Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, February 14, 1993 TAG: 9302120293
SECTION: INSURANCE PAGE: INS-7 EDITION: METRO
SOURCE:
DATELINE: LENGTH: Long
QUESTIONS, ANSWERS ABOUT FINANCING YOUR FUTURE
Q: What's the best way to choose a life insurance policy?A: First, make sure you understand what the policy provides in the way of features, benefits and limitations. Read the sales literature carefully. Have your agent explain anything that is unclear. Ask for a "sample" policy and read the actual contract language.
Second, determine what you want the policy to do; that will suggest the kind of policy you should have. Term insurance provides basic "no frills" protection. Whole life insurance combines protection with savings. Variable life offers protection with an investment feature.
After determining the right kind of policy, compare those of several different companies. See which one offers you the most protection for the right amount of money, and which policy has features that make the most sense for you.
Before you buy, make sure the company is financially sound and has high ratings from the A.M. Best Company, Standard & Poor's and Moody's financial rating services.
Q: I have read that annuities are a good way to plan for retirement. But what is an annuity?
A: Annuities come in two basic types. With an immediate annuity, you make a lump sum premium payment, usually a minimum of $10,000, and the life insurance company you purchased the annuity from begins making regular income payments to you. An immediate annuity for life is one in which your income payments are guaranteed to continue for as long as you live. An immediate annuity with period certain will provide income payments for a set period of time specified by you.
With an immediate annuity, the amount of your income payments won't change. But exactly how much the income payments are depends on the type you choose and your life expectancy at the time you buy. Think of immediate annuities as a way to distribute funds already accumulated.
Deferred annuities, on the other hand, are used to save and accumulate funds. Typically, you make a lump sum premium payment, usually a minimum of $10,000, and in effect you leave it on deposit with the company. Your initial lump sum premium earns tax-deferred interest and, as a result, your money accumulates much faster. You don't pay taxes on the interest earned until you take the money out, usually at retirement when you may be in a lower tax bracket.
Q: My wife and I are newlyweds in our late 20s. We hear that by the time we retire - if we allow for inflation - we will need more than $1 million in savings to live comfortbly off the interest. How will we ever save that much money?
A: Assume that you were to save $5,000 per year for the next 40 years and earn no interest. You would have $200,000.
In another scenario, assume that your money earns interest compounded annually at a constant rate of 7.25 percent (really 5.20 percent when you take federal income tax into consideration for someone in the 28 percent tax bracket). In that case your nest egg would swell to $637,430.
On the other hand, suppose you put your money into a tax-favored account, like a deferred annuity, earning the same 7.25 percent constant rate of interest. If so, you will accumulate not $200,000, not $637,430, but a whopping $1,064,802. That's the power of compound interest combined with the power of tax deferral!
Talk to a professional insurance or financial counselor for advice on how to make your money work better for you and your future needs.
Q: I have had a $100,000 life insurance policy for five years that costs me $350 per year. Recently another agent said he could offer me a $250,000 policy for about the same amount of money. Why the big difference?
A: You have been paying a level premium for a fixed amount of coverage for five years, so you probably have some form of "whole life" insurance.
With whole life, premiums remain level, and your coverage cannot be dropped as long as you continue to make premium payments. Moreover, a portion of each premium builds "cash value." If you cancel, the policy's cash value is returned to you. Most whole life policies also let you borrow all or some of the cash value.
The agent who called was likely offering you a "term" policy. Term insurance is issued for a set period of time - typically one, three or five years. During the term, premiums remain level. But after that, the same amount of insurance will cost you more. Term insurance does not build cash value, and that is a major reason why you can generally purchase a great deal more term than whole life insurance for the same premium amount.
Q: A friend just purchased long-term care insurance. What is it? How does it work? How do I know if I need it?
A: Long-term care insurance pays for nursing home care and certain types of home health care. Medicare pays very little of the costs for these expensive services. So if someday you require long-term care, a long-term care insurance policy could save you and your family from financial ruin.
Long-term care policies vary considerably in coverage, costs and restrictions, so shop around. Make sure the amount of coverage is adequate to cover the average cost of nursing home and home health care in your area.
Carefully compare and evaluate policies before making a decision. Similar policies may have different eligibility requirements for certain conditions. For example, some policies will not cover nursing home care without immediate prior hospitalization. Others will not cover skilled nursing care in your home without a prior hospital stay. Avoid policies with restrictive eligibility requirements.