Life Insurance: FAQs
Scarsdale accountant Paul Herman has all the answers to your personal finance questions! The following are frequently asked questions our Westchester CPA firm receives regarding life insurance. Get to know these important facts, as well as our previous life insurance discussion, to make sure you choose the best possible life insurance for you!
▼ How are people classified for rate purposes?
To ensure that you receive the best rate possible it is useful to understand how these premiums are calculated by insurers. Firstly insurers will place people into four main categories:
- Preferred
- Standard
- Substandard
- Uninsurable
Someone who has a semi-serious illness such as diabetes or heart disease can be insured but will pay a higher premium. People with a chronic illness will be placed in the substandard category. Someone with a terminal illness will be rendered uninsurable.
People with high risk jobs or hobbies will be considered substandard as well.
The premiums that you are charged will correlate with the category that you are placed in.
Life insurance can be a real life-saver for your dependents!
Since the categorizing is not an exact science, one company may place you in a different category than another, thus drastically changing the prices of your premiums.
Once you are approved for coverage from a company, they cannot deny you coverage for any reason unless you cease payment.
First of all, beware that many insurance salespeople work on a commission basis, and may want to persuade you to purchase the policy that brings them the largest commission, rather than getting you the policy that makes the most sense for you.
Most of all, be sure that the company you are buying from will be in existence when you need them. Make sure that you check the insurer’s rating before you consider doing business with them.
Always review the costs of any recommended policy. The commissions will be stated, and you can see exactly where the money that you contribute will go.
Ask the insurance agent to explain the different policies and why the one you agree on is the best for you considering your circumstances.
In most states there will be a set of rules laid down by a group of insurance regulators. Agents may be required to calculate two different types of indexes to aid in price shopping.
- Net payment index
- Surrender cost index
The net payment index calculates the cost of carrying the policy for ten to twenty years. This can be judged easily by remembering that the lower this number is, the more inexpensive the policy is. This is most helpful if you are more concerned with the death payout than the investment.
On the other hand, the surrender cost index is more useful to those who are concerned with the cash value of the investment. The lower this number is, the better.
The cash surrender value is what you will receive in return if you were to surrender the policy, which is different than the cash accumulation value. If you are checking the prices of universal life policies, if the policies have different premiums and death benefits, the policy with the higher cash surrender value would be the better investment.
The main reason that people purchase life insurance is to know that in the event of their passing, their children and loved ones will be taken care of. Life insurance can also help with the distribution of your estate. Your payout could go to family, charity, or wherever you choose to distribute it.
The main reasons to buy life insurance would be because you have dependents that would be put in a tough position without you providing for them. For example, if you have a spouse, a child, or a parent who is dependent on your income, you should have life insurance.
If you have a spouse and young children, you will need more insurance than someone with older children, because they will be dependents for a longer amount of time than older children. If you are in a position where you and your spouse both earn for the family, then you should both be insured in proportion to the incomes that you garner.
If you have a spouse and older children or no children, you will still want to have life insurance, but you won’t need the same level of insurance as in the first example, just enough to ensure that your spouse will be provided for, to cover your burial expenses, and to settle the debts that you have accumulated.
If you don’t have children or a spouse, you will only need enough insurance to make sure that your burial expenses are covered, unless you would like to have an insurance policy in order to help in the distribution of your estate.
In order to figure out how much insurance you need, you will need to explore your current household expenses, debts, assets, and streams of income. If you need assistance in this, consult either your accountant or financial advisor.
The amount of money that you want to leave behind for your dependents should allow them to use some of the money to maintain their current standard of living, then reinvest another lump sum to ensure that they will be well off in the future.
When attempting to calculate the amount of money that you need to leave behind, be extremely meticulous. If you err low, your family may not receive the help that they need from the insurance company, and if you err the other way, you will be spending more than necessary in insurance premiums.
Our Scarsdale tax preparers here at Herman & Company CPA’s are here for all your financial needs. Please contact us for all inquiries and to receive your free personal finance consultation!
Herman and Company CPA’s proudly serves Bedford Hills NY, Bronxville NY, Harrison NY, Mt. Kisco NY, Larchmont NY, Scarsdale NY, Rye Brook NY, Stamford CT and beyond.