Life insurance...

can be purchased as term or permanent ("whole life") insurance. Which is right for you? Ask your trusted Henry O. Baker representative for expert advice on your life insurance options.

FAQ: Health

Q: What is life insurance?

When a person dies, there are many expenses that will need to be paid. These expenses may include such items as funeral costs, burial expense, current bills, and estate taxes. In addition, there may be financial needs the insured would have met if they had remained alive, including family living expenses, mortgage payments, long-term debt, and college costs for children. A life insurance policy’s primary function is to provide, upon death of the insured, an amount sufficient to pay for any or all of the preceding costs and expenses. Which expenses or costs are to be provided for, and how much money will be needed is entirely up to the insured.

Q: How much life insurance should I have?

There are many and varied needs for funds upon the death of an individual, and all must be taken into account to arrive at a proper amount of insurance. For simplicity, some authorities recommend a good rule of thumb to be five times your annual income. Your Henry O. Baker insurance agent can talk with you about your needs and goals, and illustrate how each item translates into a given amount of funds needed at the time of death. He or she can also share how to account other sources of income (such as Social Security or retirement plans) that will actually lower the amount of life insurance necessary.

Q: Who can I name as my beneficiaries? How often can I change them?

Your choice of beneficiaries is entirely yours. You can name individuals, organizations or your estate. You can also change them at any time. The original beneficiaries under your policy, as well as any changes you later make, must be designated in writing to the insurance company, and attached to your policy by endorsement.

Q: Are there different types of life insurance I should consider?

Although there are many types of life insurance policies, nearly all are variations of two basic types: term and permanent. (A third type, known as universal life, is a combination of term, permanent and various investment options. Its complexity is beyond the scope of our overview, but if you are interested, your Henry O. Baker agent can discuss if universal is a good fit for your life insurance needs and goals.)

Term Insurance - is exclusively death coverage. The policies are written for a specific length of time (the term referred to in the name). Common terms are one year, five year and ten year, although longer terms may be available. If the insured dies during the term of the policy, the death benefit is paid to the beneficiaries. If at the end of the term the insured is still alive, the coverage ends.

Whole Life - Unlike term insurance, a permanent insurance policy (often referred to as whole life) never terminates as long as the premiums are paid. It also builds cash values in the policy that can provide valuable living benefits in addition to the death benefit.

Q: Do I have to die to collect life insurance?

For term insurance, the answer is always yes. For permanent insurance, as the living benefits accumulate, they may be used to provide funds for financial needs such as loans, premium payments and retirement benefits.

Q: Which life insurance is less expensive, permanent or term?

Since term insurance only provides a benefit if the insured dies during the policy term, its premiums will be the closest to pure death cost. This is why term is the least expensive coverage to buy at younger ages. At older ages, however, the cost of a term policy rises rapidly along with the increasing death cost, and may soon become prohibitive for many senior citizens. A term insurance policy’s premium will remain the same during the term, and then increase at each renewal. For example, an annual renewable term policy is written for one year at a time, so the premium will generally increase each year. A five-year renewable term policy’s premium will remain level for the five-year term, and then increase at the renewal. Once renewed, the policy premium remains level until the next renewal, and so on until the renewal provision expires (typically at age 65), or when the insured either decides the premium has risen too high or the insurance is no longer wanted.

Permanent insurance rates are also fixed for the policy term. However, since the policy is permanent, this fixed premium must represent an average death cost over the entire expected life of the insured. The result is that permanent policy rates will be often be significantly higher than term rates at the younger ages, but then significantly lower at older ages.

Q: If term life insurance is less expensive, why buy permanent?

There are many reasons. As food for thought, here are three of the key considerations:

  1. Permanent insurance will always be there. Some final expense needs are permanent, and only permanent insurance is guaranteed, assuming you pay the premiums, to be there when needed. Term insurance, by its nature, is temporary, and at some point will become nonrenewable. In fact, a good life insurance rule of thumb is to buy permanent insurance for permanent needs (funeral, burial, estate liquidity), and term insurance for temporary needs (mortgages, college costs).
  2. Permanent insurance premiums are fixed for life. While the premium may be higher at younger ages than term, it will never go up. And that can be a great comfort upon reaching older age and not having to face the possibility of your term insurance premium increasing beyond your ability to pay, possibly at the very time you need your insurance the most.
  3. Permanent insurance builds cash values. During those early years of your policy, when your lifetime average premiums are higher than the death cost, that extra money is set aside to help cover the higher death costs in later years. But in the meantime it is put to good use. In effect, it becomes a form of savings account inside your life policy. This cash value, as it grows, can be used as the basis for a loan from the insurance company, used to pay premiums if necessary, or taken as a cash settlement in the event you cancel the policy.

Q: If I need to cash in my life insurance at some point, how much will it be worth?

If your policy is term insurance, it will have no value. Term only provides a death benefit. If your policy is permanent insurance, you will be eligible to receive the current cash values contained in the policy, whatever they may be at that point in time. Your Henry O. Baker agent will be able to show you sample charts illustrating your policy’s anticipated values for any particular year after your policy is issued.

Q: Do I need an individual policy if I have group insurance at work?

Maybe. Many factors must be considered, such as: Do I plan to remain at my current job? Do I feel secure in my current job? What current benefits does my employer provide, and do I feel they are sufficient? Are there certain benefits that are not provided, or limited in a way I feel leaves a gap to be filled in my coverages? Are there members of my family who are not adequately covered, or are ineligible, for my group benefits?

Discuss these issues with your Henry O. Baker agent and he or she can make a recommendation as to the best choices to assure your medical coverages are adequate for your needs.

Q: What is a major medical health insurance policy?

This is the most common form of individual or group health insurance is a major medical health policy. It provides benefits for sickness or injury, regardless of whether the care is provided at a doctor’s office, clinic or hospital. The types of sickness and injury covered are typically broad, although there are always limitations that should be discussed with your Henry O. Baker agent prior to purchasing the coverage. Major medical policies normally have an annual deductible and a lifetime maximum amount of benefits that will be paid.

Q: How does a health insurance deductible work?

A deductible is the amount you must pay before the insurance company begins to pay on your bills. This is an annual amount per insured person, although typically there will be a maximum amount of deductibles you will have to pay in a given year. For example, if your “per person” deductible is $500, and you have five people in your family covered under your health insurance, the maximum family deductible will usually be $1,500. Once three of the people in your family have paid out a $500 deductible, no more deductibles will apply to any member of the family for the remainder of the year. This can vary, so be sure to discuss the specifics of your policy with your Henry O. Baker agent.

Q: What does a disability income policy do?

Disability income is a form of health insurance that is designed to provide you with an income during the time you are unable to work due to illness or injury.

Q: What does disability mean?

In its simplest sense, it means you are unable to work. But it’s important you realize the definition of the term under a given disability income policy will be specified by that policy. The broader the definition of disability, the higher the cost and increased limits to the underwriting restrictions. For example, some policies will define disability to mean the inability to reasonably perform the duties of your occupation,while another will define it as the inability to reasonably perform the duties of any occupation. How significant is this difference of a single word? To use an extreme example, if you were a highly trained surgeon, the first policy would pay you if you were sufficiently injured that you couldn’t perform surgery. The second would refuse to pay if you could perform any job even sweeping floors or answering phones. Despite the obvious loss of income when going from surgeon to receptionist, the policy definition of disability will determine whether you will receive benefits for specific policy. As you might guess, the second policy is likely to be great deal less expensive. Also, you can see your current occupation is the single most important factor in determining what type of disability policy and coverage options you will be eligible for.

Q: What is a PPO?

This stands for Preferred Provider Organization. Basically, this is a network of health care providers who have agreed to provide certain services at agreed-upon costs for individuals whose coverage is a part of the network. (Some suggest it is best described as a discount-buying club for medical care.) You are free to use any medical provider within the network, and all will honor the agreed services and fees. If you choose to use a provider who is not an approved member of the network, your coverage may be diminished, your personal cost higher or, in some cases, benefits for non-emergency services may be totally denied. Be sure to discuss with your Henry O. Baker agent if your coverage will utilize one or more PPOs, who are the current approved providers, and how utilizing an out-of-network provider will affect your coverage.

Q: What is a HMO?

This stands for Health Maintenance Organization. Unlike a PPO network of independent care providers, HMOs are typically fixed facilities, and benefits are designed to cover services obtained at the HMOs facilities and supplied by HMO personnel. HMO coverage plans must specify how and under what circumstances services may be obtained from non-HMO providers, and this information is crucial to determining the value of the HMO under your particular circumstances. Your Henry O. Baker agent can assist you in determining whether there are good HMO options available in your area, their benefits and any limitations for you to consider in making your final medical coverage choices.

Q: What is the purpose of PPO's and HMO's?

By assembling a network of providers who agree to provide services at a discount (PPO) or by requiring you get all of your services from a specific provider, with an emphasis on preventative care (HMO), the hope is to provide you the best possible care at the lowest possible costs. A downside is such benefits and discounts require a great deal of control over your health care options by the PPO or HMO, and not all the limitations are popular or convenient. And whether these approaches are always successful is subject to ongoing debate, and results can vary greatly by where you live.

Q: What if I want to go to any doctor or hospital I choose?

You can buy health insurance which basically says go to whomever you want and have them send us the bill (often referred to as indemnity coverage), but it lacks the negotiated cost discounts and overview of services (meant to dissuade providers from over treating and over billing) that PPOs and HMOs utilize to try and keep costs lower. Thus an indemnity policy may be readily available to you, but may be significantly more expensive than a coverage plan utilizing a PPO or HMO. Ask your Henry O. Baker agent for your options and possible premiums, and then choose the coverage method that best meets your personal preferences and needs.

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