Coverage guide · life

Life cover in two families, and the questions that separate them

Life insurance is not one product, and two quotes can describe different kinds of policy. The California Department of Insurance reduces the field to a starting fork: there are two basic types of life insurance, term life insurance and cash value life insurance, with many policy variations between them.

Term: a stated period and a face value

Term policies provide life insurance for a specified period of time, which the Department says could be as short as one year, or a set span such as 5, 10 or 20 years, or coverage to a specified age. Die during the term and the company pays the face value to your beneficiary. Live beyond the term you selected and, in the Department’s words, no benefit is payable. As a rule, it adds, term policies offer a death benefit with no savings element or cash value — and that hedge is the Department’s, not a rounding of it.

Two practical warnings travel with the form. The cost of term insurance increases as you get older, which the Department says may make it more expensive than cash value insurance in the long run. And today’s term policies usually carry two sets of premiums: guaranteed maximum premiums and current premiums. Current premiums are usually much lower but can be changed by the insurer, which cannot raise them above the guaranteed maximum shown in the policy. Some term coverage can be converted to cash value insurance up to a specified age without a physical examination, though the converted premiums will most likely be higher.

Cash value: a death benefit with an accumulation feature

Cash value insurance combines death benefits with a cash value accumulation feature. The buyer pays more in the early years than for term, and the premium not needed to pay for the cost of the death benefit accumulates with interest within the policy. Surrender the policy before death and there may be a cash value paid to the owner, less any outstanding loans placed against it. The Department advises making sure the agent or broker provides the method by which the cash value is determined, based on the policy’s guaranteed value, and states flatly that it is not a good idea to buy a cash value policy if you plan to surrender early, because of substantial surrender penalties. It also notes that a policy lapse or surrender may create a taxable event and may generate a Form 1099, that Form 1099s are sent to the IRS for tax purposes, and that you should be sure to check with your tax advisor.

Group cover, and the conversion right California requires

Many employers offer life insurance under a group plan and sometimes pay part or all of the premium; a medical exam is usually not required and the cover can be less expensive than an individual purchase. The Department records a right attached to it that is easy to miss on the way out of a job: under California law, group life insurance must be convertible to permanent insurance at the insured’s option when their coverage under the group policy terminates. The converted policy, it cautions, will probably be much more expensive than the group insurance was.

The free look, and the days the Code actually names

Every individual life policy must carry a notice saying that after the owner receives it, the policy may be returned for cancellation by delivering or mailing it to the insurer or to the agent through whom it was purchased. That period, under Insurance Code section 10127.9, shall not be less than 10 days nor more than 30 days. Senior citizens must be given a notice printed on or attached to the policy indicating a period of no less than 30 days for an individual life policy or annuity contract, with a full refund on return. The Department’s glossary states the general shape of the right the same way: a free look is the right of the policy owner to have a period of ten or more days to examine a policy and, if not satisfied, return it for a full refund of all amounts paid.

Replacement, and the sentences that should slow a conversation down

Replacing an existing policy is where the Department gets specific about behaviour. It lists things to beware of in an agent: suggesting that using the cash value from your current policy to fund the premiums on a new one offers a demonstrable advantage to you; advising you not to speak to anyone from your current insurer about the change being proposed; asking you to sign incomplete or blank forms; or speaking negatively about another agent or company. Its stated defense against an ill-advised replacement is knowledge — understanding the current policy, the proposed one, the company and the representative before anything is signed.