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A. In the first two years after you buy a policy, the company can refuse
to pay if the cause of death is suicide, or if you have made a material misrepresentation in
the application. A "material misrepresentation" happens if you do not tell
the truth about a situation or medical condition which would have caused the company to
deny you insurance if they had known the truth. If you understate your age to obtain a
more favorable premium, the insurance company will reduce the death benefit to be equal
to what your premiums would have purchased at the correct age.
After the policy has been in force for two years, the company cannot contest the claim as long
as you have paid the premiums. This is called incontestability. If you change companies or policies,
you may be required to go through another two year period in which the company could deny
a claim because of suicide or a material misrepresentation in the application.
A. During the grace period, the 30-day period after the date your
premium is due, you can pay your premium with no interest charged. If you die during the
grace period, your beneficiaries would receive the death benefit of the policy minus the
premium owed.
If you do not pay the premium within the grace period, your policy will lapse. That means that you have ended your
relationship with that insurer and, if you were to die, your beneficiaries would not get
any death benefits. Most companies will allow you to reinstate a lapsed policy for up to
three years. To reinstate a lapsed policy, you would have to pay all overdue premiums
with interest, plus reinstate or repay any loans you have taken against the policy. You
might also be required to fill out a new health questionnaire or have a medical exam.
A variable annuity is a contract between you and an insurance company, under which the insurer agrees to make periodic payments to you, beginning either immediately or at some future date. You purchase a variable annuity contract by making either a single purchase payment or a series of purchase payments.
A variable annuity offers a range of investment options. The value of your investment as a variable annuity owner will vary depending on the performance of the investment options you choose. The investment options for a variable annuity are typically mutual funds that invest in stocks, bonds, money market instruments, or some combination of the three.
Although variable annuities are typically invested in mutual funds, variable annuities differ from mutual funds in several important ways:
First, variable annuities let you receive periodic payments for the rest of your life (or the life of your spouse or any other person you designate). This feature offers protection against the possibility that, after you retire, you will outlive your assets.
Second, variable annuities have a death benefit. If you die before the insurer has started making payments to you, your beneficiary is guaranteed to receive a specified amount – typically at least the amount of your purchase payments. Your beneficiary will get a benefit from this feature if, at the time of your death, your account value is less than the guaranteed amount.
Third, variable annuities are tax-deferred. That means you pay no taxes on the income and investment gains from your annuity until you withdraw your money. You may also transfer your money from one investment option to another within a variable annuity without paying tax at the time of the transfer. When you take your money out of a variable annuity, however, you will be taxed on the earnings at ordinary income tax rates rather than lower capital gains rates. In general, the benefits of tax deferral will outweigh the costs of a variable annuity only if you hold it as a long-term investment to meet retirement and other long-range goals.