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Getting Married

Getting married is one of the most important events in many people's lives. Within this section you will find several guides to help you acquire necessary financial intelligence and wisdom.

Table of Contents

Getting Married: Some Financial Guideline

What are the financial implications of marriage (and of divorce and re-marriage)? Those who have recently changed their marital status or who are planning such a change may have important financial and legal decisions to make. These decisions might deal with property ownership, providing for children's welfare, post-mortem planning, and day-to-day finances.

This Financial Guide discusses financial considerations related to a change in marital status. And, because divorce is sometimes the flip side of a marriage--and often the bridge between marriage and remarriage--it is covered here as well.

Note: Under a joint IRS and U.S. Department of the Treasury ruling issued in 2013, same-sex couples, legally married in jurisdictions that recognize their marriages, are treated as married for federal tax purposes, including income and gift and estate taxes. The ruling applies regardless of whether the couple lives in a jurisdiction that recognizes same-sex marriage or a jurisdiction that does not recognize same-sex marriage.

In addition, the ruling applies to all federal tax provisions where marriage is a factor, including filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA and claiming the earned income tax credit or child tax credit.

Any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory or a foreign country is covered by the ruling. However, the ruling does not apply to registered domestic partnerships, civil unions or similar formal relationships recognized under state law.

This guide will also briefly touch on legal issues involved; however, variations in state law make it nearly impossible to discuss in any detail the legal ramifications that a change in marital status presents.

Related Guide: For a discussion of the impact of the death of a spouse, please see the Financial Guide: DEATH OF A SPOUSE: Financial Steps You Should Take

How To Prepare Financially For A First Marriage

For the young, newly married couple, areas of financial concern primarily include: (1) life insurance, (2) form of property ownership, and (3) money management.

Life Insurance

When it comes to insurance needs, the basic rule is that you need enough coverage to sustain your family's present income level should you die. If you are the only breadwinner, or if you plan on starting a family soon, then you should purchase life insurance.

Related Guide: Please see the Financial Guide: LIFE INSURANCE: How Much And What Kind To Buy

Property Ownership

If you intend to buy a home or other property or if you and your spouse already own property together, then you need to consider the best way for you to hold that property. Will the property be held solely by one spouse? By both spouses jointly? Because of the complex legal implications of the various forms of property ownership, you should seek legal advice about this issue.

Money Management

It is important to carefully consider how the two of you will handle your day-to-day finances. New couples should be prepared to discuss financial goals, resolve differences (or at least agree to disagree) in spending habits, and establish a budget and/or saving and investment plan.

You'll also need to think about whether you want a joint bank account, separate accounts, or both. How much do you want to spend on vacations? On monthly food bills? Entertainment? Gifts? Personal items? What are your long-term financial goals?

Do you have a financial plan? If you don't, then now is the time to prepare one. Even if you do have a financial plan in place, since your marital status has changed it might be time to review and update it.

Related Guide: Please see the Financial Guide: YOUR FINANCIAL PLAN: Getting Started on A Secure Future

How To Prepare Financially For A Divorce

If you are considering divorce, it is vital to plan for the dissolution of the financial partnership in your marriage. Such dissolution involves dividing financial assets accumulated during the marriage. Further, if children are involved, future financial support for the custodial parent must be planned for.

While it may not be at the top of your to-do list, taking time to prepare financially during divorce pays off in the long run. Here are some steps you can take to get started.

Take Stock Of Your Situation

Assessing your financial situation helps you in two ways:

  • It will provide you with preliminary information for an eventual division of the property.
  • It will help you to plan how debts incurred during the marriage are to be paid off. Although the best way to deal with joint debt (such as credit card debt) is to pay it off before the divorce, this strategy is often impossible so compiling a list of your debts will help you to come to some agreement as to how they will be paid off.

To take stock of your situation start by preparing an inventory of your financial assets:

    • The current balance in all bank accounts;
    • The value of any brokerage accounts;
    • The value of investments, including any IRAs;
    • Your residence(s);
    • Your autos; and
    • Your valuable antiques, jewelry, luxury items, collections, and furnishings.
  1. Make sure you have copies of the past two or three years' tax returns. These will come in handy later.
  2. Make sure you know the exact amounts of salary and other income earned by both yourself and your spouse.
  3. Find the papers relating to insurance-life, health, auto, and homeowner's-and pension or other retirement benefits.
  4. List all debts you both owe, separately or jointly. Include auto loans, mortgage, credit card debt, and any other liabilities.

Tip: If you are a spouse who has not worked outside the home lately, be sure to open a separate bank account in your own name and apply for a credit card in your own name. These measures will help you to establish credit after the divorce.

Related Guide: For a system that makes it easy to organize and locate your records, please see the Financial Guide: DOCUMENT LOCATOR SYSTEM: A Handy Aid For Keeping Track Of Your Records

Estimate Your Post-Divorce Living Expenses

Figure out how much it will cost you to live after the divorce. This is especially important for the spouse who is planning to remain in the family home with the children; it may be determined that the estimated living expenses are not manageable.

To estimate these expenses, add up all of your monthly debts and living expenses, including rent or mortgage. Then total your after-tax monthly income from all sources. The amount left over is your disposable income.

Related Guide: Please see the Financial Guide: BUDGETING: How To Prepare A Workable Plan

Cancel All Joint Accounts

It is important to cancel all joint accounts immediately once you know you are going to obtain a divorce because creditors have the right to seek payment from either party on a joint credit card or other credit account, no matter which party actually incurred the bill. If you allow your name to remain on joint accounts with your ex-spouse, you are also responsible for the bills.

Your divorce agreement may specify which one of you pays the bills. However, as far as the creditor is concerned both you and your spouse remain responsible if joint accounts remain open. The creditor will try to collect the bill from whoever it thinks may be able to pay while at the same time reporting the late payments to credit bureaus under both names. Your credit history could be damaged because of the co-signer's irresponsibility.

Some credit contracts require that you immediately pay the outstanding balance in full if you close an account. If this is the case, then try to get the creditor to have the balance transferred to separate accounts.

If Your Spouse's Poor Credit Affects You

If your spouse's poor credit hurts your credit record, you may be able to separate yourself from the spouse's information on your credit report. The Equal Credit Opportunity Act requires a creditor to take into account any information showing that the credit history being considered does not reflect your own. If for instance, you can show that accounts you shared with your spouse were opened by him or her before your marriage, and that he or she paid the bills, you may be able to convince the creditor that the harmful information relates to your spouse's credit record, not yours.

In practice, it is difficult to prove that the credit history under consideration does not reflect your own, and you may have to be persistent.

For Women: Maintain Your Own Credit Before You Need It

If a woman divorces, and changes her name on an account, lenders may review her application or credit file to see whether her qualifications alone meet their credit standards. They may ask her to reapply even though the account remains open.

Maintaining credit in your own name is the best way to avoid this inconvenience. It also makes it easier to preserve your own, separate, credit history. Further, should you need credit in an emergency it will be available when you need it.

Do not use only your husband's name (for example, Mrs. John Wilson) for credit purposes.

Tip: Check your credit report if you have not done so recently. Make sure the accounts you share are reported in your name as well as your spouse's name. If not, and you want to use your spouse's credit history to build your own credit, write to the creditor and request that the account be reported in both names.

Also, carefully review your credit report to determine whether there is any inaccurate or incomplete information. If there is, write to the credit bureau and ask them to correct it. The credit bureau must confirm the data within a reasonable time period, and let you know when they have corrected the mistake.

Related Guide: Please see the Financial Guide: CREDIT REPORTS: What You Should Know-And Do-About Yours.

If you have been sharing your husband's accounts, building a credit history in your name should be fairly easy. Call a major credit bureau and request a copy of your report. Contact the issuers of the cards you share with your husband and ask them to report the accounts in your name as well.

If you used the accounts, but never co-signed for them, ask to be added on as jointly liable for some of the major credit cards. Once you have several accounts listed as references on your credit record, apply for a department store card, or even a Visa or MasterCard, in your own name.

If you held accounts jointly and they were opened before 1977 (in which case they may have been reported only in your husband's name), point them out and tell the creditor to consider them as your credit history also. The creditor cannot require your spouse's or former spouse's signature to access his credit file if you are using his information to qualify for credit.

Tip: If you do not have a credit history, a secured credit card is a fairly quick and easy way to get a major credit card. Secured credit cards look and are used like regular Visa or MasterCard's, but they require a savings or money market deposit of several hundred dollars that the lender holds in case you default. In most cases, the creditor will report your payment record on these accounts just like a regular bankcard, allowing you to build a good credit record if you pay your bills promptly.

Consider the Legal Issues

The best way to plan for the legal issues involved in a divorce including child custody, division of property, and alimony or support payments is to come to an agreement with your spouse. If you can reach an agreement, the time and money you will have to expend in coming up with a legal solution--either one worked out between the two attorneys or one worked out by a court--will be drastically reduced.

Here are some general tips for handling the legal aspects of a divorce:

  • Get your own attorney if there are significant issues to deal with such as child custody, alimony, or significant assets.
  • The best way to find a good matrimonial attorney is to ask for referrals or contact the American Academy of Matrimonial Lawyers (see the last section of this guide for contact information).
  • Make sure the divorce decree or agreement covers all types of insurance coverage including life, health, and auto.
  • Be sure to change the beneficiaries on life insurance policies, IRA accounts, 401(k) plans, other retirement accounts, and pension plans.
  • Don't forget to update your will.

Tip: Those who have trouble arriving at an equitable agreement--and who do not require the services of an attorney--might consider the use of a divorce mediator. Ask friends, relatives, and other professionals for recommendations or contact the Association for Conflict Resolution (see the last section of this guide for contact information). You can also look in the phone book or classifieds under "Divorce Assistance" or "Lawyer Alternatives."

Division of Property

The laws governing division of property between ex-spouses vary from state to state. Further, matrimonial judges have a great deal of latitude in applying those laws.

Here is a list of items you should be sure to take care of, regardless of whether you are represented by an attorney.

  1. Understand how your state's laws on property division work.
  2. If you owned property separately during the marriage, be sure you have the papers to prove that it has been kept separate.
  3. Be ready to document any non-financial contributions to the marriage such as support of a spouse while he or she attended school or non-financial contributions to his or her financial success.
  4. If you need alimony or child support, be ready to document your need for it.
  5. If you have not worked outside the home during the marriage, consider having the divorce decree provide for money for you to be trained or educated.

How To Prepare Financially For Re-Marriage

When considering remarriage, it is important to plan for the following:

  • Whether property acquired before the marriage will be held jointly
  • How to provide for children from a previous marriage
  • Whether a prenuptial agreement is necessary to accomplish goals related to either of these issues

If either spouse has significant assets, it will be necessary to consult an attorney.

As for the estate planning aspects of providing for children from a previous marriage, trusts and/or life insurance are the vehicles most often used to do this.

Tip: Be sure to update your will before you remarry to ensure that your assets will be divided among your heirs after your death in the manner and proportions you desire.

Government and Non-Profit Agencies

  • American Academy of Matrimonial Lawyers (AAML)
    150 North Michigan Ave., Suite 1420
    Chicago, IL 60601
    Tel. 312-263-6477

  • Association for Conflict Resolution (ACR)
    12100 Sunset Hills Rd., Suite #130
    Reston, VA 20190
    Tel. 703.234.4141

  • National Foundation for Credit Counseling (NFCC)
    Tel. 800-388-CCCS (2227)

  • Ex-Partners of Servicemen/women for Equality (EX-POSE)
    P.O. Box 11191
    Alexandria, VA 22312
    Tel. 703-255-2917
    This non-profit organization provides information to divorcing or separating spouses of military service people.

Life Insurance: How Much and What Kind To Buy

How much life insurance do you need? What type is appropriate? You should review your life insurance needs each time you have a major life event. Here is what you need to know to properly plan for your life insurance needs-to buy enough and to get the most for your money.

The prospect of planning for your family's life insurance needs may seem daunting. The array of confusing products available, coupled with the calculations needed to find the right amount of insurance, would put anyone off.

Yet the hard fact is that life insurance is an essential part of your family's financial well-being. The more you know about it before you go to your agent, the better your coverage will be. If you don't plan for your life insurance needs, the result could be a waste of thousands of dollars on inappropriate or ineffective life insurance or, worse, financial hardship due to not having enough insurance.

We've tried to make the process of buying life insurance easier and more informed by providing you with objective, unbiased information and a plan of action. This Financial Guide gives you some basic guidelines about whether and when you should purchase life insurance, and provides you with a system for determining how much you need. It also discusses the types of insurance available, their suitability for various situations, and how to comparison shop for a policy.

Do You Need Life Insurance?

The purpose of life insurance is to provide a source of income, in case of your death, for your children, dependents, or other beneficiaries. Life insurance can also serve other estate planning purposes, such as giving money to charity on your death, paying for estate taxes, or providing for a buy-out of a business interest. However we won't go into these other purposes in this guide.

Related Guide: Please see the Financial Guide: ESTATE PLANNING: How To Get Started.

Whether you need to buy life insurance depends on whether anyone is depending on your income. If you have a spouse, child, parent, or some other individual who depends on your income, you probably need life insurance. (You might also need life insurance for estate planning or business succession planning purposes.) Here are some typical insurance situations along with typical insurance needs:

Situation 1. Families or single parents with young children or other dependents. The younger your children, the more insurance you need. If both spouses earn income, then both spouses should be insured, with insurance amounts proportionate to salary amounts. If the family cannot afford to insure both wage earners, the primary wage earner should be insured first, and the secondary wage earner should be insured later on. A less expensive term policy might be used to fill an insurance gap. If one spouse does not work outside the home, insurance should be purchased to cover the absence of the services being provided by that spouse (child care, housekeeping, and bookkeeping). However, if funds are limited, insurance on the non-wage earner should be secondary to insurance on the life of the wage earner.

Situation 2. Adults with no children or other dependents. If your spouse could live comfortably without your income, then you will need less insurance than the people in situation (1). However, you will still need some life insurance. At a minimum, you will want to provide for burial expenses, for paying off whatever debts you have incurred, and for providing an orderly transition for the surviving spouse. If your spouse would undergo financial hardship without your income, or if you do not have adequate savings, you may need to purchase more insurance. The amount will depend on your salary level and that of your spouse, on the amount of savings you have, and on the amount of debt you both have.

Situation 3. Single adults with no dependents. You will need only enough insurance to cover burial expenses and debts, unless you want to use insurance for estate planning purposes.

Situation 4. Children. Children generally need only enough life insurance to pay burial expenses and medical debts. In some cases, a life insurance policy might be used as a long-term savings vehicle.

Situation 5. Retirees. There is less of a need for life insurance after retirement, unless it is to be used for other estate planning purposes. You may need to provide an income for the second spouse to die if your retirement assets are not large enough. Further, you will need some insurance to pay burial expenses, final medical costs, and debts.

How Much Life Insurance Do You Need?

Determining how much insurance to buy requires you to invest some time in calculating...

  • Your current annual household expenses

  • Your assets, debts, and other sources of income.

We've provided a work sheet, which we will refer to in our discussion.

Tip: Find out how much insurance you need before considering which type of insurance to buy. Having enough is more important than having the right type. You should provide for your insurance needs immediately, although you can always switch to a more cost-effective or investment-oriented type of insurance later.

The ideal amount of coverage is the amount that would allow your dependents to invest the insurance proceeds after your death and maintain their desired standard of living without touching the principal. Although the old rule of thumb-to buy five, six or seven times your annual salary-may serve as a starting point, it is no substitute for making the calculations to find out how much you really need.

By using the worksheet and our explanations, you will be able to make a fairly good estimate of your insurance coverage needs. You will need to make some assumptions about your family's future.  It's important to be as accurate as possible in filling out the worksheet, since an underestimation could lead to your being underinsured, and an overestimation will lead to money wasted on unnecessary coverage.

Here is a line-by-line discussion of how to prepare the worksheet.

Line 1: Calculate The "Annual Income Needed"

Line 1 of the worksheet, "Annual Income Needed," is the amount that your survivors would need to live comfortably. It is important not to underestimate this amount. If there are recurring expenses that your family incurs but that are not shown on the list below, do not neglect to include these.

To arrive at the "Annual Income Needed," find the following amounts paid monthly. Then multiply the figure you arrive at by 12 to arrive at an annual amount. Add the following amounts:

Mortgage or rent, and other home-related expenses. Include your monthly mortgage payment, with insurance and real estate taxes, or the amount paid for rent. Also include the amounts you spend monthly on home repairs-e.g., plumbers, contractors, electricians, appliance repair-and on home improvements. Add to this the amounts spent monthly on furniture, appliances, linens, and other items bought for the home$___________
Heat, electricity, insurance (life, health, and liability) water, gas, trash collection, and other monthly bills$___________
Food, including other items bought at grocery stores or drug stores, such as toothpaste, and including restaurant bills$___________
Travel, including car payments, gas and oil, car repair, and car payments$___________
Child care or other dependent care$___________
Recreation, including travel, gifts, theater, cinema$___________
Multiply by 12 and enter amount in Line 1 of the worksheet (below)$___________

Line 2: Subtract "Other Sources"

The next item on the worksheet represents the income that your survivors will have. If there are sources of income other than the ones listed, do not neglect to include them.

Tip: To calculate Social Security benefits, you may wish to obtain an estimate of your benefit from the Social Security Administration. You can obtain a request form by calling SSA's toll-free number-800-772-1213.

Since you cannot predict the amount your survivors will receive (it will depend on your age at death, your earnings, and the ages of your children), you may use the following as rough estimates: $4,000 per year if you have one child under 16, or $5,000 for two or more children under 16.

Do not include other insurance proceeds here; this will be accounted for later.

Line 3: Determine The "Shortfall"

Line 3 represents the shortfall, i.e., the amount you need your insurance proceeds to replace. This is determined by subtracting the "Annual Income From Other Sources" amount from the "Annual Income Needed."

Line 4: Determine the "Amount Of Proceeds Needed"

Line 4 is the amount that will generate the investment income needed to make up the annual "Shortfall" in Line 3.

The amount by which you should divide line represents the after-tax rate of return you can expect on the invested life insurance proceeds. The amount you choose to divide by depends on how conservative you want to be. It is reasonable for most people to expect an after-tax rate of return of at least 6%. But if you want to ensure that you are protected from inflation risk and interest rate risk, use the lower divisor of 4%. The middle divisor of 5% represents a "middle of the road" approach.

The amount you arrive at is the amount of death benefit (proceeds) you will need. The amount will be further adjusted as you work through the worksheet.

Line 5: Add the "Lump-Sum Expenses"

These are the items your family will have to pay for at the time of death. They differ from the "annual income needs" amounts in that they are not part of the family's everyday living expenses. Further, unlike the annual income amounts, they represent pure guesswork. If you wish to strive for a higher rate of accuracy, you can try to adjust these items for inflation, but this is not strictly necessary.

The estimate for funeral expenses should be at least $5,000. Depending on your desires and those of your family, you can adjust this figure upward.

The final medical expenses will be minimal if you have adequate health insurance. You can estimate this amount by finding out how much your policy requires you to contribute per illness.

The estate administration and probate costs can be estimated at 5% of your estate for the sake of simplicity. Your estate is the total value of your assets at death.

You will only owe federal estate taxes if your taxable estate exceeds the amount of the unified credit exemption equivalent. Your state inheritance taxes will depend on the laws in your state.

The "emergency living expenses" amount can range from three to six months' worth of family living expenses.

The "debts" amount represents debts that your family desires to pay off at your death. Normally, it does not include items that make up the "annual living expenses"-e.g., mortgage payments, car payments. However, if you decide that you wish to use insurance proceeds to pay off such expenses, then add in the amounts you estimate will be needed to pay off such debts.

As for future education expenses, it is suggested that you use an annual cost of $20,000 per child, per year, for the sake of simplicity.

Line 6: Determine the "Interim Insurance Proceeds Amount"

Subtract the "future expenses" on line 5 from the "proceeds needed" amount on line 4. This is the amount of insurance you will need to buy on your life. The amount will be further adjusted.

Line 7: Subtract the "Assets That Can Be Sold and Other Insurance"

For line 7, determine the amounts that represent assets that your survivors could liquidate to pay future expenses. Do not include any assets your survivors will be using to produce income that you included in "other sources." Also, note that you should include insurance payments and pension death benefits here, and not on the line for "other sources." This is because such proceeds will represent one-time payments, and not sources of annual income.

Line 8: Determine the "Total Insurance Needed"

Subtract the "assets that can be sold and other insurance" on line 7 from the interim insurance proceeds amount" on line 6. This is an estimate of the amount of insurance coverage you need.

Life Insurance Worksheet



1. Annual income needed.$_____________
2. Subtract other annual income sources:
    Salary of surviving spouse and other family$_____________

    Estimated earnings on investments


    Social Security


    Pension income


    Other income

Total other annual income sources$_____________
3. Subtract total of line 2 items from line 1$_____________
4. Amount of proceeds needed (divide line 3 by 4%, 5%, or 6%)$_____________
5. Lump-sum expenses:

    Funeral expenses


    Final medical costs


    Estate administration and probate costs


    Federal estate and state inheritance tax


    Emergency living expenses fund


    Debts to be paid off


    Education expenses


    Other lump-sum expenses


Total lump-sum expenses:

6. Interim insurance proceeds needed
(add line 4 and total of line 5 items)
7. Assets that can be sold and other insurance

    Employer-provided group life insurance


    Other life insurance.


    Death benefit from pension plan.


    Cash, savings.


    IRA, Keogh, and 401(K) plan lump sum amounts


    Other assets that can be sold


Total assets

8. Total insurance needed (subtract total of line 7 items from line)$_____________

Types Of Insurance

  • Term, whereby you pay for coverage for a specified amount of time, and if you die during that time the insurer pays your survivors the death benefit specified; and

  • Cash value, usually referred to as whole life, universal life, or permanent life insurance, where, in addition to paying a death benefit, it also provides you with some other redeemable value.

Term Insurance

For individuals age 40 or less, a term policy will almost always be less costly than a whole life policy. Although term policies do not build cash values, many are convertible to whole life policies without a physical exam. Thus, a term convertible policy may be a good option for someone who is under 40. There are various types of term insurance, which we will discuss briefly here.

  • Renewable. Renewable term policy is the most common type of life insurance where the policy renews automatically on a renewable term, e.g. every year, every 5 years, every 10 years, or every 20 years--the most popular renewal term. You do not need to take a physical or verify the fact that you are employed. The premium goes up at the beginning of each new term to reflect the fact that you are older. Most renewable term policies can be renewable until you reach age 70 or so.

  • Re-entry. With this type of policy, you must undergo a physical exam after a certain period, or pay an extra premium.

  • Level. With level term policies, the premium is guaranteed to stay the same over a certain period. This period may be shorter than the term of the policy. Nearly all life insurance bought today is level term.

  • Decreasing. With a decreasing term policy-a good option for insuring mortgage payments-the face amount of the policy decreases over time while the premium payments remain the same.

  • Return of Premium. Some insurers offer term life with "return of premium". Typically, premiums are significantly higher and they require keeping the policy in force to its term.

Cash Value Insurance

There are four types of cash value life insurance: (1) whole life, (2) universal life, (3) variable universal life and (4) variable whole life. The first two types are the most common and have a guaranteed cash surrender value; in the last two types, the cash surrender value is not guaranteed.

Whole Life. This is the traditional life insurance policy. It provides a death benefit, has a cash value build-up, and sometimes pays dividends. You do not need to renew a whole life policy. As long as you pay your premiums, you will have coverage, usually until your death. The premium for a whole life policy remains the same for the amount of time you own the policy; the premium is "level" in insurance parlance. Thus, when you are younger, the premium you pay for whole life will be greater than what you would pay for term, but when you are older, the premium will be much less than a term premium. Part of each premium goes into the cash value of your policy. Your cash value, which is actually an investment, is guaranteed to grow at a fixed rate. You do not have to pay current income taxes on the growth in the cash value-it is tax-deferred.

Dividend-paying whole life policies-termed "participating" policies-are usually offered by mutual life insurance companies. Mutual life insurance companies are generally owned by policyholders, while other insurance companies are owned by shareholders. The dividends are refunds of insurance premiums that exceed a certain level. They are paid when the insurance company does well during a quarter or a year. Of course, premiums for participating policies are usually higher than those paid for non-participating policies.

Note: Term policies can also be participating, but the dividends paid are usually minimal.

Universal Life. Universal life, also known as "flexible premium adjustable life," is similar to whole life, but offers more flexibility in terms of payment of premiums and cash value growth. With a universal life policy, your monthly premium amount is first credited to your cash value. The company then deducts the cost of your death benefit and the expenses of the policy. These costs are about equal to what it would cost to buy term coverage. As with whole life, your cash value grows at a fixed minimum rate of interest. The growth of the cash value is tax-deferred, and you can borrow against it or make partial withdrawals.

Caution: A special feature of universal life is that you can vary the premium paid from month to month. You can pay more or less-within certain limits-without jeopardizing your coverage. You can even let the cash value absorb the premium. However, the danger here is that if the premium payments fall too low, your policy may lapse. While some states require the insurer to tell you when your cash value is at a dangerously low point, you will, if you live in another state, have to maintain a careful watch on the amount of cash value if premiums are skipped.

Variable Universal Life. Variable universal life allows you to choose the investment for your cash value. You have a potentially greater cash value growth, but you also have added risk, depending on the type of investment you choose.

Variable Whole Life. With variable whole life, the death benefit and cash value will depend on the performance of an investment fund that you choose. Again, you have potentially greater reward, with its accompanying risks.

How Insurance Products Differ

Here, in table form, is a summary of the different features of the various types of life insurance.

 Term LifeUniversal LifeWhole LifeVariable Whole LifeVariable Universal Life
Policy termStated in policyUntil age 95LifeLifeLife
Type of death benefitDeterminedVariableDeterminedVariableVariable and determined
Existence of cash valueNoCurrent rate, guaranteed minimumFixed rate, guaranteedVariable rate, not guaranteedVariable rate, not guaranteed
Ability to choose cash value investmentsN/ANoNoYesYes
Regulatory agencyInsuranceInsuranceInsuranceInsurance and securitiesInsurance and securities

How To Shop For Insurance

In order to be able to shop for the best premiums, it's a good idea to know how premiums are calculated by insurers. Bear in mind that premiums vary among insurance companies, and it is a good idea to ask several insurers for their rates.

Insurance companies place individuals into four risk groups: preferred, standard, substandard, or uninsurable. The premiums charged will be commensurate with the category you are placed in. Thus, a standard risk will pay an average premium for similarly situated insurers.

If you have a high risk job or hobby, you will be considered substandard, a high risk. A terminal illness at the time you apply for insurance will render you uninsurable. Having some type of chronic illness will place you in the substandard category. People with conditions such as diabetes or heart disease can be insured, but will pay higher premiums.

Tip: One company's category for you may not hold with another company. Thus, it still pays to shop for insurance with other companies even though one may have labeled you "substandard."

Tip: Once an insurance company approves you for coverage, you cannot be dropped unless you stop paying your premium.

Shopping For A Policy

In most states, there are rules, set by a group of state insurance regulators, requiring the agent to calculate two types of cost indexes that can help you to shop for a policy. You can use the indexes to compare policy costs.

One type of index, the net payment index, gauges the cost of carrying your policy for the next ten or twenty years. The lower the number is the less expensive the policy will be. This index is useful if you are most interested in the death benefit aspect of a policy, as opposed to the investment aspect. The other type of index, the surrender cost index, is useful to those who have a high level of concern about the cash value. This index may be a negative number. The lower the number, the less expensive the policy.

These two indexes apply to term and whole life policies. With universal life policies, focus on the cash value growth and the cash surrender value to make comparisons. Cash surrender value is the amount you receive if you cancel the policy. It is not the same as cash accumulation value. If you are shown two universal life policies, and they have the same premium, death benefit, and interest rate, then the one with the higher cash surrender value is generally the better policy.

Here are some questions to ask about policies:

  • How do cash values accumulate? An early, rapid build-up is generally preferable.

  • How has the policy's cash value performed in the past? You can get this information from a publication called Best Review, Life and Health. Determine how the policy performed in comparison with the company's projection and with other insurers.

  • Are any special features merely bells and whistles, or do they add value for you?

  • What is the company's rating with Best, Standard & Poor's, and Moody's? You can find these publications in public libraries. The rankings should be in the top three to ensure that a company has financial stability.

Government and Non-Profit Agencies

  • National Insurance Consumer Helpline
    1001 Pennsylvania Avenue NW
    Washington, DC 20004
    Phone: (800) 942-4242

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