INSURANCE

Question: How do I change the beneficiary on my life insurance policy?

Answer: Changing the beneficiary on a life insurance policy is generally a simple matter. You'll need to contact your insurance company and follow its instructions for executing a change of beneficiary. Beneficiary change requests must be in writing, usually on a form that your insurer will provide. Some insurance companies actually make a physical change to your insurance policy (called an endorsement) to reflect the new beneficiary, but this is unusual.

Sometimes changing the beneficiary on your life insurance policy can be more difficult. If you have designated an irrevocable beneficiary, you are not allowed to make changes to this designation without first getting the current beneficiary's consent. If you live in a community property state, your spouse must give his or her consent before you can name anyone else as your beneficiary.

If you are changing your beneficiary as a result of divorce, make sure you comply with the terms of your divorce decree. Your settlement agreement may require you to maintain life insurance coverage with your ex-spouse as beneficiary. In this case, you cannot legally change the beneficiary. Keep in mind, also, that if you designated your spouse as beneficiary while you were married, divorce does not change this. If you do not want your ex-spouse to receive the benefits of your life insurance policy (assuming that your divorce decree does not require you to maintain that coverage), you will need to execute a change of beneficiary.

Whatever you do, don't make the mistake of thinking that you can change the beneficiary of your life insurance policy via your will. A change of beneficiary specified in your will does NOT override the beneficiary designation of your life insurance policy. If you want to change the beneficiary, make sure you follow the procedures established by your insurance company.

Question: Can I name someone other than a relative as the beneficiary of my life insurance policy?

Answer: Although it is typical for an individual to name his or her spouse, child, parent, or other relative as the life insurance beneficiary, non-relatives can also be named. For instance, you can designate your estate, trust, business partner, lender, or domestic partner as beneficiary of your life insurance policy. Check the laws in your state, though. A few states require that under certain circumstances an unrelated beneficiary have an insurable interest. An insurable interest exists when one party has a financial interest in another party's life. The beneficiary of a life insurance policy must expect to suffer a financial loss if the insured dies.

Before designating a beneficiary, you should also make sure that you understand all of the tax implications. Life insurance proceeds are generally not income taxable, but there may be other considerations. For example, naming your estate as the beneficiary of your life insurance policy will increase the size of your estate and may necessitate probate and create an estate tax liability. Consult with an attorney or accountant for more information.

Question: I don't smoke cigarettes, but I smoke cigars occasionally. Will I have to pay smokers' rates for life insurance?

Answer: Because of the increased mortality risk associated with smoking, smokers almost always pay more for life insurance than their nonsmoking counterparts. Some life insurance companies distinguish between moderate smokers (20 or fewer cigarettes per day) and heavy smokers (more than 20 cigarettes per day) and offer somewhat lower rates for those who smoke less. The recent cigar craze has now raised numerous questions about how to classify cigar smokers. But unfortunately, there is not yet an industry-wide consensus on this issue.

Note: Life insurance companies now ask about the use of any nicotine-containing product, including chewing tobacco.

The ways in which life insurance companies categorize treatment of cigar smokers literally vary from one extreme to the other. A few companies have taken the position that all forms of tobacco are equally harmful, and thus charge cigar smokers and cigarette smokers the same rates. (However, there may be exceptions for very occasional use; for example, less than 12 cigars per year.) Other insurance companies take a middle-of-the-road position, charging cigar smokers more than nonsmokers but less than the heaviest-smoking class. Some insurance companies even consider cigar smokers to be nonsmokers, offering the lower rates typically reserved for those who don't smoke cigarettes at all.

So, if you're a cigar smoker, try calling your insurance agent or doing some research to find the best life insurance rates available. You should probably act quickly, too, as insurance companies could change their rules if clinical research determines that cigar smoking is more dangerous than previously believed.

Insurance companies will typically reevaluate your rates if you quit smoking for at least a year - something to keep in mind if you're more just a part of the cigar trend than a truly dedicated stogie smoker.

Question: My life insurance company has become insolvent. What should I do?

Answer: First of all, don't panic. Chances are you're still at least partially covered. Most states have established "guaranty associations" or "guaranty funds" that cover insurance company failures; in much the same way as the FDIC covers bank failures. Although the coverage provided by a guaranty association or guaranty fund is limited (typically $300,000 for auto, home, and life insurance policies) and depends upon the financial resources of the guaranty association, in most cases it should prevent you from being left completely without protection if your insurance company goes belly-up. Typically, the state insurance regulators will persuade another insurance company to take over the policies of the company being liquidated. You will most likely still have coverage, but you may not receive all of the benefits you had hoped for (e.g., projected interest rates on a cash value life insurance policy).

Next, just follow instructions. If your insurance company goes into receivership, you should be contacted by the insurance company itself, the company's receiver (usually the state insurance commissioner), or by the guaranty association. The communication you receive will tell you what you need to do and often contains the forms you need to move your policy to another insurance company. If you don't hear from someone soon after the insurance company is declared insolvent or taken over by a receiver, call the company, your agent, your state's guaranty association, or the state insurance department.

If you decide to purchase a new policy elsewhere, do your homework first. Although any company can go bankrupt, it's less likely when the company is financially stable. Insurance company rating information is available through several independent rating agencies, such as Moody's Standard and Poor's and A.M. Best. To get rating information, contact the rating service directly either through its website or by calling its customer service department. If you don't want to look up the information yourself, ask your insurance agent or financial planner to do some research for you.

Question: I have a disabled child. Is there any government or private insurance product that will help me save for and fund his future care?

Answer: Although many disabled children and adults receive benefits from two government programs, Supplemental Security Income (SSI) for disabled individuals and Medicaid, no government or private insurance product has been created specifically to save for and fund the future care of disabled children. However, one very common insurance product, life insurance, can play a critical role in securing your child's financial future.

Term or permanent (cash value) life insurance can be used to fund a special needs trust, a legal arrangement that allows you to provide for your disabled child throughout his life (even after you die) without risking his eligibility for SSI or Medicaid. To receive SSI and Medicaid, your child must have minimal income and assets, which means that you potentially jeopardize his eligibility for benefits every time you save a dime towards his future care.

Because the funds in a special needs trust are managed by a trustee and legally do not belong to your child, they are not considered "countable" for SSI and Medicaid eligibility purposes. However, funds in the trust must supplement, rather than replace, government benefits. They must be used for expenses, like clothing and transportation, which are not covered by government programs.

Once the trust is created, you can fund it using any asset you choose (e.g., cash, stocks, personal property, etc.), but many people choose to fund a special needs trust with life insurance. The trust can own a life insurance policy or can be named beneficiary of your policy in the event that you die. Many special needs trusts are funded (at least in part) by "survivorship" or "second to die" insurance because it's less expensive than other types of life insurance, an important consideration if you're trying to find room in your budget to save for your child's future care. However, talk to a professional advisor. Other options are available that may better suit your needs.

Question: Can I donate my life insurance policy to my favorite charity?

Answer: Yes, you can donate your life insurance policy to charity. In fact, insurance can be a good way to leverage affordable premium payments into a substantial future donation. There are several different ways you can give your life insurance policy (or the death benefits from it), to charity. Each method has different advantages and disadvantages to both you and the charity.

One way to help your favorite charity is to simply name the charity as a beneficiary on your policy. When you die, the charity will receive the death benefits. A disadvantage of this approach is that you will not get to take the charitable income tax deduction for the premium payments that you make. With this method, there are no gift tax implications. The proceeds of the policy will be includable in your taxable estate, but you will receive an offsetting estate tax charitable deduction.

Another way to help your favorite charity is to donate an existing life insurance policy to the charity. You will be able to claim an income tax deduction for either the tax basis or the fair market value of the policy (whichever is less) for the year of the donation. You can then make deductible cash gifts to the charity, which the charity can use to make the premium payments. The proceeds of the policy may be includable in your taxable estate, but you will receive an offsetting estate tax charitable deduction.

A third way to donate a life insurance policy to charity is to donate money to the charity and have the charity buy the life insurance policy. You make income and gift-tax-deductible donations to the charity, and the charity makes the premium payments. The proceeds of the policy will not be included in your estate for estate tax purposes.

Note: Some states' laws do not consider a charity to have an insurable interest in a donor and will not allow a charity to purchase a life insurance policy on a donor.

There are a number of different strategies from which to choose, as well as a number of tax rules and differing state laws that may influence your decision. If you are considering a substantial gift of life insurance to a charity, ask your attorney or tax advisor to help you decide on the best approach.

Question: What are the advantages and disadvantages of buying life insurance coverage through my employer vs. buying through a separate company?

Answer:

A number of companies offer their workers employer-sponsored life insurance coverage, generally purchased through an outside insurance company, as part of the employee benefit package. The employer does not take out a separate life insurance policy on each individual employee, but rather purchases a single group policy (subject to one group premium) that provides coverage for all employees who choose to participate.

Advantages.  This arrangement may have certain benefits for your employer (e.g., a tax deduction) and, more importantly from your perspective, can be a relatively inexpensive and hassle-free way to obtain some of the life insurance coverage you need. In some cases, an employer may go so far as to shoulder the entire cost of a group policy. Even if you have to pay part of the group premium, the amount will probably be less than the premium you would pay if you bought a separate policy directly from an insurance company. That's because, in the case of a group policy, the insurance company's risk is spread out among the members of the group and therefore reduced. For the same reason, you generally don't have to submit to the medical exams, probing questions, and other screening processes that are often required when you apply for an individual policy. Insurance companies know that, even if some of the individuals covered under a group policy are poor risks, the other members of the group will probably make up for it due to the law of averages.

Disadvantages.  One disadvantage to consider is that it's difficult to obtain a customized policy that meets your individual needs. The amount of coverage, for example, may be considerably less than what you require to be adequately protected. If so, your employer's group policy may give you the option of purchasing more coverage for an additional cost. And you can always shop around for a policy to supplement your employer's coverage.

Finally, bear in mind that if you leave your job, any life insurance coverage obtained through that employer will probably end with your departure. This could leave you under-protected or, worse yet, without any coverage at all at a time when it may be difficult for you to qualify for an individual policy (due to age, changes in health, etc.). With this in mind, it may not be prudent to rely on an employer's group policy as your sole or primary source of life insurance coverage (although you can sometimes convert membership in a group policy to an individual policy upon leaving the group).

Question: What does insurable interest mean on a life insurance policy?

Answer: If you want to buy a life insurance policy on someone else's life, you must have an interest in that person remaining alive, or expect emotional or financial loss from that person's death. This is called an insurable interest. Without this requirement, it would be very easy to make a living by purchasing life insurance policies on elderly strangers, and then collecting the proceeds when they died. The insurable interest requirement also prevents people from buying a life insurance policy on someone and then causing or hastening that person's death.

When you buy insurance on your own life, you are assumed to have an insurable interest. If you are buying a policy on someone else's life, an insurable interest can typically be established if you have a sufficiently strong relationship with that person based on blood, marriage, or monetary interest. To put it simply, they have to be worth more to you alive than dead!

Husband-wife relationships and parent-child relationships are almost always sufficient to create an insurable interest. In addition, grandparent-grandchild relationships and sibling relationships are frequently considered sufficient for establishing an insurable interest. The ties between cousins, aunts/uncles and nieces/nephews, and other more distant relatives don't automatically give rise to insurable interests because their emotional and financial bonds may be less strong.

Certain relationships founded on monetary interests can also create insurable interests. For example, a creditor is considered to have an insurable interest in a debtor's life. Even though death doesn't extinguish the debtor's obligation to repay a loan, the creditor faces potential harm if the debtor's estate cannot repay the loan. Other examples include the relationship between a business and a key employee, or the relationships among partners in a partnership or stockholders in a closely held corporation. The death of a CEO, general partner, or active stockholder can cause financial disruption to the business and harm the other business owners.

The insurable interest must exist at the time you enter into the life insurance contract, not at the time of the loss or harm. In other words, you must have an insurable interest at the time you take out the policy. However, the insurable interest generally doesn't have to remain at the time of that person's death.

Question: I'm single. Do I need life insurance?

Answer: Single people often think they don't need life insurance, and in many cases, they are right. However, there are many factors that determine your need for life insurance; marital status is just one.

First of all, do you have any dependents? If you have children, or if you provide support for a parent or grandparent, your death could create a serious financial hardship for these dependents. Life insurance can provide a continued stream of income for your loved ones if you die prematurely. It can also provide peace of mind for you, knowing that they will be taken care of when you're gone.

Do you have a mortgage or other loans that are jointly held with a cosigner? If so, your death would leave the cosigner responsible for the entire debt. You might want to consider purchasing at least enough life insurance to cover these debts in the event of your death. If you have debts for which you alone are responsible, your creditors can make a claim for payment against any assets in your estate.

Are you at risk for any serious medical conditions? If, for example, your family medical history includes certain genetic conditions (diabetes, certain types of cancer, etc.) it may make sense to purchase life insurance while you are young and healthy. Purchasing life insurance after you develop such a condition could be difficult, or even impossible. If you choose to buy insurance for this reason, consider adding a guaranteed insurability rider to your policy. This rider guarantees you the right to purchase additional insurance at specified times, without having to provide proof of insurability.

If you died tomorrow, would you leave enough to cover your funeral expenses? If not, who would be responsible for paying? For many families, even a relatively simple funeral can create a major financial burden. For this reason alone, you might consider purchasing a small life insurance policy, or even a simple burial policy. As an alternative, you could invest the premiums you would spend on such a policy, and make sure your family knows this investment is earmarked for your final expenses, should the need arise.

Even if you determine that you don't need life insurance, make sure your other insurance needs are covered. You may not realize it, but disability insurance is just as important as life insurance. Statistically speaking, you are much more likely to become disabled than to die prematurely. Disability insurance can replace lost income if you are unable to work due to serious illness or injury.

Question: Can I do anything to lower the cost of life insurance?

Answer: The price you pay for life insurance depends on your age, your health, and your lifestyle. So if you are older, you have health problems, and you are a smoker, you will always pay more for life insurance than someone who is younger, healthier, and a nonsmoker. That being said, there are ways to lower your life insurance premiums, even if you fall into a higher-risk category. Following are some simple suggestions for life insurance and term life insurance.

1. Round up.  Often, you'll actually pay less for a little more life insurance as you approach multiples of $250,000 in coverage. For example, $240,000 of life insurance coverage might cost $275 per year, while $250,000 in coverage might cost only $260 per year. Find out the rate per $1,000 of coverage, which often drops once you pass a certain level of coverage. This figure will help you determine how to get the most life insurance for the least money.

2. Find a "friendly" life insurance company.  Some life insurance companies do offer competitive rates for conditions such as diabetes, heart disease, and cancer. These companies employ underwriters who are trained in analyzing people on a case-by-case basis, rather than lumping everyone with a particular condition into one group.

3. Consider quitting.  Everyone knows that you'll save money on your insurance premiums if you quit smoking, start exercising, and lose weight. But you might be surprised to find out just how much you can save. Many insurance companies charge smokers double the nonsmoker rate for insurance. (Don't even think about lying, though. If you end up dying of a smoking-related illness, your insurance company can opt not to pay your death benefit.) Similar discounts can apply if you lose enough weight to fall into a preferred category.

4. Forget the riders.  While riders may add value to your life insurance policy in certain situations, many are simply an unnecessary expense. Paying extra money to cover an event that's almost guaranteed not to happen just doesn't make sense when you're trying to cut costs. Additionally, many riders simply provide duplicate coverage once your overall insurance needs are met.

5. Find out about hidden fees.  You may not realize it, but your life insurance could end up costing you more if you choose to make "convenient monthly payments" rather than paying the entire premium up front. Before you choose a payment plan, compare the single payment price to the total cost of the monthly payments. Do the math, and decide whether the convenience is worthwhile.

6. Shop around.  When it comes to insurance, it pays to shop around because premiums can vary widely. And thanks to the Internet, it's now easier than ever. Save time by going to a website where you can compare multiple insurance companies at once.

Question: What is a life insurance medical exam and how should I prepare for it?

Answer: Sometimes when applying for a life insurance policy, you may be asked to take a medical exam. Generally, you won't have to take a medical exam if you're under age 40 and applying for life insurance coverage of less than $100,000. However, the older you are, the less life insurance you can buy without a medical exam. Of course, these figures also depend on your health history and the underwriting guidelines of the insurance company you choose.

A typical medical exam may include a basic physical, blood work, and urine tests. Some insurance companies also require EKGs and/or treadmill EKGs (stress tests), especially for large life insurance policies. You'll also have to provide information on your medical history, including the names of doctors you've seen, dates you saw them, and any treatment recommended. A nurse or doctor (often an independent contractor) who is paid by the insurance company will normally conduct the exam.

If you have a medical condition, there's really nothing you can do to hide it. In fact, you shouldn't even try. Insurance companies have access to an amazing amount of medical information through the Medical Information Bureau, so even if you attempt to obscure the facts, there's a good chance an insurance company will find the information it needs. In addition, if the insurance company discovers you have withheld information, it will look at everything else much more closely. And if you died as a result of the illness, your insurance company may opt not to pay your death benefit.

There are a number of simple steps you can take to make sure you get the best possible results at your medical exam:

• Get a good night's sleep the night before the exam
• Fast for eight hours before the exam if possible to ensure the most accurate results
• Don't smoke for at least one hour before the exam
• Avoid caffeine for at least one hour before the exam
• Avoid alcohol for at least eight hours before the exam
• Don't engage in strenuous exercise for 24 hours before the exam
• Limit your consumption of salt and cholesterol for 24 hours before the exam
• Cancel the exam if you get sick - even a minor infection can distort the results.

Question: I'm about to retire and start receiving pension benefits. Should I elect a single life annuity or a joint and survivor annuity?

Answer: First, make sure you understand the difference between the two. With a single life annuity, you receive pension benefits for life, then all benefits stop when you die. With a joint and survivor annuity, you receive reduced benefits for life, and then your spouse receives "survivor" benefits for life after you die. These survivor benefits are typically a percentage (e.g., 50, 75, or 100 percent) of the benefits you received prior to death.

Choosing between these payout options can sometimes be a no-brainer. Since the joint and survivor annuity is designed to provide for a surviving spouse, it's usually not an option if you're single. And if you're married, you typically can't elect a single life annuity unless your spouse agrees to waive the joint and survivor annuity. Keep in mind, too, that a single life annuity makes distributions only until you die, and therefore provides no benefits for your surviving spouse.

That's why even if your spouse agrees to waive his or her right to a joint and survivor annuity, the joint and survivor option may still be the best choice if you want to be certain your spouse will be taken care of. The joint and survivor annuity can be especially attractive if choosing this option will also entitle your spouse to other benefits, such as health insurance. Furthermore, it may not even be a problem if the joint and survivor annuity will pay you smaller benefits during your life if you have other sources of income.

But if smaller benefits will result in an income shortfall, you may be better off choosing the single life annuity to maximize your pension benefits. To make up for the lack of survivor benefits, there are several ways you can protect your spouse. You can leave your spouse assets that he or she can draw on for income. Or, if such assets won't be enough to meet your spouse's needs, you can buy life insurance. Your surviving spouse will then receive insurance proceeds that can be used to provide an adequate income stream. When available, you may also choose a settlement option known as lifetime with period-certain guarantee. In this case, you receive annuity payments for a specified number of years. If you die during this period, then your spouse (as beneficiary) would receive the payments for the remainder of the period.

The best strategy for you depends largely on your individual circumstances. Don't elect either a single life annuity or a joint and survivor annuity until you've talked with your professional advisors.

Question: My insurance agent advised me to convert part of my term life insurance to permanent life insurance. How does this work?

Answer: If you own convertible term life insurance, your policy contains a provision that allows you to convert the policy to permanent life insurance (cash value insurance) such as whole life, variable life, or universal life. Convertible term policies typically state that conversion must occur within a certain time after the policy is issued, or before you reach a certain age. Once the policy is converted, you enjoy all the benefits of cash value life insurance, including lifetime coverage, a more stabilized premium structure, and the tax-favored buildup of cash value. (You will pay a higher premium for the cash value insurance.) And, you won't be required to provide proof of insurability at the time of conversion.

For instance, if you have a $100,000 term life insurance policy, you can opt to convert $50,000 to permanent life insurance while keeping $50,000 in term life insurance. Then, you can either keep the remaining term insurance until the term period expires, or later convert the $50,000 term policy to permanent life insurance, depending upon your needs.

The premium you pay for the permanent life insurance policy will usually be based on your age at the time of conversion (attained age), but in some cases it may be based on your age when the original policy was purchased (original age). Ask your insurance agent for details.

Question: I'm unhappy with the rate of return I'm receiving on my permanent life insurance policy. Should I change or replace the policy for another?

Answer: First, you should consider the purpose for which you bought the life insurance policy. For example, was it to provide death benefits to your dependents or to serve as the conservative part of your investment portfolio? If you are disappointed with the financial performance of your permanent life insurance policy, you may decide to exchange your policy for another at the same company or replace your policy by taking out a new one with another insurance company. In either case, you must weigh the potential for greater returns against the costs associated with switching policies. Ask either your current insurance agent or a new independent agent to assist you with the needed research and comparisons.

Your unhappiness with the rate of return you're receiving may be a legitimate reason for exchanging or replacing your policy. But it would make little sense to purchase a new policy containing a higher investment return if those higher proceeds are offset by increased fees. For instance, when you purchase a new policy, new agent commissions and transaction fees are generated, reducing the growth of your policy's cash value over the first several years. When you cancel your old policy, you may also be required to pay a surrender charge to compensate the company for deferred expenses.

Keep in mind that when you switch to a new policy, you may end up paying a higher premium if your insurance company requires you to take another medical examination. Another medical exam will almost certainly happen if you're replacing your policy with one at another company, and it may happen if you're exchanging your policy through your current insurance company. Because you are now older, you may pay a higher premium for your new policy, especially if medical problems have arisen since your old policy was issued.

Before exchanging or replacing your current policy, ask your insurance company if there are ways to modify its provisions to result in a better rate of return, such as reallocating the investment subaccounts in a variable policy or reducing the number of riders (e.g., dependent coverage). But if you do decide to exchange or replace your policy, make sure that the new policy is issued before terminating your old one. Otherwise, you may be left without the coverage you need if your application is declined. The tax code allows you to exchange one life insurance policy for another without triggering current tax liability. However, you must follow the IRS's rules when making the exchange.

Question: Do I need to buy a separate life insurance policy for my child?

Answer: If you want life insurance coverage for your child, you may be able to add a child death benefit rider (usually limited to $5,000 or $10,000) to an existing policy on your own life. Otherwise, you'll probably need to buy a separate policy on your child's life.

But is it a good idea to insure your child's life? In some cases, yes. Term policies for children typically carry small premiums. In addition, your employer's group policy may include inexpensive term coverage for your dependents. Either one of these options can provide you with some peace of mind at a relatively low cost. In most cases, however, it's better to wait until your child reaches adulthood to start thinking about life insurance.

Why? Because the main purpose of life insurance is to replace lost income when a person dies. Unless your child is a movie star or a model, he or she is likely earning little or no income. His or her death would certainly be a tragedy, but it would probably not cause your family any financial hardship. You would have to pay for your child's funeral expenses, but buying a life insurance policy just to cover those costs may not make sense. Instead, consider saving or investing the money you would spend on insurance premiums. That way, the money will be available in case a tragedy strikes, but it can be used for other purposes as well.

Perhaps you have other reasons for wanting to buy a separate insurance policy on your child's life. You might be worried that you won't be able to insure your child down the road if he or she develops a medical condition (especially if certain diseases run in your family). However, few medical conditions make a person uninsurable. Only about four percent of all life insurance applications are rejected. And don't think that life insurance will be too expensive once your child grows up. Insurance policies for healthy young adults don't cost much more than policies for children.

Question: Do life insurance companies really check out if I'm a smoker? How?

Answer: Because smoking is a health hazard, life insurance companies may charge you a higher premium if you smoke. Worse yet, smoking may even prevent you from obtaining life insurance coverage at all. How does an insurance company find out if you smoke and how much? In most cases, they start by simply asking you. Almost every application for life insurance contains questions about health issues, including smoking. Your responses to any smoking-related questions will play a part in a company's decision about whether to sell you life insurance and at what price.

If you do smoke, the best approach is to be truthful. Don't be dishonest about your smoking habit just because you're afraid the insurance company will deny your application or charge you more for insurance. Because a life insurance policy is a type of legal contract, lying on your application for insurance is essentially fraudulent (not to mention unethical). What's more, it could come back to haunt you.

While some companies might never learn of your deceit, others might. Keep in mind that the application you fill out is not the only source of data an insurance company may use to evaluate your risk potential. Most companies will require you to submit to a physical exam, the results of which may indicate that you smoke. Some may conduct in-depth investigations into your background/medical history. Others may request additional information from the Medical Information Bureau (MIB), which maintains centralized medical files on individuals who have applied for life insurance with member companies.

The point is, if you lie about your smoking, insurance companies have ways of uncovering your falsehood and will almost certainly reject your application if they find out you've lied. In addition, if a company sells you a life insurance policy and then finds out that you lied about your smoking, they may be able to terminate your life insurance coverage immediately (leaving your beneficiaries without protection). The reason: most life insurance policies are subject to a contestability period (generally, the first two years that the policy is in force) during which the company has the right to cancel the contract based on any false statements you made on your application. For example, if you died from emphysema due to smoking a year after you bought life insurance and told the insurance company you don't smoke, your beneficiaries might not be entitled to the policy death benefit.

Question: Is it true that after 10 years the proceeds of a variable life policy and the cash value are tax-free if you want to withdraw the money?

Answer: The cash value of variable life insurance (and other types of cash value insurance) may be accessible by various means, but some of them require you to sacrifice at least part of your insurance coverage. And typically, the insurance proceeds of a life insurance policy are not accessible at all.

Note: This information pertains specifically to variable life insurance; variable universal life is a different type of policy and may have different rules.

Cash value.  One way to access the cash value of life insurance is through a policy loan. Like all cash value life insurance, variable life allows you to borrow against your cash value. Policy loans are usually not considered taxable income, but you normally have to pay a nominal interest rate. Part of the interest you pay may be credited back to your cash value (so you are in effect making interest payments to yourself). Policy loans can affect the growth of the cash value, and could reduce the death benefit if they are not repaid.

Certain types of cash value policies (such as universal life) also allow partial withdrawals of the cash value. Most variable life policies do not allow such withdrawals. A cash value withdrawal is accomplished by making a partial surrender of the policy. This means that your death benefit could be reduced, because a partial surrender could effectively cancel part of the policy. A withdrawal from the cash value of a life insurance policy is typically tax free up to your basis in the policy (the premiums you have paid in), but there may be surrender fees associated with the transaction.

Some cash value policies also allow you to access your full cash surrender value by surrendering (canceling) the policy. However, once you cancel the policy, you will no longer have insurance protection.

Proceeds (death benefit).  Typically, you do not have access to the insurance proceeds of any life insurance policy before your death. Some insurance policies do allow you to use part of the death benefit for medical expenses or long-term care while you are alive, but this is rare. Should you become terminally ill, you may also have the option of selling your life insurance policy to a viatical settlement funding company, and using the money to pay for your care. Outside of these extreme circumstances, however, you typically cannot access the insurance proceeds of a life insurance policy during your lifetime.

Question: When should I buy life insurance?

Answer: When to buy life insurance depends more on your individual circumstances and your personality than on any hard-and-fast rules. There are good arguments on both sides of the issue.

Buy now.  Life insurance premiums increase dramatically as you get older. If you buy permanent life insurance while you're younger and (presumably) healthy, you can take advantage of lower rates. Your premium costs may increase, but these increases are strictly regulated. Cash value life insurance also offers a type of "forced savings," and the policy accumulates tax-deferred over time. Buying while you are younger provides the added advantage of extra time in which the cash value can grow.

Buying life insurance while you are younger can be especially important if you are in a high-risk group for any disease or medical condition that might make you uninsurable. If you choose to buy insurance for this reason, ask about adding a guaranteed insurability rider to your policy. This rider guarantees you the right to purchase additional insurance at specified times, without having to provide proof of insurability. This way, if you get married, start a family, or take on other responsibilities, you can purchase the insurance you need without worrying about whether you will be denied coverage.

Buying term life insurance while you are younger has certain advantages as well. Like cash value insurance, premiums for term life insurance increase significantly as you get older. By buying now, you can lock in low premium rates for the duration of your policy. If you choose to purchase term insurance, look for a policy with a renewability provision. This clause allows you to renew the policy without having to take a medical exam or prove insurability. However, your premiums will likely increase each time you renew your policy as a result of your decreased life expectancy.

Buy later.  Instead of buying life insurance now, you might decide to put off this purchase until later, perhaps when you have a family and more responsibilities. For the time being, you may want to put that money into other types of investments that have the potential to provide greater returns.

In order to fully reap the benefits of this strategy, you must have the financial discipline to invest your premium savings on a regular basis. Or, instead of depending on your own ability to faithfully invest each month, arrange for funds to be automatically transferred from your bank to the investment account of your choice.

Keep in mind, however, that while this strategy provides the potential for investment returns, these returns are not guaranteed. In addition, it would be unwise to delay purchasing any life insurance if you have children or other dependents who would suffer financially as a result of your premature death.