376.714. Contents and form of buyer's guide.
Contents and form of buyer's guide.
376.714. The life insurance buyer's guide shall consist of thefollowing:
(1) The face page of the buyer's guide shall read as follows:
LIFE INSURANCE BUYER'S GUIDE This guide can show you how tosave money when you shop for life insurance. It helps you to:
-Decide how much life insurance you should buy,
-Decide what kind of life insurance policy you need, and
-Compare the cost of similar life insurance policies. Prepared by theNational Association of Insurance Commissioners
Reprinted by (company name)
(month and year of printing)
(2) The buyer's guide shall contain the following language at the bottomof page 2: The National Association of Insurance Commissioners is anassociation of state insurance regulatory officials. This association helpsthe various Insurance Departments to coordinate insurance laws for the benefitof all consumers. You are urged to use this Guide in making a life insurancepurchase.
This Guide Does Not Endorse Any Company or Policy.
(3) The remaining text of the Buyer's Guide shall begin on page 3 asfollows:
BUYING LIFE INSURANCE When you buy life insurance, youwant a policy which fits your needs without costing too much. Your first stepis to decide how much you need, how much you can afford to pay and the kind ofpolicy you want. Then, find out what various companies charge for that kindof policy. You can find important differences in the cost of life insuranceby using the life insurance cost indexes which are described in this guide. Agood life insurance agent or company will be able and willing to help you witheach of these shopping steps.
If you are going to make a good choice when you buy life insurance, youneed to understand which kinds are available. If one kind does not seem tofit your needs, ask about the other kinds which are described in this guide.If you feel that you need more information than is given here, you may want tocheck with a life insurance agent or company or books on life insurance inyour public library.
CHOOSING THE AMOUNT
One way to decide how much life insurance you need is to figure how muchcash and income your dependents would need if you were to die. You shouldthink of life insurance as a source of cash needed for expenses of finalillnesses, paying taxes, mortgages or other debts. It can also provide incomefor your family's living expenses, educational costs and other futureexpenses. Your new policy should come as close as you can afford to making upthe difference between (1) what your dependents would have if you were to dienow, and (2) what they would actually need.
CHOOSING THE RIGHT KIND
All life insurance policies agree to pay an amount of money if you die.But all policies are not the same. There are three basic kinds of lifeinsurance.
1. Term insurance
2. Whole life insurance
3. Endowment insurance
Remember, no matter how fancy the policy title or sales presentationmight appear, all life insurance policies contain one or more of the threebasic kinds. If you are confused about a policy that sounds complicated, askthe agent or company if it combines more than one kind of life insurance. Thefollowing is a brief description of the three basic kinds:
Term Insurance
Term insurance is death protection for a "term" of one or more years.Death benefits will be paid only if you die within that term of years. Terminsurance generally provides the largest immediate death protection for yourpremium dollar.
Some term insurance policies are "renewable" for one or more additionalterms even if your health has changed. Each time you renew the policy for anew term, premiums will be higher. You should check the premiums at olderages and the length of time the policy can be continued.
Some term insurance policies are also "convertible". This means thatbefore the end of the conversion period, you may trade the term policy for awhole life or endowment insurance policy even if you are not in good health.Premiums for the new policy will be higher than you have been paying for theterm insurance.
Whole Life Insurance
Whole life insurance gives death protection for as long as you live. Themost common type is called "straight life" or "ordinary life" insurance, forwhich you pay the same premiums for as long as you live. These premiums canbe several times higher than you would pay initially for the same amount ofterm insurance. But they are smaller than the premiums you would eventuallypay if you were to keep renewing a term insurance policy until your lateryears.
Some whole life policies let you pay premiums for a shorter period suchas 20 years, or until age 65. Premiums for these policies are higher than forordinary life insurance since the premium payments are squeezed into a shorterperiod.
Although you pay higher premiums, to begin with, for whole life insurancethan for term insurance, whole life insurance policies develop "cash values"which you may have if you stop paying premiums. You can generally either takethe cash, or use it to buy some continuing insurance protection. Technicallyspeaking, these values are called "nonforfeiture benefits". This refers tobenefits you do not lose (or "forfeit") when you stop paying premiums. Theamount of these benefits depends on the kind of policy you have, its size, andhow long you have owned it.
A policy with cash values may also be used as collateral for a loan. Ifyou borrow from the life insurance company, the rate of interest is shown inyour policy. Any money which you owe on a policy loan would be deducted fromthe benefits if you were to die, or from the cash value if you were to stoppaying premiums.
Endowment Insurance
An endowment insurance policy pays a sum or income to you -- thepolicyholder -- if you live to a certain age. If you were to die before then,the death benefit would be paid to your beneficiary. Premiums and cash valuesfor endowment insurance are higher than for the same amount of whole lifeinsurance. Thus endowment insurance gives you the least amount of deathprotection for your premium dollar.
FINDING A LOW COST POLICY
After you have decided which kind of life insurance fits your needs, lookfor a good buy. Your chances of finding a good buy are better if you use twotypes of index numbers that have been developed to aid in shopping for lifeinsurance. One is called the "Surrender Cost Index" and the other is the "NetPayment Cost Index". It will be worth your time to try to understand howthese indexes are used, but in any event, use them only for comparing therelative costs of similar policies. LOOK FOR POLICIES WITH LOW COST INDEXNUMBERS.
What is Cost?
"Cost" is the difference between what you pay and what you get back. Ifyou pay a premium for life insurance and get nothing back, your cost for thedeath protection is the premium. If you pay a premium and get something backlater on, such as a cash value, your cost is smaller than the premium.
The cost of some policies can also be reduced by dividends; these arecalled "participating" policies. Companies may tell you what their currentdividends are, but the size of future dividends is unknown today and cannot beguaranteed. Dividends actually paid are set each year by the company.
Some policies do not pay dividends. These are called "guaranteed cost"or "nonparticipating" policies. Every feature of a guaranteed cost policy isfixed so that you know in advance what your future cost will be.
The premiums and cash values of a participating policy are guaranteed,but the dividends are not. Premiums for participating policies are typicallyhigher than for guaranteed cost policies, but the cost to you may be higher orlower, depending on the dividends actually paid.
What Are Cost Indexes?
In order to compare the cost of policies, you need to look at:
1. Premiums
2. Cash values
3. Dividends Cost indexes use one or more of these factors to give you a convenient way tocompare relative costs of similar policies. When you compare costs, anadjustment must be made to take into account that money is paid and receivedat different times. It is not enough to just add up the premiums you will payand to subtract the cash values and dividends you expect to get back. Theseindexes take care of the arithmetic for you. Instead of having to add,subtract, multiply and divide many numbers yourself, you just compare theindex numbers which you can get from life insurance agents and companies:
1. LIFE INSURANCE SURRENDER COST INDEX -- This index is useful if youconsider the level of the cash values to be of primary importance to you. Ithelps you compare costs if at some future point in time, such as 10 or 20years, you were to surrender the policy and take its cash value.
2. LIFE INSURANCE NET PAYMENT COST INDEX -- This index is useful if yourmain concern is the benefits that are to be paid at your death and if thelevel of cash values is of secondary importance to you. It helps you comparecosts at some future point in time, such as 10 or 20 years, if you continuepaying premiums on your policy and do not take its cash value.
* * *
There is another number called the Equivalent Level Annual Dividend. Itshows the part dividends play in determining the cost index of a participatingpolicy. Adding a policy's Equivalent Level Annual Dividend to its cost indexallows you to compare total costs of similar policies before deductingdividends. However, if you make any cost comparisons of a participatingpolicy with a nonparticipating policy, remember that the total cost of theparticipating policy will be reduced by dividends, but the cost of thenonparticipating policy will not change.
How Do I Use Cost Indexes?
The most important thing to remember when using cost indexes is that apolicy with a small index number is generally a better buy than a comparablepolicy with a larger index number. The following rules are also important:
(1) Cost comparisons should only be made between similar plans of lifeinsurance. Similar plans are those which provide essentially the same basicbenefits and require premium payments for approximately the same period oftime. The closer policies are to being identical, the more reliable the costcomparison will be.
(2) Compare index numbers only for the kind of policy, for your age andfor the amount you intend to buy. Since no one company offers the lowest costfor all types of insurance at all ages and for all amounts of insurance, it isimportant that you get the indexes for the actual policy, age and amount whichyou intend to buy. Just because a "shopper's guide" tells you that onecompany's policy is a good buy for a particular age and amount, you should notassume that all of that company's policies are equally good buys.
(3) Small differences in index numbers could be offset by other policyfeatures, or differences in the quality of service you may expect from thecompany or its agent. Therefore, when you find small differences in costindexes, your choice should be based on something other than cost.
(4) In any event, you will need other information on which to base yourpurchase decision. Be sure you can afford the premiums, and that youunderstand its cash values, dividends and death benefits. You should alsomake a judgment on how well the life insurance company or agent will provideservice in the future, to you as a policyholder.
(5) These life insurance cost indexes apply to new policies and shouldnot be used to determine whether you should drop a policy you have alreadyowned for awhile, in favor of a new one. If such a replacement is suggested,you should ask for information from the company which issued the old policybefore you take action.
IMPORTANT THINGS TO REMEMBER -- A SUMMARY
The first decision you must make when buying a life insurance policy ischoosing a policy whose benefits and premiums most closely meet your needs andability to pay. Next, find a policy which is also a relatively good buy. Ifyou compare Surrender Cost Indexes and Net Payment Cost Indexes of similarcompeting policies, your chances of finding a relatively good buy will bebetter than if you do not shop. REMEMBER, LOOK FOR POLICIES WITH LOWER COSTINDEX NUMBERS. A good life insurance agent can help you to choose the amountof life insurance and kind of policy you want and will give you cost indexesso that you can make cost comparisons of similar policies.
Don't buy life insurance unless you intend to stick with it. A policywhich is a good buy when held for 20 years can be very costly if you quitduring the early years of the policy. If you surrender such a policy duringthe first few years, you may get little or nothing back and much of yourpremium may have been used for company expenses.
Read your new policy carefully, and ask the agent or company for anexplanation of anything you do not understand. Whatever you decide now, it isimportant to review your life insurance program every few years to keep upwith changes in your income and responsibilities.
(L. 1979 H.B. 508 § 8)