Life Insurance Basics |
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Buying a Policy? |
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How
do I pick a life insurance company?
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 (for an example,
click here).
- 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. See How
do I select a life insurance agent?
- 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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