily living" without help. These include bathing, dressing, eating, toileting and "transferring" or being able to move from place to place or between a bed and a chair.

    • Cognitive impairment. Most policies cover stroke and Alzheimer’s and Parkinson's disease, but other forms of mental incapacity may be excluded.

    • Medical necessity, or certification by a doctor that long-term care is necessary.

    What events must occur before the policy begins paying benefits?

    • Some older policies require a hospital stay of at least three days before benefits can be paid. This requirement is very restrictive; you should avoid it.

    • Most policies have a “waiting period” or "elimination" period. This is a period that begins when you first need long-term care and lasts as long as the policy provides. During the waiting period, the policy will not pay benefits. If you recover before the waiting period ends, the policy doesn’t pay for expenses you incur during the waiting period. The policy pays only for expenses that occur after the waiting period is over, if you continue to need care. In general, the longer the waiting period, the lower the premium for the long-term care policy.

    How long will benefits last?

    A benefit period may range from two years to lifetime. You can keep premiums down by electing coverage for three to four years—longer than the average nursing home stay—instead of lifetime.

    Indemnity vs. Reimbursement

    Most long-term care policies pay on a reimbursement (or expense-incurred) basis, up to the policy limits. In other words, if you have a $150 per day benefit but spend only $130 per day for a home long-term care provider, the policy will pay only $130. The “extra” $20 each day will, in some policies, go into a “pool” of unused funds that can be used to extend the length of time for which the policy will pay benefits. Other policies pay on an indemnity basis. Using the same example as above, an indemnity policy would pay $150 per day as long as the insured needs and receives long-term care services, regardless of the actual outlay.

    Inflation protection

    Inflation protection is an important feature, especially if you are under 65, when you buy benefits that you may not use for 20 years or more. A good inflation provision compounds benefits at 5 percent a year. Without inflation protection, even 3 percent annual inflation will, over 24 years, reduce the purchasing power of a $150 daily benefit to the equivalent of $75.

    Six other important policy provisions

    • 1=7 Elimination period. Under some policies, if the insured has qualifying long-term care expenses on one day during a seven-day period, he or she will be credited with having satisfied seven days toward the elimination period. This type of provision reflects the way home care is often delivered—some days by professionals and some days by family members.

    • Guaranteed renewable policies must be renewed by the insurance company, although premiums can go up if they are increased for an entire class of policyholders.

    • Waiver of premium, so that no further premiums are due once you start to receive benefits.

    • Third-party notification, so that a relative, friend or professional adviser will be notified if you forget to pay a premium.

    • Nonforfeiture benefits keep a lesser amount of insurance in force if you let the policy lapse. This provision is required by some states.

    • Restoration of benefits, which ensures that maximum benefits are put back in place if you receive benefits for a time, then recover and go for a specified period (typically six months) without receiving benefits.

    For more information on long-term care insurance, you can access the Life and Health Foundation for Education ( http://www.life-line.org ) or America’s Health Insurance Plans ( http://www.ahip.org ).

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  • The tips below will help you save money wisely, but don’t rely on price alone.

    MOST IMPORTANT: Because you may not collect for decades to come, be sure to buy from a company that has been around for some time and is financially stable. You may want to look up, from an independent rating agency, the financial strength ratings of a company you're considering.

    GENERAL GUIDELINE: Keep the premium for your long-term care insurance policy to 7 percent of your income, or less. For example, if your monthly income is $4,000, the long-term care insurance premium should not be more than $280 per month. (This is what the National Association of Insurance Commissioners recommends in its Model Regulation for Long-Term Care Insurance.) Another expert advises that the income to use in this calculation isn’t your current income, but your expected income in retirement, since that’s the income from which you’ll be paying premiums for most of the policy’s existence.

    Other ways of saving:

    • Find out if long-term care benefits are available through a group policy from your employer. Employers might subsidize the cost, lowering what you must pay.

    • Check whether you can add long-term care benefits as a rider on an existing life insurance or annuity policy. These “combination” arrangements can save because the insurance company gains operational savings that it can pass along to you.

    • Buy a policy with the longest waiting period you can afford. For example, choosing a 90-day period instead of a 30-day period can cut the premium by 30%. However, if you do need long-term care services, you should save some money to pay these costs until the waiting period ends.

    • If both spouses of a married couple are considering buying long-term care policies, look into buying one joint policy for both of you. Such a policy pays when either one needs care and can pay for both, if necessary, up to its benefit limits.

    • If you’re still looking to trim the premium further, consider buying a policy that will pay most, but not all, of the average nursing home costs in your area. For example, if a nursing home room now costs $120 per day, buy a policy that pays $100 per day. However, be sure to buy an inflation-protection provision.

    • Check with several companies and agents, comparing both benefits and costs. As with other types of insurance (and many other purchases), comparison shopping can save you money. Just be sure you’re comparing policies with similar provisions and companies with comparable financial strength and service records.

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  • If you're under 55, you might think that, since the likelihood of long-term care outlays is many years in the future, you could invest the money you might otherwise spend for long-term care insurance premiums. That way, if you do need long-term care, you could just draw upon that investment, and if not, you’d have money for your heirs, for a charitable donation, or for your own needs.

    But this strategy leaves you vulnerable if you need long-term care services in your late 50s, 60s, or early 70s. And it might also leave you vulnerable if you need these services for a long time, even if you don’t need assistance until you’re in your 80s. Here’s why:

    • Assume you’re 55 and won’t need long-term care for 30 years, when you’re 85.

    • Assume you save $2,000 per year,(1) that you invest the savings, and that your investment grows at 5 percent per year, net after taxes.

    After 30 years, your savings will have grown to $139,500.

    • Assume today’s monthly cost of nursing home care grows, due to inflation, by 5 percent per year, from $7,000 per month now to $28,800 per month in the future.

    At that time—that is, when you’re 85—if all these assumptions come true, your savings would be able to pay for less than three months of nursing home care; if you need more money—say, because the cost of services for long-term care grew faster than 5 percent per year or your investments earned less than 5 percent net after taxes—you’d have to liquidate other assets that you hadn’t planned to liquidate, if you have them.

    It’s possible that you’ll save more than $1,000 per year, or earn more than 5 percent net after taxes, or that the cost of long-term-care services will rise more slowly than 5 percent per year, or that two or more of these things will happen. In that case, if you need long-term care services for the first time after age 85, you would be able to pay for more than the example above shows. Here are some indications of what results alternate assumptions would produce:

    • Nursing home costs inflate at 3 percent per year for 30 years: monthly cost of $16,500

    • Earn 6 percent per year net after taxes on saving $1,000 per year: accumulate $83,800

    • Save $1,200 per year at 5 percent net after taxes: accumulate $83,700

    Of course, it’s possible that you’ll never need long-term care services, or that if you do need them, you’ll need them only for a month or two. In that case, a long-term care policy won’t help. For most other scenarios, it’s probably a prudent buy.

    (1) This figure is not intended to represent the premium for a long-term care policy for a 55-year-old, because premiums vary considerably depending on the daily benefit amount, length of benefit period, length of waiting period, and inflation and other policy features. It only shows how the overall analysis might work.

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Medicare Insurance  (Top of Page)

  • “Open enrollment” allows the applicant guaranteed acceptance of a Medicare Supplement Insurance plan regardless of any pre-existing health conditions. Otherwise, the applicant must meet medical underwriting standards to qualify if required by the insurance company. The “open enrollment” period includes a six-month period from the date you initially enrolled in Medicare Part B, or a six-month period from when you turn 65 if you were eligible for Part B benefits prior to age 65.

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  • Under the Balanced Budget Act of 1997, you have a “guaranteed issue” right to enroll in a Medicare Supplement Insurance plan without having to medically qualify if you fall under one of the following categories:

    • Within the past 63 days enrolled in an employer group health plan which terminated or the plan ceases to provide at least the minimum benefits as provided under Medicare Supplement Plan A; or

    • Within the past 63 days, your Medicare Advantage plan or health pre-payment plan terminated or you moved out of the service area or the company is leaving the service area; or

    • Within the past 63 days your Medicare Supplement plan terminated due to insurer Insolvency; or

    • You were first enrolled in a Medicare in a Medicare Supplement plan then subsequently enrolled for the first time under a Medicare Advantage or Medicare SELECT insurance plan, then within the past 63 days you voluntarily terminated the coverage within 12 months of the effective date; or

    • Within the past 60 days an individual who is 65 years of age or older is enrolled in Medicare Part B, voluntarily terminated the group health policy or

    • Within the past 63 days you were enrolled in any employer health plan that is primary to Medicare and the plan terminates or ceases to provide all health benefits or you leave the plan; or

    • Within the past 63 days the insurer or agent materially misrepresented the policy provisions or

    • Within the past 63 days a Medicare Advantage plan failed to provide medically necessary care for which benefits were available under the plan or failed to provide care in accordance with applicable quality standards or

    • Other exceptional situations as specified by law.

    • Upon first becoming enrolled in Part B of Medicare at age 65 you enrolled in a Medicare Advantage or Medicare SELECT insurance plan and then cancelled coverage within 12 months.

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  • Creditable coverage refers to previous health insurance coverage that can be used to shorten the pre-existing waiting period, such as a health insurance coverage under a group (employer) health plan or an individual health insurance policy. However, if there was a time that you had no health insurance coverage of any kind, and during that time you were without health insurance coverage for more than 63 days in a row, you can only count the creditable coverage you had after the break in health insurance coverage.

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  • This is the fee that Medicare sets as reasonable, that providers who accept "Medicare assignment" will charge for a covered medical service. However, the Medicare approved amount may be less than the actual amount charged by a doctor or supplier for a provided service or purchased supply.

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  • Charges by a provider in excess of the Medicare approved amount. Medicare Supplement Plans “F”, “I” and “J” cover 100% of the excess charges, while Plan “G” covers 80% of these charges.

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  • No, but the length of time you've had your Medicare supplemental plan will affect how your new Medicare Supplement policy covers you for pre existing conditions. If you've had a Medicare Supplement insurance plan for at least six months and you decide to switch, your new Medicare supplemental insurance plan must cover you for all pre existing conditions. If you've had a Medicare supplemental insurance plan for less than six months, the new Medicare supplement policy must give you credit for the time the older policy covered you.

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  • Because your Medicare supplemental insurance plan is guaranteed renewable, you will still have insurance coverage if you move. If you move to a new state, however, the Medicare supplement insurer may quote you a different premium. If you have a Medicare Select insurance plan, which contain network restrictions, you must change your Medicare insurance coverage. But you have the right to buy Medicare Supplemental Insurance plans “A”, “B”, “C” or “F” in the state you move to without having to medically qualify, however not every insurance company offers each of these plans.

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Life, Annuities, Health, Disability, and Long Term Care Insurance content originally from the Insurance Information Institute.