• Provide income for surviving dependent family members.
  
• Preserve an estate — pay federal and state death taxes and other estate settlement costs.
  
• Pay off loans.
  
• Fund college education expenses for children and grandchildren.
  
• Equalize inheritances.
  
• Protect business from loss of a key employee.
  
• Shift wealth from one generation to another in a cost- effective manner.
  
• Benefit a charity.
  
• Replace a charitable gift.
  
• Meet special financial demands of dependents with physical or mental limitations, such as physically or mentally handicapped or learning disabled children, or elderly parents.
  
• Relieve survivors of financial management burdens by providing the death benefit in the form of an annuity payable for life.
  
• Create an estate.
  
• Create a supplemental retirement fund.
  
• Fund a business continuation arrangement.

• Term Life
• Whole Life
• Universal Life
• Survivorship Life
• Variable Life
• Annuities

Term Life Insurance

Term life insurance provides death benefit protection for a term of one or more years. Death benefits are paid only if the insured dies within the specified term of years. Term life insurance typically provides the largest immediate death benefit for each premium dollar.

Most term life insurance policies are renewable for one or more additional years even if the insured's health has changed. Each time the policy is renewed for a new term, premiums increase.

Term life policies generally contain a conversion feature. This enables the policyowner, prior to the final conversion date, to exchange the term life policy for a permanent plan of life insurance such as whole life or universal life, without evidence of insurability. Premiums for the new policy will be higher than what the policyowner had been paying for the term life insurance.

Whole Life Insurance

Whole life insurance provides death protection, as its name suggests, for the whole of life. Typically the policyowner would pay the same premium for as long as the insured should live. Premiums can be several times higher than premiums you would pay initially for the same amount of term life insurance, but they are smaller than the premiums you would eventually pay if you were to keep renewing the term life insurance policy until the insured's later years.

Although you pay a higher premium initially for whole life than for term life insurance, whole life policies develop cash values which may be available to the policyowner.

Additionally, the policy's cash value can be used as collateral for a loan. If the policyowner borrows from the policy, interest is charged at the rate specified in the policy. Any money owed on a policy loan is deducted from the benefits upon the insured's death, or from the cash value if the policyowner surrenders the policy for cash.

Universal Life

Universal Life has several unique features not found in whole life policies. Specifically, the policyowner is provided with the flexibility to vary the timing and amount of premiums and the face amount, depending upon present needs.

Cash values are a function of past and present premium payments, interest crediting rates, mortality charges and expense charges. The interest rate credited to the policy cash value is based on current rates of interest, subject to a stated guaranteed minimum interest rate. In addition, current mortality and expense charges are deducted from the accumulation value, but the only guarantee is that these charges will not exceed certain maximums. As a result, the policyowner bears more of the risk of adverse trends in mortality and expenses than if a traditional whole life insurance policy were purchased. On the other hand, if the insurance company's mortality costs and expenses improve, the policyowner may benefit through lower charges.

Second-To-Die or Survivorship Life Insurance

This is one policy that covers the lives of two insureds, typically a married couple. The death benefit is payable only when the last of two insureds dies. Typically this policy type is used to provide liquidity to pay estate taxes when the second spouse dies. Other uses of this form of life insurance include: to protect dual income families, to provide key person business insurance, to replace an asset gifted to charity and to fund a business buyout.

Because of the timing of the death benefit payment, the premium charges for survivorship life insurance plans are generally lower than those of comparable single life plans.

Second-To-Die life insurance policies are available in whole life, universal life and variable life versions and can be funded on either a single premium or annual premium basis.

Variable Life Insurance

This product combines permanent life insurance protection with a flexible investment plan that allows the policyowner to choose to invest premiums and cash values among a broad range of investments. Under such a policy, there is no guaranteed minimum cash value. The policyowner bears all the investment risk associated with the policy. There are two types of variable life insurance - variable whole life and variable universal life.

Under a variable whole life policy the death benefit may increase or decrease depending on investment performance, but will not fall below the guaranteed minimum, provided the required premium is paid.

Variable universal life policies (VUL) provide the policyowner with the flexibility to vary the timing and amount of premiums and the face amount of coverage, much like the fixed interest rate universal life policy. The primary difference is that under the VUL design the policyowner directs the investment of cash values among a variety of investments and assumes all of the investment risk. In addition, most variable universal life policies do not guarantee a minimum death benefit.

Annuities

Annuities are either deferred or immediate.

• Deferred annuities provide income payments that begin at a later date. The primary reason for purchasing a deferred annuity is to accumulate money on a tax-deferred basis, which can then provide an income at a later date.
• Immediate annuities are contracts which begin paying installments generally within 12 months of the premium payment. The main reason for purchasing an immediate annuity is to obtain a regular income, most frequently for retirement purposes.

Deferred annuities can be either single premium or flexible premium.

• Single premium contracts, commonly referred to as Single Premium Deferred Annuities (SPDAs), do not permit additional premiums after the initial premium.
• Flexible premium contracts on the other hand permit the contract owner to make additional contributions after the initial premium.

Annuities may be either fixed or variable.

• A fixed annuity provides for tax-deferred accumulation at a fixed rate of interest.
• The value of a variable annuity is dependent upon the performance of an underlying portfolio of investments such as stocks, bonds and money market accounts.

Income Tax Considerations of Non-Qualified Annuities

• Under current tax law, a contract owner is not taxed on increases in the value of an annuity contract until distributions occur, either as a lump sum, withdrawal or as annuity payments. For a lump sum payment received as a total surrender, the recipient is taxed on the portion of the payment that exceeds the cost basis of the contract.
• Withdrawals are taxable up to the amount of contract earnings.
• For annuity payments, the taxable portion is determined by a formula which establishes the ratio that the cost basis of the contract bears to the total value of the annuity payments for the term of the annuity contract.
• Note: Annuity distributions that begin prior to age 59 1/2 may be subject to a 10% federal penalty tax.
• The above information does not necessarily apply to Qualified contracts (contracts used under various types of Qualified retirement plans), separate tax withdrawal penalties and restrictions apply.
  
  Note: Security Mutual Life Insurance Company of New York does not provide tax, legal or accounting advice. The above information is based upon the Company's understanding of current federal income tax law applicable to annuities in general. Purchasers are cautioned to seek competent tax advice regarding the tax consequences of annuities.

• Entire Contract Clause
• Ownership Rights
• Free Look—Right to Examine Policy
• Grace Period
• Reinstatement
• Incontestable Clause
• Suicide Clause
• Misstatement of Age or Sex

Entire Contract Clause

Provides that the policy itself, the application and any attached riders constitute the entire contract between the policyowner and the insurer.

Ownership Rights

The policyowner typically has the following ownership rights:

• The right to designate and change the Beneficiary of the policy death proceeds.


The beneficiary is the person or entity that the policyowner has selected to receive any death benefit payable upon the insured's death.

• The right to select a Settlement Option, which is how the death proceeds will be paid to the named beneficiary.
  
  Beneficiaries can receive life insurance proceeds in a number of different ways aside from the common method of a lump sum distribution. Usual settlement options are: interest only, fixed period of years installments, fixed amount and life income.

  Interest Only

  All or a portion of the policy proceeds are left on deposit with the company for a defined period of time, and only the interest is paid to the beneficiary. The proceeds are credited with interest at a rate declared by the company yearly, but the rate of interest will not be less than the guaranteed minimum rate.

  Fixed Period of Years Installments

  Provides for the payment of the policy proceeds in installments over a definite period of time, typically not longer than 30 years. The amount of each installment is determined by the amount of the proceeds, the period of time, interest rates and the frequency of payments.

  Fixed Amount

  The proceeds are paid in regular installments of a fixed amount. Payments continue until the principal amount and interest earnings are exhausted.

  Life Income

  Proceeds are used to buy an annuity with payments made to a payee for life. Typically the policy provides for a guaranteed payment period of 10 or 20 years. If the payee dies within the guaranteed payment period, a beneficiary can be named to receive the remainder of the specified benefits.
  
• The right to select a Nonforfeiture Option.

  Nonforfeiture Values

  Policy values such as loans, cash, reduced paid-up insurance and extended term insurance which are not lost for nonpayment of premiums.

  Cash Option

  The policy is surrendered and the company issues a check to the policyowner for the policy's cash value.

  Reduced Paid-up Option

  A nonforfeiture option found in most life insurance policies that allows the policyowner to have the cash surrender value of the policy used to purchase a paid-up policy for a reduced amount of insurance.

  Extended Term Insurance Option

  A nonforfeiture option that provides for the cash value to be used as a net single premium to purchase term insurance for the face amount of the policy at the insured's then attained age. The term insurance will continue for as long as possible, but not beyond the term of the original policy.
  
• The right to take out a Policy Loan, provided that a loan value exists.
  
  The policyowner can borrow money (subject to some limitations) from the insurer at a stated rate of interest by using the policy's cash value as collateral. Any loan balance outstanding at the insured's death would be deducted from any life insurance death proceeds payable.

  Automatic premium loan

  If elected by the policyowner, the loan value of the policy is used to pay a premium that has not been paid before the end of the grace period.
  
  
• If the policy is participating, the right to receive Dividends and apply them under one of the available dividend options.

  Dividend

  In a mutual company, or company that issues a participating policy, it is a share of the surplus earned by the Company and reflects the difference between the premium charged and the actual expense of the policy. Dividends and/or values based on dividends should not be construed as guarantees or even as estimates of dividends to be paid in the future. Dividends will depend on the company's investment earnings, claims experience and expenses in the future.

  Dividend Options

  The different ways in which the policyowner of a participating insurer may elect to receive dividends, for example: in cash, to reduce premium, to purchase additional paid-up life insurance, left on deposit with the insurer at interest, to purchase one-year term insurance and to increase cash value.

• The right to assign Ownership to someone else.
  
  The policyowner may typically assign the ownership of the policy. An absolute policy assignment will make the assignee the owner. A collateral assignment will not cause an ownership change, however, the rights of any owner, beneficiary, or other payee will be subject to the terms of the collateral assignment. The company is not responsible for the validity, effect or sufficiency of an assignment.

Free Look—Right to Examine Policy

Generally, a life insurance policy may be canceled for any reason within 10 days after it is received by the policyowner by delivering or mailing it to the agent through whom it was purchased or the home office of the company. Upon cancellation, the company will refund any premium paid. The policy will be considered void from its inception.

Grace Period

A grace period of 31 days after the premium due date is generally granted for the payment of each premium due after the first. During this period, the policy remains in effect. If the insured dies during the grace period and the premium has not been paid, any death proceeds will be reduced by the premium amount due.

Reinstatement

If any premium is not paid before the grace period ends, or with respect to universal life insurance and current assumption whole life insurance policies, if the policy's cash value is not sufficient to pay the monthly mortality and expense charges, the policy will lapse. Typically the policy may be reinstated within 5 years after lapse if:

• The policy has not been surrendered for cash.
  
• The insured is alive.
  
• Evidence of insurability satisfactory to the company is given.
  
• All overdue premiums, or with respect to universal life, overdue monthly deductions, are paid with interest from the due date of each premium.
  
• Any policy indebtedness existing on the due date of the unpaid premium is paid or reinstated with interest from that date.

Incontestable Clause

This provision provides that after a specified period of time, usually 2 years from the policy issue date, the company may not generally contest the policy.

Suicide Clause

If the cause of death of the insured is by suicide within 1 or sometimes 2 years from the policy issue date, the policy proceeds generally will be limited to the premiums paid, reduced by the amount of any dividends paid in cash, dividends applied in reduction of premium and any outstanding loans with loan interest to date of death.

Misstatement of Age or Sex

If the insured's age or sex is incorrectly stated on the application, the amount payable will be the amount which the premiums paid would have purchased for the correct age and sex. Upon receipt of due proof, the company will adjust the age and sex of the insured at any time.

Accidental Death Benefit

A rider providing for the payment of an additional death benefit if the insured's death occurs by accidental means, as defined in the rider.

Accelerated Benefits Rider

This rider permits the policyowner to access a portion of the life insurance proceeds during the insured's life should the insured suffer from a terminal illness.

Disability Waiver of Premium

A rider that can be added to most life insurance policies that exempts the policyowner from paying premiums after the insured has been disabled for a specified period of time.

Guaranteed Insurability Rider

A rider that gives the policyowner the contractual right to acquire additional insurance at specified times in the future, without evidence of insurability.

Insurance Exchange Rider

A rider that allows the policyowner to exchange the original policy for a policy insuring another life, subject to evidence of insurability at the time of the exchange. This rider is primarily used in business situations. For example, a corporation that owns a series of policies on key executives' lives may wish to switch insureds in the event one or more of the executives terminates employment or retires.

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?
• What are Cost Indexes?
• How do I Use Cost Indexes?
• Summary

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:

1. Premiums
2. Cash values
3. 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.

Think twice before discontinuing or changing your current life insurance policy in order to buy a new one. It is rarely in your best interest; following are a few reasons why...

• It Could Cost You.  During the early years of policy ownership, much of what you paid covered the insurance company's expense of selling and issuing the policy. This expense will be incurred all over again when you buy a new policy.
  
  If a cash value policy is surrendered and the proceeds placed into a new policy, the cash value may be relatively small for several years due to the imposition of surrender charges. In fact, the new policy's cash value may never be as large as that of the existing policy.
  
  If you are older and your health has changed, premiums and/or insurance charges for the new policy will often be higher. Beware of anyone offering free insurance or more insurance at a lower cost. It is likely the premium due on the new policy is being paid by drawing cash from an existing policy.
  
• You Could Lose Guarantees. Life insurance is purchased to assure the accumulation of a desired amount of liquid capital at death. If you are considering the purchase of a variable life (VL) or variable universal life (VUL) policy, be aware that you bear all of the investment risk and more of the risk of adverse trends in mortality and expenses than with a traditional whole life policy. The cash value, and perhaps the death benefit, under VL and VUL policies would not be guaranteed.  
• You Could Lose Benefits. Certain provisions such as the suicide and contestable clauses are required by state law to safeguard the policy owner and beneficiary. Usually after one or two years from the date of the policy, the insurance company cannot challenge the validity of the policy or deny benefits if death is a result of suicide. These clauses, which may have already been satisfied in your existing policy, will often start over on a new policy. The result — the insurance company may have the right to cancel the contract or refuse to pay a claim for certain events during the initial period of the policy.
• You Could Owe Income Taxes.  According to Section 72(e) of the Internal Revenue Code, upon the complete surrender of a policy, if the gross cash value of the present policy exceeds the new premiums paid, the difference is taxable to the policyowner. You should understand that a 1035 exchange does not eliminate taxable income if there is a taxable gain and there is an outstanding policy loan at the time of surrender.
   
• Get All The Facts.  Before making the decision to replace or exchange an existing policy, make sure you get all the facts. Read over your existing policy, and ask your representative or a member of your insurer's policyowner service department for a detailed cost breakdown of premiums, cash surrender values and death benefits. Request the same information for the new policy you are considering. Then, compare the two thoroughly.
  
  Make sure you hear from both your existing company and your proposed company before you make your decision.
  
  If your requirements have changed since you bought your policy, you may be able to change your present policy, or even add to it, to get the coverage and benefits you now need.
  
  If you decide to replace the policy you now own with other insurance, be sure:

  To insist that the agent making the proposal put it in writing. That you qualify for the insurance applied for. That you do not take action to terminate your existing policy until your new policy has been issued and you have examined it and found it acceptable.

Under Current Tax Law:

• The cash value growth in a life insurance policy generally enjoys deferral of taxation while the policy remains in force.
   
• Policy loans, except those made from Modified Endowment Contracts, are generally NOT treated as taxable distributions.
   
• If the entire life insurance policy is surrendered for its cash value, the difference between the gross cash value and the taxpayer's basis in the policy, is generally subject to income tax.
   
• Partial surrenders from life insurance policies are taxable to the extent funds received exceed the taxpayer's basis in the policy.
   
• Funds coming out of a life insurance policy (other than as death proceeds) classified as a Modified Endowment Contract (MEC), are taxed differently than those not classified as a MEC. Under a MEC, distributions, including policy loans, are subject to income tax to the extent the gross cash value of the policy exceeds the taxpayer's basis in the contract. In addition, a 10% penalty tax may apply if the distribution was made prior to owner's age 59 ¹/₂.
   
• In general, life insurance death proceeds are not subject to income taxation. This income tax exclusion makes life insurance a very attractive financial planning tool.
  
  

Note:  Security Mutual Life Insurance Company of New York does not provide legal or tax advice. The general information presented on various tax aspects of life insurance is not intended to be relied upon as tax advice. Individuals should seek the advice of a qualified tax professional regarding the taxation of life insurance as it applies to their particular situation.