University of Illinois Extension

U N D E R S T A N D I N G Insurance University of Illinois Extension College of Agricultural, Consumer and Environmental Sciences University of Illinois at Urbana-Champaign Circular 1350 2 This publication is a revised version of Life Insurance and Family Protection, originally published in 1984. The original circular was written by Jeanne L. Hafstrom, Associate Professor of Family and Consumer Economics; Sheila Fitzgerald Krein, Extension Specialist, Family Economics; and Marilyn M. Dunsing, Professor of Family and Consumption Economics. The revised circular was written by Brenda Cude, Extension Consumer Economics Specialist, and designed by Debra J. Eisenmann. Issued in furtherance of Cooperative Extension Work, Acts of May 8 and June 30, 1914, in cooperation with the U.S. Department of Agriculture. Dennis Campion, Director, University of Illinois Extension, University of Illinois at Urbana-Champaign. The University of Illinois Extension provides equal opportunities in programs and employment. Copyright © 1998 by University of Illinois Board of Trustees. Authors and publishers have granted permission for copies of this work or parts of this work to be reproduced, provided that (1) copies are distributed at or below the cost of reproduction; (2) the author, the publication, and the University of Illinois College of Agricultural, Consumer and Environmental Sciences and the relevant division within the College are identified; and (3) proper notice of copyright is affixed to each copy. The information provided in this publication is for educational purposes only. References to commercial products or trade names do not constitute an endorsement by the University of Illinois and do not imply discrimination against other similar products. UNDERSTANDING Insurance Contents 5 Life Insurance and Protection 5 Ways to Buy Life Insurance 6 What Is the Best Type of Life Insurance? 8 Special Policy Features 9 Payment of Premiums 9 Who Needs Life Insurance? 10 How Much Life Insurance Do You Need? 12 Settlement Options 12 Taxes and Insurance 12 Regulation of Insurance 13 If Your Insurer Can’t Meet Its Obligations 14 Keeping Your Insurance Program Effective 14 Suggestions for Further Reading 15 Life Insurance Terms 4 Most families consider life insurance to be an important part of their economic security program because it provides protection for the future. But the amount of protection needed and the reasons for needing it vary between families, so it is not always easy to decide which policy to buy. This publication explains the most common life insurance options and discusses how those options can help protect your family. A glossary explains the various terms used concerning life insurance. hree situations — the sound of screeching brakes on an interstate highway, a widow beginning her first job at age 55, and a young man dropping out of college — brought three families to us asking for information on life insurance. hen Paul Martinez, on the road for a business trip, heard the squeal of brakes and then watched the automobile crash that killed the parents of three young children, he began to worry about his own family. What would happen to his two daughters if he and his wife were to die suddenly? Where would they live? Who would pay for their food, their clothing, the rest of their everyday expenses? He decided it was time to talk with his wife about making provisions for their daughters. ugene and Vera Clark saw the determination on their neighbor`s face when she got her first job at age 55, shortly after her husband died. They watched her give up membership in many organizations she enjoyed, and they sympathized when she said she was just too tired to join them for an evening`s entertainment. She struggled to make her small earnings pay the mortgage, buy food and clothing, and cover her other living expenses. The Clarks decided they needed some advice on providing for Mrs. Clark in case Mr. Clark, the wage earner for their family, were to die prematurely. ob Price couldn`t believe it when he heard that Gary Williams, whose goal was to become a doctor, had dropped out of college in his freshman year. This happened shortly after the death of Gary`s father, who had been Bob`s business partner. Bob found out that his partner had only enough life insurance to pay his burial expenses and to meet the family’s mortgage payments. Since Gary’s mother needed some additional training before she could earn enough money to support the family, it was decided that the best solution in the meantime was for Gary, the oldest child, to interrupt his education and to work. Bob Price didn`t want that to ever happen to his wife and children. his publication presents the kind of information we gave these three families to help them understand and meet their life insurance needs. Life Insurance and Protection Life Insurance and Protection 5 amilies buy life insurance for protection. In the event of a family member’s death, life insurance replaces the income that the person earned and that his or her dependents relied on. Some families also buy life insurance as a part of their retirement planning or when planning how their assets and income will be distributed after death (estate planning). Life insurance is based on the law of large numbers. A large number of families share the common risk of losing a wage earner, and each family pays a certain amount of money (called a premium) each year. Then the dependents of the insured persons who actually die during that year receive a much larger amount of money than the annual premiums they have paid. The life insurance company uses mathematical mortality tables to calculate the risk that those who are insured will die during the year, collects premiums from the persons sharing the risk, and pays proceeds to beneficiaries of any insured individuals who die. The type of life insurance a family needs varies with their income, resources, goals, composition, and stage in the family life cycle. Used correctly, life insurance can make a valuable contribution to family economic security. Having too much life insurance or paying for insurance when it isn’t needed for financial protection can be an unnecessary drain on family finances. ❖ Ways to Buy Life Insurance Ways to Buy Life Insurance ou can buy life insurance through an individual policy or a group policy. You can buy an individual policy from an insurance agent or through the mail. Often you must pass a medical examination to qualify. You usually buy a group policy through your employer or an organization to which you belong. Your employer may pay part of your premium as an employment benefit. Unlike health insurance, rates for group life insurance rates may not be lower than individual rates. However, you usually aren’t required to pass a medical exam to qualify for a group policy. Group insurance is often term insurance. When you leave a job, you may have the opportunity to convert your group insurance coverage into a term or whole life individual policy. Some group policies can also be continued into retirement. (Both term and whole life insurance are discussed in the next section.) When you apply for a loan or mortgage, you can buy credit life insurance from ... - tailieumienphi.vn