| 5. How do I find a low-cost
policy? After you have decided which
kind of life insurance fits your needs, look for a good buy.
Your chances of finding a good buy are better if you use
two types of index numbers that have been developed to aid
in shopping for life insurance. One is called the Surrender
Cost Index and the other is the Net Payment Cost
Index. It will be worth your time to try to understand
how these indexes are used, but in any event, use them ONLY
for comparing the relative costs of similar policies. Look
for policies with low cost index numbers.
What is Cost?
Cost is the difference between what you
pay and what you get back. If you pay a premium for life insurance
and get nothing back, your cost for the death protection is
the premium. If you pay a premium and get something back later
on, such as a cash value, your cost is smaller than the premium.
The cost of some policies can also be reduced
by dividends; these are called participating policies. Companies
may tell you what their current dividends are, but the size
of future dividends is unknown today and cannot be guaranteed.
Dividends actually paid are set each year by the company.
Some policies do not pay dividends. These are
called guaranteed cost or non-participating policies. Every
feature of a guaranteed cost policy is fixed so that you know
in advance what your future cost will be.
The premiums and cash values of a participating
policy are guaranteed, but the dividends are not. Premiums
for participating policies are typically higher than for guaranteed
cost policies, but the cost to you may be higher or lower,
depending on the dividends actually paid.
What are Cost
Indexes?
In order to compare the cost of policies,
you need to look at:
- Premiums
- Cash values
- Dividends
Cost indexes use one or more of these factors
to give you a convenient way to compare relative costs of
similar policies. When you compare costs, an adjustment must
be made to take into account that money is paid and received
at different times. It is not enough to just add up the premiums
you will pay and to subtract the cash values and dividends
you expect to get back. These indexes take care of the arithmetic
for you. Instead of having to add, subtract, multiply and
divide many numbers yourself, you just compare the index numbers
which you can get from life insurance agents and companies:
- LIFE INSURANCE SURRENDER COST INDEX
- This index is useful if you consider the level of the
cash values to be of primary importance to you. It helps
you compare costs if at some future point in time, such
as 10 or 20 years, you were to surrender the policy and
take its cash value.
- LIFE INSURANCE NET PAYMENT COST INDEX
- This index is useful if your main concern is the benefits
that are to be paid at your death and if the level of cash
values is of secondary importance to you. It helps you compare
costs at some future point in time, such as 10 or 20 years,
if you continue paying premiums on your policy and do not
take its cash value.
There is another number called the Equivalent
Level Annual Dividend. It shows the part dividends play in
determining the cost index of a participating policy. Adding
a policy's Equivalent Level Annual Dividend to its cost index
allows you to compare total costs of similar policies before
deducting dividends. However, if you make any cost comparisons
of a participating policy with a non-participating policy,
remember that the total cost of the participating policy will
be reduced by dividends, but the cost of the non-participating
policy will not change.
How Do I Use Cost
Indexes?
The most important thing to remember when
using cost indexes is that a policy with a small index number
is generally a better buy than a comparable policy with a
larger index number. The following rules are also important:
- Cost comparisons should be made
only between similar plans of life insurance. Similar
plans are those which provide essentially the same
basic benefits and require premium payments for approximately
the same period of time. The closer policies are
to being identical, the more reliable the cost comparison
will be.
- Compare index numbers only for the
kind of policy, for your age and for the amount you
intend to buy. Since no one company offers the lowest
cost for all types of insurance at all ages and for
all amounts of insurance, it is important that you
get the indexes for the actual policy, age and amount
which you intend to buy. Just because a Shoppers Guide
tells you that one company's policy is a good buy
for a particular age and amount, you should not assume
that all of that company's policies are equally good
buys.
- Small differences in index numbers
could be offset by other policy features, or differences
in the quality of service you may expect from the
company or its agent. Therefore, when you find small
differences in cost indexes, your choice should be
based on something other than cost.
- These life insurance cost indexes apply
to new policies and should not be used to determine
whether you should drop a policy you have already
owned for a while, in favor of a new one. If such
a replacement is suggested, you should ask for information
from the company which issued the old policy before
you take action.
- An important fact to note is the difference
in premium payments paid during one year's time based
on an annual premium versus the annualized periodic
premium. For example, if you choose to pay premiums
on a monthly basis, the annualized periodic premium
would be twelve (12) times the monthly premium. There
may be a significant difference between the annualized
periodic premium and the annual premium and it should
be considered when deciding on a payment schedule.
- In any event, you will need other information
on which to base your purchase decision. Be sure
you can afford the premiums, and that you can understand
its cash values, dividends and death benefits.
You should also make a judgment on how well the life
insurance company or agent will provide service in
the future, to you as a policyholder.
|
 |
IMPORTANT THINGS TO
REMEMBER—A SUMMARY
The first decision you must make when buying
a life insurance policy is choosing a policy that has benefits
and premiums that most closely meet your needs and ability
to pay. Next, find a policy which is also a relatively good
buy. If you compare Surrender Cost Indexes and Net Payment
Cost Indexes of similar competing policies, your chances of
finding a relatively good buy will be better than if you do
not shop. Remember, look for policies with lower cost
index numbers. A good life insurance agent can help you
to choose the amount of life insurance and kind of policy
you want and will give you cost indexes so that you can make
cost comparisons of similar policies.
Don't buy life insurance unless you intend to
stick with it. A policy that is a good buy when held for 20
years can be very costly if you quit paying premiums during
the early years of the policy. If you surrender such a policy
during the first few years, you may get little or nothing
back and much of your premium may have been used for company
expenses.
Read your new policy carefully, and ask the
agent or company for an explanation of anything you do not
understand. Whatever you decide now, it is important to review
your life insurance program every few years to keep up with
changes in your income and responsibilities.
|
