New York State Life Insurance

Buying life insurance can be confusing, and you want to be sure you get the best policy for your needs. If you live in the State of New York, here are answers to some of the questions you might have.

The purpose of life insurance is to replace your income if you should die prematurely. If other people, such as a spouse, children, or even elderly parents, depend on your income, and your death would cause a hardship for those dependents, you probably need life insurance.

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How much life insurance do I need?

Think about the standard of living you want your dependents to have, and other sources of income that might be available to them. The difference in these two numbers is the amount of life insurance you need.

Specifically, you may want your life insurance policy to pay off your mortgage, pay all your other bills, cover funeral expenses, pay for college for the children, and pay for retirement for your spouse. You may also want to leave money to charity, or provide an inheritance for your children beyond paying for their living expenses and college.

What kind of life insurance is best?

There are two basic kinds of life insurance: term insurance and permanent insurance. Sometimes you will hear permanent insurance referred to as whole life. The best kind of life insurance for you will depend on your circumstances.

Term Insurance

Term life insurance provides insurance coverage for a specified period of time. You can get a term insurance policy that covers you for as little as one year, for as much as 30 to 40 years, or up to a specific age, such as 65.

Most term insurance policies have a level premium, meaning that the premium is the same each year for the life of the policy. In this case, the shorter the term, the lower the premium. So, the annual premium for a 10-year term policy will be less than the premium for a 30-year term policy. This is because the cost for the company to insure you goes up each year, because the probability of you dying is greater each year.

With a term policy, you are only covered for the term of the policy, assuming you continue to pay the premiums. If you stop paying the premiums, the policy will lapse and you will not be covered. If you die, the insurance company will pay the face value of the policy to the beneficiary you name. If you do not die during the term of the policy, the policy will expire and you will get nothing.

Term insurance is useful for people who want insurance coverage for a specific period of time, such as the term of their mortgage or when their children are young. You can get a lot of coverage for a reasonable premium with term insurance.

There are some specialized types of term insurance.

• Decreasing term insurance has a level premium, but the amount of insurance declines over time. This type of insurance is used to protect a mortgage, so the amount of insurance decreases as the mortgage is paid down.
• Renewable term is a one-year policy that will automatically renew each year without requiring a new application. The premium will increase each year as you age, but if your health deteriorates you won’t need to reapply and risk being rejected for poor health.
• Convertible term lets you exchange your term policy for a permanent policy during a certain period of time, without additional underwriting. Your premium will be based only on your age, without requiring you to provide health information.
• Adjustable premium insurance lets the insurer give you a lower premium at the start, with the ability to increase the premium in future years. The policy will state a maximum guaranteed premium, so you will know what the highest possible premium will be.

Permanent Insurance

Permanent insurance, sometimes called whole life insurance or cash value life insurance, is intended to provide coverage for your whole life. This type of insurance has a level premium which is calculated based on your life expectancy.

Since the cost to insure you at younger ages is much less than the premium, the excess money is invested. This generates cash value in the policy.

The cash value can be used in one of three ways: it can remain in the policy, it can be used to pay future premiums, or it can be withdrawn by the policy owner.

Keep in mind that the idea behind these excess premiums is that they will help to cover the increasing cost of insurance as you age, so be sure that you don’t withdraw too much from your policy and jeopardize your benefit later in life.

You can also take a loan against a cash value policy. If you borrow against the cash value in your policy, you will be charged interest, which you will pay back to the policy. If you die with an outstanding loan on your policy, the death benefit will be reduced by the amount of the loan.

In New York State, there are six types of whole life insurance.

• Participating whole life pays dividends based on the insurance company’s performance. Dividends may be paid in cash, left in the policy to accrue interest, used to reduce the amount of the premium or used to purchase additional insurance, increasing the face value of the policy.
• Non-participating whole life insurance has a level premium and face value. This type of policy has lower costs and a lower premium than some other kinds of whole life insurance.
• Indeterminate premium whole life has adjustable premiums, which can change as the insured person ages and the company’s costs change. The policy includes a guaranteed maximum premium, so you will know how high the premium can go.
• Economatic whole live insurance includes some participating whole life insurance, along with supplemental insurance paid for with dividends. If the dividends cannot pay for the estimated amount of additional paid up insurance, the coverage amount may decrease later in life.
• Single premium whole life insurance is a policy that is paid for with one premium payment when the policy is taken out. The amount of insurance is based on the insured’s age and amount of the premium payment.
• Limited payment whole life requires premium payments for a limited period of time. Once those payments have been made, the policy is considered paid up.

Other Types of Insurance

There are also other types of permanent insurance, including universal life and variable life.

Universal life is a sort of hybrid between term and whole life. Premium payments are credited to a cash value account, and the monies needed to pay the premium are deducted from this account. The remaining monies earn interest which remains in the cash account.

In the early years of the policy, the premiums are greater than the cost of insurance, so the money in the cash account builds up. As the insured ages, the cost of insurance increases. The important thing to remember about universal life is that it is not guaranteed, so it is possible that the cash account may some day become insufficient to pay the premiums and keep your insurance in place.

Variable life is a type of universal life insurance. Instead of investing the excess cash in a fixed interest account, it is invested in mutual funds or some other variable-return investment.

As with universal life, the risk is that the investments will not have a sufficient return to support the premium payments in later years.

Life insurance companies will come out with new kinds of insurance products from time to time, but they are usually based on either term or permanent coverage. The New York State Department of Financial Services has to approve any new type of insurance policy before it can be issued to consumers. If you don’t understand the type of coverage you are buying, ask your agent to explain it.

For more information on life insurance in New York State, visit the New York State Department of Financial Services. To start your search for life insurance policies, use the FREE comparison tool below.