Life Insurance and Annuities

Life Insurance Buyer’s Guide (PDF)

Life Insurance And You

When you buy life insurance, you want coverage that fits your needs. First, decide how much you need – and for how long – and what you can afford to pay. Keep in mind the major reason that you buy life insurance is to cover the financial effects of unexpected or untimely death. Life insurance can also be one of the many ways you plan for the future. Next, learn what kinds of policies will meet your needs and pick the one that best suits you. Then, choose the combination of policy premium and benefits that emphasizes protection in case of early death, or benefits in case of long life, or a combination of both.

It makes good sense to ask a life insurance agent or company to help you. An agent can help you review your insurance needs and give you information about the available policies. If one kind of policy does not seem to fit your needs, ask about others.

This page provides only basic information. You can get more facts from a life insurance agent or company, the Internet, or from your public library.

Important Things To Consider About Life Insurance

  • Review your own insurance needs and circumstances. Choose the kind of policy that has benefits that most closely fit your needs. Ask an agent or company to help you.
  • Be sure that you can handle premium payments. Can you afford the initial premium? If the premium increases later and you still need insurance, can you still afford it?
  • Donʼt sign an insurance application until you review it carefully to be sure all of the answers are complete and accurate.
  • Donʼt buy life insurance unless you intend to stick with your plan. It may be very costly if you quit during the early years of the policy.
  • Donʼt drop one policy and buy another without a thorough study of the new policy and the one you have now. Replacing your insurance may be costly.
  • Read your policy carefully. Ask your agent or company about anything that is not clear to you.
  • Review your life insurance program with your agent or company every few years to keep up with changes in your income and your needs.

What About Your Existing Life Insurance Policy?

If you are thinking about dropping a life insurance policy, here are some things you should consider:

  • If you decide to replace your policy, donʼt cancel your old policy until you have received the new one. You then have a minimum period to review your new policy and decide if it is what you wanted.
  • It may be costly to replace a policy. Much of what you paid in the early years of the policy you have now, paid for the companyʼs cost of selling and issuing the policy. You may pay this type of cost again if you buy a new policy.
  • Ask your tax advisor if dropping your policy could affect your income taxes.
  • If you are older or your health has changed, premiums for the new policy will often be higher. You will not be able to buy a new policy if you are not insurable.
  • You may have valuable rights and benefits in the policy you now have that are not in the new one.
  • If the policy you have now no longer meets your needs, you may not have to replace it. You might be able to change your policy or add to it to get the coverage or benefits you now want.
  • A new policy contains a two-year contestability clause, which means that the insurance company can refuse a death claim if it is a result of suicide or if there is material misrepresentation on the application.

In all cases, if you are thinking of buying a new policy, check with the agent or company that issued you the one you have now. When you bought your old policy, you may have seen an illustration of the benefits of your policy. Before replacing your policy, ask your agent or company for an updated illustration. Check to see how the policy has performed and what you might expect in the future, based on the amounts the company is paying now.

How Much Life Insurance Do You Need?

Here are some questions to ask yourself:

  • How much of the family income do I provide? If I were to die early, how would my survivors, especially my children, get by? Does anyone else depend on me financially?
  • Do I have children for whom Iʼd like to set aside money to finish their education in the event of my death?
  • How will my family pay final expenses and debts after my death?
  • Do I have family members or organizations to whom I would like to leave money?
  • Will there be estate taxes to pay after my death?
  • How will inflation affect future needs?

As you figure out what you must have to meet these needs, count on the life insurance you have now, including any group insurance where you work or veteranʼs insurance. Donʼt forget Social Security and pension plan survivorʼs benefits. Add other assets you have: savings, investments, real estate, and personal property. Which assets would your family sell or cash in to pay expenses after your death?

Life Insurance Illustrations

You may be thinking of buy a policy where cash values, death benefits, dividends or premiums may be based on events or situations the company does not guarantee (such as interest rates). If so, you may get an illustration from the agent or company that helps explain how the policy works.

The illustration will show how the benefits that are not guaranteed will change as interest rates and other factors change. The illustration will show you what the company guarantees. It will also show you what could happen in the future.

Remember that nobody knows what will happen in the future. You should be ready to adjust your financial plans if the cash value doesnʼt increase as quickly as shown in the illustration. You will be asked to sign a statement that says you understand that some of the numbers in the illustration are not guaranteed.

What Is The Right Kind Of Life Insurance?

All policies are not the same. Some give coverage for your lifetime and others cover you for a specific number of years. Some build up cash values and others do not. Some policies may offer other benefits while you are still living. Your choice should be based on your needs and what you can afford.

There are two basic types of life insurance: term insurance and cash value insurance. Term insurance generally has lower premiums in the early years, but does not build up cash values that you can use in the future. You may combine cash value insurance with term insurance for the period of your greatest need for life insurance to replace income.

Term insurance covers you for a term of one or more years. It pays a death benefit only if you die in that term. Term insurance generally offers the largest insurance protection for your premium dollar. It generally does not build up cash value. You can renew most term insurance policies for one or more terms even if your health has changed. Each time you renew the policy for a new term, premiums will be higher. Ask what the premiums will be if you continue to renew the policy. Also ask if you will lose the right to renew the policy at some age. For a higher premium, some companies will give you the right to keep the policy in force for a guaranteed period at the same price each year. At the end of that time you may need to pass a physical examination to continue coverage, and premiums may increase.

Cash value life insurance is a type of insurance where the premiums charged are higher at the beginning than they would be for the same amount of term insurance. The part of the premium that is not used for the cost of insurance is invested by the company and builds up a cash value that may be used in a variety of ways.

Whole life insurance covers you for as long as you live if your premiums are paid. You generally pay the same amount in premiums for as long as you live. When you first take out the policy, premiums can be several times higher than you would pay initially for the same amount of term insurance. But they may be smaller than the premiums you would eventually pay if you were to keep renewing a term policy until your later years.

Universal life insurance is a kind of flexible policy that lets you vary your premium payments. You can also adjust the face amount of your coverage. Increases may require proof that you qualify for the new death benefit. The premiums you pay (less expense charges) go into a policy account that earns interest. Charges are deducted from the account.

Variable life insurance is a kind of insurance where the death benefits and cash values depend on the investment performance of one or more separate accounts, which may be invested in mutual funds or other investments.

Finding A Good Life Insurance Value

After you have decided which kind of life insurance is best for you, compare similar policies from different companies to find which one is likely to give you the best value for your money. A simple comparison of the premiums is not enough. There are other things to consider:

  • Do premiums or benefits vary from year to year?
  • How much do the benefits build up in the policy?
  • What part of the premiums or benefits is not guaranteed?
  • What is the effect of interest on money paid and received at different times on the policy?

Once you have decided which type of policy to buy, you can use a cost comparison index, available from life insurance agents and companies, to help you compare similar policies.

Viatical Settlement Information

A viatical settlement allows a terminally ill person to receive a portion of his or her life insurance benefits while he or she is still alive. Viatical settlement companies purchase life insurance policies from people diagnosed with terminal illnesses at a discount of face value. The insured receives a lump-sum payment. The company, which becomes the owner and beneficiary of the policy, is required to pay all future premiums. In return, the company collects the full amount of the policy when the insured dies. Contact a licensed viatical broker or viatical settlements provider for information about viatical settlements. The Mississippi Viatical Settlements Act of 2000 requires disclosure of many facts as aspects surrounding viatical settlement transactions, including the financial consequences of selling your life insurance policy and possible alternatives. Consult your own financial advisor, who knows your personal financial needs. Complaints and inquiries regarding viatical settlements should be directed to the Mississippi Secretary of State’s Office‘s Business Services Division at 601-359-6367 or 800-804-6364.

Annuities Explanation

Insurance companies also provide annuities, which at its most basic, are interest-bearing contracts that ensure an income stream. A payment or series of payments are made to an insurance company, and in return, the insurer agrees to pay an income (the invested capital plus interest on the outstanding balance) for a specified time period. Annuities can take many forms but have a couple basic properties: an immediate or deferred payout, with fixed (guaranteed) or variable returns. Consequently, different annuity types can resemble Certificate of Deposits (CDs), pensions or even investment portfolios. Annuities are most often bought for future retirement income, and can pay an income that can be guaranteed to last as long as you live. Depending on your age, an annuity may or may not be appropriate.

Challenges To Annuity Industry

Life insurance companies must minimize the risk of what is called disintermediation. This happens when annuity holders seeking higher-yielding alternatives withdraw funds prematurely (often during periods of increased interest rates), and force companies to pay these surrenders by liquidating investments in an unrealized loss position. Insurers can protect themselves by matching an interest-sensitive liability portfolio with the asset portfolio, and by selling a mix of low-risk and high-risk products.

Types Of Annuities

  • Immediate Annuities: Annuities designed to guarantee owners a determined income stream on a monthly, quarterly, annual or semiannual basis in exchange for a lump sum. Options are limited from the annuity holder’s perspective, so profits are less volatile, and because of the fixed nature of these products, immediate annuities are at the lower end of the annuity risk spectrum.
  • Deferred Annuities: A type of long-term savings product that allows assets to grow tax deferred until payment. This product category includes:
    • Fixed Annuities: These products guarantee a minimum rate of interest during the time that the account is growing, and typically guarantee a minimum benefit. For the issuer, fixed annuities are subject to significant asset/liability mismatch risks, as described above. Also, when interest rates fall, spread earnings, or the difference between the yield on investments and credited rates, can decrease and asset cash flows much be reinvested at lower rates.
    • Fixed Indexed Annuities: These products are credited with a return that is based on changes in an equity index. The insurance company typically guarantees a minimum return. Payouts may be periodic or in a lump sum. The potential for gains is an attractive feature during favorable market conditions; however, gains may not be as favorable as those available from variable annuities or straight equity investments. Sales also likely will suffer if equity markets go through a prolonged downturn.
    • Variable Annuities: The participant is given a range of different investment options, typically mutual funds, to choose from. The rate of return on the purchase payment, and the amount of the periodic payments, will vary depending on the performance of the selected investments. Like fixed indexed annuities, sales tend to slump during unfavorable market conditions. In addition, the only sources of revenue for these products are account-value based fees, which also decline when market conditions deteriorate. Relatively thin margins, increasing product complexity (e.g., guaranteed living benefits) and intense competition put variable annuities at the riskier end of the product continuum.Because variable annuities contain a return linked to equity markets, they are regulated by the U.S. Securities and Exchange Commission (SEC). Fixed annuities are not securities, and as such, are not regulated by the SEC. Though it depends on the features, the typical equity-indexed annuity is not registered with the SEC.

      Group annuities differ slightly from individual annuities in that the payout is dependent upon the life expectancy of all the members of the group rather than the individual. Many company retirement plans, such as 401(k) plans, are annuities that will pay a regular income to the retiree. Tax-deferred annuity plans – 403(b) and 457 plans – also are used widely by public-sector and non-profit workers.

Is An Annuity Right For You?

To find out if an annuity is right for you, think about what your financial goals are for the future. Analyze the amount of money you are willing to invest in an annuity, as well as how much of a monetary risk you are willing to take. You shouldn’t buy an annuity to reach short-term financial goals. When determining whether an annuity would benefit you, ask yourself the following questions:

  • How much retirement income will I need in addition to what I will get from Social Security and my pension plan?
  • Will I need supplementary income for others in addition to myself?
  • How long do I plan on leaving money in the annuity?
  • When do I plan on needing income payments?
  • Will the annuity allow me to gain access to the money when I need it?
  • Do I want a fixed annuity with a guaranteed interest rate and little or no risk of losing the principal?
  • Do I want a variable annuity with the potential for higher earnings that aren’t guaranteed and the possibility that I may risk losing principal?
  • Or, am I somewhere in between and willing to take some risks with an equity-indexed annuity?

Understand The Annuity Product You Are Buying

When it comes to annuities, inappropriate sales practices can occur in many ways and come from a variety of sources. Here are a few ways to protect yourself:

  • Always review the contract before you decide to buy an annuity. Terms and conditions of each annuity contract will vary.
  • You should understand the long-term nature of your purchase. Be sure you plan to keep an annuity long enough so the charges don’t take too much of the money you invest.
  • Compare information for similar contracts from several companies. Comparing products may help you make a better decision.
  • Ask your agent and/or the company for an explanation of anything you don’t understand.
  • Remember that the quality of service you can expect from the company and the agent should be an important factor in your decision.
  • Verify that the company and agent are licensed. In order to sell insurance in your state, companies and agents must be licensed. To confirm the credibility of a company or agent, contact your state insurance department.
  • Check the company’s credit rating. Legitimate insurers have their “creditworthiness” rated by independent agencies such as Standard & Poor’s, A.M. Best Co. or Moody’s Investors Services. An “A+++” or “AAA” rating is a sign of a company’s strong financial stability. You can check a company’s rating online or at your local library.
  • The proof is in the paperwork. As you complete your research and decide to purchase a particular policy, it’s important to keep detailed records. Get all rate quotes and key information in writing. Once you’ve made a purchase, keep a copy of all paperwork you complete and sign, as well as any correspondence, special offers and payment receipts.

Avoid Being Fooled By Deceptive Annuity Sales Practices

Watch for the following red flags, which serve as warnings of possible deceptive annuity sales practices:

  • High-pressure sales pitch. If a particular group or agent has contacted you repeatedly, offering a “limited-time” deal that makes you uncomfortable or aggravated, trust your instincts and steer clear.
  • Quick-change tactics. Skilled scam artists will try to prey on your “time fears.” They may try to convince you to change coverage quickly without giving you the opportunity to do adequate research.
  • Unwilling or unable to prove credibility. A licensed agent will be more than willing to show adequate credentials.
  • Remember, if it seems too good to be true, it probably is!

If you suspect you’ve been a victim of deceptive sales practices, or you have a specific question and can’t get the answers you need from an agent or the insurance company, contact the Mississippi Insurance Department. Please see our Request Assistance Page for information on how to contact us.

Getting Assistance From The Mississippi Insurance Department (MID)

If we can be of assistance, please see the Request Assistance Page for information on how to contact us.