Buying Insurance

Maintaining adequate homeowner's insurance is a vital part of owning a residence and your homeowner's policy should be chosen carefully. This Financial Guide discusses the policy provisions to consider when deciding which homeowner's insurance policy to buy to be sure that your home is adequately insured and that you are getting the most insurance value for your money.

This Financial Guide offers guidance about homeowner's insurance such as what questions to ask your insurance broker or agent and how to find the best insurer for your needs. It also explains why you need to keep a list of personal possessions and provides a homeowner's inventory sheet for you to use to make a list of your belongings, as well as offers useful tips on how to qualify for a discount and helps you purchase the policy that best fits your needs at an affordable price.

What Homeowner's Insurance Generally Covers

Tip: It is equally important that renters maintain insurance. Many renters neglect to obtain insurance, perhaps deterred by cost or perhaps, or because unlike homeowners, they are not required to maintain insurance. Studies show that about three-quarters of all those who rent a residence do not have renter's insurance. Adequate replacement cost coverage and liability insurance can be obtained for about $200 per year--less if combined with an auto policy for instance since most insurers offer discounts for multiple policies.

Note: Homeowner's insurance is usually required by mortgage lenders

What's Covered

Although exact coverage and policy limits vary, homeowner's insurance usually covers damage caused by the following events or catastrophes:

• Fire
• Lightning
• Explosion
• Smoke
• Vandalism
• Theft, including check forgery and counterfeit currency
• Unauthorized use of credit cards
• Falling objects
• Ice, snow, or sleet weighing on vehicles
• Windstorm
• Hail
• Riot
• Volcano
• Freezing of plumbing
• Flooding due to plumbing overflow
• Hot water heater bursting
• Heating system malfunction
• Power surges

Basic coverage may also include food spoilage, lock replacement, temporary repairs, and removing debris. If these items are not initially included in your basic coverage, it is possible to have them added.

Planning Aid: For information about the standard types of homeowner's policies, see consumer resource library at the National Association of Insurance Commissioners.

If you incur expenses for temporary living quarters because your home is rendered uninhabitable by an insured event/casualty, most policies will reimburse you in part for this so-called "loss of use."

Tip: Earthquakes and sinkholes are not covered under standard policies; however, earthquake insurance can be purchased as an endorsement for an additional fee in all states except California. Flood insurance, which also includes mudflow, must also be purchased as a separate policy. It is only available National Flood Insurance Program run by the federal government. Other types of water damage such as overflows or backups from a sump pump, sewer system, or drains are also excluded and require a separate endorsement.

There is usually a deductible of $100 to $500 for personal property losses. Raising the deductible can lower the premium.

Actual Cash Value Or Replacement Cost

If you insure your belongings for their "actual cash value," you will not get their replacement value at the time of a loss. Actual cash value refers to the value of your belongings after taking into account depreciation and wear and tear. this is also known as Fair Market Value (FMV). For instance, the actual cash value of a television you bought ten years ago may be worth only $50. On the other hand, "replacement cost" coverage provides you with the costs to replace your belongings. Thus, you would get the $500 you need to replace that ten-year-old television, not the $50 "actual cash value."

Limits on Coverage

You choose the limits on the amounts of coverage on your home and personal property. The premium you pay depends on the limits you choose. Regardless of the policy limit, there is a separate limit on the replacement of high-value items, such as jewelry and artwork. If you want increased coverage for certain items, you must purchase an endorsement or floater (also known as a "rider"). You must generally pay extra for the following:

• High-value items (e.g., jewelry, furs, silverware, weapons)
• Personal computers and other home-office equipment
• Waterbeds
• Business operated in the home
• Earthquake, flood, and hurricane (depending on location)

Policy Coverage: What to Consider

If your home is damaged or your possessions are stolen, will your homeowner's policy pay as much as you are expecting? If you are willing to pay the premium for full protection, here are the policy coverages you might consider.

100% of Rebuilding Costs

The amount of insurance that you buy should be based on the cost of rebuilding--not on the price of your home. The cost of rebuilding your house is usually higher than the price you originally paid for it, and often, even the price you could sell it for today. Most insurance companies recommend you insure your home for 100% of the cost of rebuilding it.

Tip: Your insurance agent or company representative may be able to help you calculate rebuilding costs. If not, you could hire an appraiser to do this. Real estate agents can provide you with the names of appraisers.

The cost of rebuilding is affected by local construction costs and by the type of house you have; however, the following are some of the factors that enter into the calculation:

• The type of exterior wall construction such as wood frame, masonry (brick or stone) or veneer
• The square footage of the structure
• The style of the home, ranch or colonial, for example
• The number of bathrooms and other rooms
• The type of roof and materials used
• Whether the home was custom built
• Whether the home has an attached garage, a fireplace, exterior trim, or any special features such as arched or bay windows

Tip: For a rough estimate of the cost of rebuilding your house, calculate the square footage and multiply it by local building costs per square foot for your type of house. Ask a real estate agent or appraiser for average building costs in your area.

If you already have homeowner's insurance, it's very important to make sure that you have enough. If your home is one of the few that are totally destroyed, and it is insured for less than 100% of the rebuilding cost, you risk not having enough money to replace it with one of similar size and quality.

Make sure your insurance agent or broker knows about any improvements or additions to your house that have been made since you last discussed your insurance policy. If you haven't increases your policy limits to cover the cost of rebuilding that new deck, second bathroom, or other improvements that have increased the value of your home, then you risk being under-insured. If you lack sufficient insurance, your insurer may pay only a part of the cost of replacing or repairing damaged items--depending on the kind of policy you have.

Look at your policy to see what the maximum amount that your insurance company would pay if your house was damaged and had to be rebuilt. The limits of the policy usually appear on the Declarations Page under Section 1, Coverage A Dwelling. Your insurance company will pay no more than this amount to rebuild your home--no exceptions.

Some banks require that you buy homeowner's insurance to cover the amount of your mortgage. However, if the limit of your insurance policy is based only on your mortgage, your policy is unlikely to cover the cost of rebuilding. Make certain that the value of your insurance policy keeps up with increases in local building costs.

Caution: If the limits of your policy have not changed since you bought your home, it is likely that you are under-insured.

Tip: Ask your agent about adding an "inflation guard clause," which automatically adjusts the limit to reflect current construction costs when you renew your policy.

Replacement Cost

Consider buying replacement cost coverage for structural damage. A replacement cost policy will pay for the repair or replacement of damaged property with materials of similar kind and quality. The insurance company will not deduct for depreciation. Depreciation is the decrease in value due to age, wear and tear, and other factors.

If you own an older home, you may not be able to buy a replacement cost policy. Instead, you might buy a modified replacement cost policy that will pay for repairs using standard building materials and construction techniques in use today, rather than repairing or replacing features typical of older homes, like plaster walls and wooden doors, with similar materials.

Insurance companies differ greatly in the way they insure older homes. Some refuse to insure older homes for 100% of replacement cost because of the expense of re-creating special features like wall and ceiling moldings and carvings. Other companies will insure older homes for 100% of replacement cost as long as the dwelling is in good condition.

Caution: If you cannot insure your home for 100% of replacement cost--or choose not to do so--because the cost of replacing a large old home is prohibitive, then make sure the limits of the policy are high enough to provide you with a house of acceptable size and quality.

Guaranteed Replacement Cost Insurance

A guaranteed replacement cost policy will pay whatever it costs to rebuild your home as it was before the fire or other disaster, even if it exceeds the policy limit. This policy protects you against sudden increases in construction costs due to a shortage of building materials, for example, or other unexpected situations, but generally does not cover the cost of upgrading the house to comply with building codes.

Tip: Building codes require structures to be built to minimum standards. If your home is severely damaged, there may be an extra cost in rebuilding it to comply with standards enacted since the home was built. Complying with building code may require a change in design or building materials. Generally, homeowner's insurance policies will not pay for this extra expense, but some insurers offer an endorsement (a form attached to an insurance policy that changes what the policy covers) that pays a specified amount toward these costs.

Note: A guaranteed replacement cost policy may not be available if you own an older home.

Flood Insurance

If your home is located in an area prone to flooding, contact your insurance agent or the National Flood Insurance Program (800-427-4661).

Tip: Your homeowner's insurance policy does not cover flood damage. If you buy a federal government flood insurance policy, consider insuring your home for 100% of replacement cost and buying insurance to cover the contents of your home as well as the dwelling.

Contents Insurance

This list should include everything you and other members of your household own in your home and in other buildings on the property, except your car and certain boats, which must be insured separately. Among the items you should include are indoor and outdoor furniture, appliances, stereos, computers and other electronic equipment, hobby materials and recreational equipment, china, linens, silverware and kitchen equipment, and jewelry, clothing and other personal belongings.

Tip: Estimate the value of your personal possessions at current prices and not what you paid for it. The total is the amount of insurance you would need to replace the contents of your home with new items if everything were destroyed.

Check your homeowner's policy to find out how much insurance you have for the contents of your home. The limit of the policy is shown on the Declarations Page under Section 1, Coverage, Personal Property. The contents limit generally is 50% of the amount of insurance on the dwelling. For example, on a home insured for $100,000 the contents would be limited to $50,000. Now compare the contents limit with the total value of the items on your list of personal possessions. If you think you are under-insured, give your insurance agent or broker a call.

As discussed before, there are two ways of insuring your personal possessions. If you have a homeowner's insurance policy, find out whether claim payments for damage to your personal property would be based on replacement cost or actual cash value. Check your policy under Section 1, Conditions, Loss Settlement or ask your agent. As with insurance for the structure, a replacement cost policy pays the dollar amount needed to replace a damaged item with one of similar kind and quality without deductions for depreciation. An actual cash value policy pays the amount needed to replace the item minus depreciation.

Special Limits

Check the limits on certain kinds of personal possessions, such as jewelry, art, silverware, and furs. This information is in Section 1, Personal Property, Special Limits of Liability. Some insurance companies also place a limit on what they'll pay for computers and other home office equipment. If the limits are too low, consider buying a special personal property endorsement or rider.

Note: An endorsement is an addition to your policy. A floater is a form of insurance that allows you to insure valuable items separately. Under a rider or floater, you will be able to insure these items for higher amounts than under a standard homeowner'spolicy.

Tip: If you have a claim, the more information you have about the damaged items--a description of each and the date of purchase and purchase price--the faster the claim can usually be settled.

Videotape or take photographs of rooms and their contents. Note where and when you bought each item and the price. Write down the brand names and model numbers of appliances and electronic equipment. Add new items as you buy them, and keep receipts with the list.

Store the list, photos, and other records in a safe place outside the home-in a bank deposit box or with a neighbor or relative-so that they are not destroyed if your home is damaged.

Shopping For A Policy

The price you pay for homeowner's insurance can vary by hundreds of dollars, depending on the insurance company. Companies offer several types of discounts, but they do not offer the same discount or the same amount of discount in all states. Here are some things to consider when buying homeowner's insurance:

Shop Around

Although it may take a few phone calls to shop around for the best insurance, you could save a few hundred dollars by taking the time to do so. Conduct a preliminary search by compiling a list of possible insurers. Check with your insurance broker or agent, ask your friends, check the Yellow Pages, search online, check consumer guides, and/or call your state insurance department. A thorough investigation of available insurers will give you an idea of price ranges and tell you which companies or agents have the lowest prices.

Tip: Do not consider price alone. The insurer you select should offer both a fair price, good coverage and excellent service. Quality service may cost a bit more, but it provides added conveniences. Talking to insurers will give you a feel for the type of service they offer.

When talking to insurers, ask them what they would do to lower your costs. Once you've narrowed your search to three companies, get price quotes.

Raise Your Deductibles

Deductibles on homeowners' policies typically start at $250. You might save up to 12% of the premium by increasing your deductible to $500, up to 24% by increasing it to $1,000, up to 30% by going up to $2,500, and 37% by raising it to $5,000.

Considering Buying Home And Auto Policies From the Same Insurer

Many companies that sell homeowner's, auto and liability coverage will take 5 to 15% off your premium if you buy two or more policies from them. This is called a multiple policy discount.

Consider Insurance Cost Before Buying A Home

When buying a home, don't overlook the insurance costs. These may affect the price you are willing to pay for the home. Among the factors to consider:

• The home's construction in relation to the geographical region. For example, brick houses may result in less costly premiums in the East whereas frame houses are less costly in the West. Choosing wisely could cut your premium by 5 to 15%.
• Whether the area is prone to floods (if so, you will have to pay additional money for an endorsement). Visit www.floodsmart.gov to determine your flood risk and find out whether you are in a flood zone.
• Whether the home is new or used (insurers may offer you a discount of 8 to 15% for a new home).
• The electrical system, plumbing, and structure.
• Whether the town has full-time or volunteer fire service and whether the home is close to a hydrant or fire station (the closer it is, the lower your premium will be).

Don't Insure Land

When deciding how much homeowner's insurance to buy, do not include the value of the land under your house. It is not at risk against theft, windstorm, fire, or other disasters, so why pay for wasted coverage.

Increase Home Security

You can usually get discounts of at least 5% for a smoke detector, burglar alarm, or dead-bolt locks. Some companies offer to cut your premium by as much as 15 or 20% if you install a sophisticated sprinkler system and a fire and burglar alarm that rings at the police station or other monitoring facility. Although these discounts are incentives to invest in home security and yard maintenance systems, be aware that these systems are not inexpensive and that not every system qualifies for the discount.

Tip: Before you buy an alarm system, find out what kind your insurer recommends and how much you'd save on premiums.

No Smoking Discounts

Insurers may offer lower premiums if all the residents in a house do not smoke.

Senior Discounts

If you are at least 55 years old and retired, you may qualify for a discount of up to 10% at some insurers.

Investigate Group Coverage

Employers, alumni and business associations can often benefit from an insurance package at competitive rates. Ask your company's human resources department or your association's director if such a package is available.

Stay With the Same Insurer

If you've kept your coverage with one company for several years, you may get a reduction in your premiums of 5 or 10%, depending on the insurer.

Check Your Policy Once A Year

Compare the limits in your policy with the value of your possessions at least once a year to make sure your policy covers major purchases and/or additions to your home.

Tip: On the other hand, you do not want to spend money for unnecessary coverage. If your five-year-old fur coat is no longer worth the $20,000 you paid for it, reduce your rider and cut your premium.

Look For Private Insurance First

If you live in a high-risk area, that is, one that is vulnerable to coastal storms, fires, or crime, and have been buying your homeowner's insurance through a government plan, you may find that there are steps you can take to buy insurance at a lower price in the private market. Check with your insurance agent or broker.

* * * *

To be sure you have adequate homeowner's insurance, ask your insurance agent questions about the issues discussed in this Financial Guide. A thorough inquiry into specific coverage and costs should result in a policy that offers the best coverage and value. It is also important to ask your agent or broker to explain what factors were used to calculate the policy limits for the dwelling.

Planning Aid: National Flood Insurance Program provides information about National Flood Insurance.

Tip: If you have a problem or need more information, contact the Consumer Federal of America (CFA) Insurance Group.

Glossary

For your convenience, several common insurance terms are defined below:

Actual Cash Value. The current value of property measured in cash, arrived at by taking the replacement cost and deducting for depreciation brought about by physical wear and tear, age and other factors.

Endorsement. A written form attached to a policy that alters the policy's coverage, terms or conditions.

Floater. A policy or endorsement that applies to moveable property whatever its location. The coverage floats or moves with the property.

Guaranteed Replacement Cost Insurance. Insurance providing for payment of the cost of replacing the damaged property without deduction for depreciation and without a dollar limit

Inflation Guard Clause Provision. In a policy or endorsement that automatically adjusts the dwelling limit at policy renewal time to reflect current construction costs in your area.

Replacement Cost Dwelling Insurance. Insurance providing that the policyholder will be paid the cost of replacing the damaged property without deduction for depreciation, but limited by the dollar amount displayed under Section 1, Coverage, A. Dwelling on the Declarations Page of the policy.

Replacement Cost Contents Insurance. Insurance that pays the dollar amount needed to replace damaged personal property with that of similar kind and quality without deducting for depreciation.

Inventory of Belongings

Use this form to document and determine whether your personal property coverage is adequate. Go through each room and inventory your belongings. Write in the year you bought the item and how much you paid for it. Then write in the approximate cost to replace the item today. Finally, calculate the totals at the end of the form. This list will also help in case you need to submit a claim.

Tip: Make a photographic or video record of your belongings, too, and of the outside of your home. This will help should you ever need to submit a claim.

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:

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

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.

Tip: You can borrow against your cash value at a rate that is usually better than the prevailing consumer lending rates. If you die with an outstanding loan amount, the loan amount, plus interest, will be subtracted from your death benefit.

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.

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

Who is entitled to Social Security disability benefits? How is a "disability" determined? How long do payments continue? What happens when you reach retirement age? This Financial Guide provides information you should know about Social Security disability benefits in the event you or a loved one becomes disabled.

Every family needs to plan for the possibility of a disabling illness that prevents a breadwinner from earning income. Here is a summary of the part that Social Security benefits will play in your disability insurance planning-the amount you're entitled to and the rules that apply. This Guide also informs you of what changes you need to report to Social Security and the easiest ways to report them.

General Information

An individual who is determined by the Social Security Administration to be "disabled" receives an Award Letter, which is a notice of decision that explains how much the disability benefit will be and when payments start. It also tells you when you can expect your condition to be reviewed to see if there has been any improvement

Planning Aid: Social Security Disability Benefits gives a general overview of social security disability benefits.

Caution: You never have to pay for information or service at Social Security. Some businesses advertise that they can provide name changes, Social Security cards, or earnings statements for a fee. All these services are provided free by Social Security.

Generally, a worker is entitled to disability if he or she (1) is "insured" for disability (i.e., has accumulated sufficient credits in the Social Security system), (2) is under age 65, (3) has been disabled or is expected to be disabled for at least 12 months, (4) has filed an application for benefits, and (5) has completed a five-month waiting period. In general, to get disability benefits, you must meet two different earnings tests:

• A "recent work" test based on your age at the time you became disabled; and
• A "duration of work" test to show that you worked long enough under Social Security.

Certain blind workers have to meet only the "duration of work" test.

Disability is generally defined as the inability to perform substantial gainful activity due to a medical or mental impairment. Social Security pays benefits to people who cannot work because they have a medical condition that is expected to last at least one year or result in death. Federal law requires this very strict definition of disability and meeting this definition under Social Security is difficult.

If you are getting disability benefits on your own work record or on a deceased spouse's record, your payments cannot begin before the sixth full month of disability. If the sixth month has passed, your first payment may include some back benefits.

Note: Your Social Security disability benefit may be reduced if you are eligible for workers' compensation, other public disability payments, or a pension from a job where you did not have to pay Social Security taxes (discussed later). You can expect your payment amount to go up in future years. Whenever the cost of living goes up in a year, benefits will be increased by that amount the following January. If there is an increase, then you will get a notice telling you about it.

Caution: If a person claiming to be a Social Security employee visits you to talk about Social Security or SSI, ask for identification. A bona fide Social Security employee will be glad to show you proper identification. If you have any doubts, check with SSA. Remember: Social Security employees will never ask you for money to have something done. It is their job to help you.

Taxation of Benefits

Some people who get Social Security have to pay taxes on their benefits. About one-third of our current beneficiaries pay taxes on their benefits. You will be affected only if you have substantial income in addition to your Social Security benefits. If you file a federal tax return as an "individual" and your combined income is more than $25,000, you have to pay taxes. Combined income is defined as your adjusted gross income + Nontaxable interest + ½ of your Social Security benefits. If you file a joint return, you may have to pay taxes if you and your spouse have a combined income that is more than $32,000. If you are married and file a separate return, then you will probably pay taxes on your benefits.

Benefit Payments

When to Expect Them

Your check should arrive on the third day of every month. If the third falls on a Saturday, Sunday, or legal holiday, then you will receive your check on the last banking day before that day. The check you receive is the benefit for the previous month. For example, the check you receive dated July 3 is for June.

Form of Payment

Your benefit can either be deposited directly into your bank account or paid through the Direct Express card program. The money is deposited on the second, third, or fourth Wednesday, depending on your day of birth. For more information: Schedule of Social Security Benefit Payments for 2014.

Note: The SSA began phasing out paper checks starting in May 2011 and those who began receiving Social Security checks before May of 2011 had until March 1, 2013, to sign up for electronic payments.

Direct Deposit. Direct deposit of your check is safe, reliable, and convenient.

Questions about direct deposit and Direct Express can be answered by your financial institution or any Social Security office.

Direct Express. Direct Express is a pre-paid debit card that does not require a bank account, but still gives you the same advantages of direct deposit.

Tip: It is especially important to tell Social Security about any change in your mailing address when you receive your benefits by direct deposit. If you decide to change the account or the financial institution where your benefits are going, it is important to keep the old account open until the first benefit is received in your new account. It usually takes one or two months to process the change from one bank or account to another.

Duration of Payments

Your disability benefits generally continue for as long as you cannot work and your impairment has not medically improved. They will not necessarily continue indefinitely, however. Because of advances in medical science and rehabilitation techniques, an increasing number of people with disabilities recover from serious accidents and illnesses. Also, many individuals, through determination and effort, overcome serious conditions and return to work in spite of them.

Having a Child After Benefits Start

If you become the parent of a child after you begin receiving Social Security benefits and the child is in your care, be sure to notify SSA so that the child can also receive benefits.

Reaching Retirement Age

If you are still getting disability benefits when you reach full-retirement age, your benefits will be automatically changed to retirement benefits, generally in the same amount. You will then receive a new booklet explaining your rights and responsibilities as a retired person. If you are a disabled widow or widower, your benefits will be changed to regular widow or widower benefits (at the same rate) at 60, and you will receive a new instruction booklet that explains the rights and responsibilities for people who get survivors benefits.

Eligibility for Medicare

After you receive disability benefits for 24 months, you will be eligible for Medicare. You will get information about Medicare several months before your coverage starts. If you have permanent kidney failure requiring regular dialysis or a transplant or you have amyotrophic lateral sclerosis (Lou Gehrig's disease), you may qualify for Medicare almost immediately.

Changes That Can Affect Your Benefits

You should promptly report any changes that may affect your disability benefits. Family members receiving benefits also should report events that might affect their checks. The events that must be reported are explained in this section.

If you work while receiving disability payments

Notify SSA if you take a job or become self-employed, no matter how little you earn. Let them know how many hours you expect to work and when your work starts or stops. If you still are disabled, then you will be eligible for a trial work period, and you can continue receiving benefits for up to nine months. Also, tell SSA if you have any special work expenses because of your disability (such as specialized equipment, a wheelchair or even prescription drugs) or if there is any change in the amount of those expenses.

If you receive other disability benefits

Social Security benefits for you and your family may be reduced if you also are eligible for workers' compensation (including payments through the black lung program) or for disability benefits from certain federal, state or local government programs. You must tell SSA if:

• You apply for another type of disability benefit;
• You receive another disability benefit or a lump-sum settlement; or
• Your benefits change or stop.

If you are offered services under the Ticket to Work Program

Social Security may send you a Ticket that you can use to obtain services to help you go to work or earn more money. You may take the Ticket to your state vocational rehabilitation agency or to an Employment Network of your choice. Employment Networks are private organizations that have agreed to work with Social Security to provide employment services to beneficiaries with disabilities. Your participation in the Ticket Program is voluntary and the services are provided at no cost to you.

If you move

When you plan to move, give SSA your new address and phone number as soon as you know them. Also let them know the names of any family members who are getting benefits and are moving with you. Even if you receive your benefits by direct deposit, the social security office must have your correct address so they can send letters and other important information to you. Your benefits will be stopped if they are unable to contact you. You can change your address here. Be sure you also file a change of address with your post office.

If you change direct deposit accounts

If you change financial institutions or open a new account, be sure to say that you want to sign up for direct deposit. You also can change your direct deposit online if you have a personal identification number and a password. Or, SSA can change your direct deposit information over the telephone. Have your new and old bank account numbers handy when you call. It takes about 30-60 days to change this information. Do not close your old account until after you make sure your Social Security benefits are being deposited into the new account.

If you are unable to manage your benefits

Sometimes people are unable to manage their money. When this happens, Social Security should be notified. They can arrange to send benefits to a relative or other person who agrees to use the money to take care of the person for whom the benefits are paid. The person who manages someone else's benefits is called a "representative payee."

NOTE: People who have "power of attorney" for someone do not automatically qualify to be the person's representative payee. For more information, ask Social Security for A Guide For Representative Payees (Publication No. 05-10076).

If you get a pension from work not covered by Social Security

If you start receiving a pension from a job for which you did not pay Social Security taxes-—for example, from the federal civil service system, some state or local pension systems, nonprofit organizations or a foreign government—-your Social Security benefit may be reduced. Also, be sure to notify SSA if the amount of your pension changes.

If you get married or divorced

If you get married or divorced, your Social Security benefits may be affected, depending on the kind of benefits you receive.

If your benefits are stopped because of marriage or remarriage, they may be started again if the marriage ends.

If you change your name

If you change your name, either by marriage, divorce or court order, you need to tell SSA right away. If you do not give them this information, your benefits will be issued under your old name and, if you have direct deposit, payments may not reach your account. If you receive checks, you may not be able to cash them if your identification is different from the name on your check.

If you care for a child who receives benefits

If you receive benefits because you are caring for a disabled worker's child who is younger than age 16 or disabled, notify SSA right away if the child leaves your care. You must give them the name and address of the person with whom the child is living.

A temporary separation may not affect your benefits if you continue to have parental control over the child, but your benefits will stop if you no longer have responsibility for the child. If the child returns to your care, SSA can start sending your benefits to you again.

Your benefits usually stop when the youngest, unmarried child in your care reaches age 16, unless the child is disabled.

If you become a parent after entitlement

If you become the parent of a child after entitlement (including an adopted child) let SSA know so that they can determine if the child qualifies for benefits.

If a child receiving benefits is adopted

When a child who is receiving benefits is adopted by someone else, let SSA know his or her new name, the date of the adoption decree, and the adopting parent's name and address. The adoption will not cause the child's benefits to stop.

If you have an outstanding warrant for your arrest

You must tell SSA if you have an outstanding arrest warrant for any of the following felony offenses:

• Flight to avoid prosecution or confinement;
• Escape from custody; and
• Flight-escape.

You cannot receive regular disability benefits, or any underpayments you may be due for any month in which there is an outstanding arrest warrant for any of these felony offenses.

If you are convicted of a crime

Tell SSA right away if you are convicted of a crime. Regular disability benefits or any underpayments that may be due are not paid for the months a person is confined for a crime, but any family members who are eligible for benefits based on that person's work may continue to receive benefits.

Monthly benefits or any underpayments that may be due usually are not paid to someone who commits a crime and is confined to an institution by court order and at public expense. This applies if the person has been found:

• Not guilty by reason of insanity or similar factors (such as mental disease, mental defect or mental incompetence); or
• Incompetent to stand trial.

If you violate a condition of parole or probation

You must tell SSA if you are violating a condition of your probation or parole imposed under federal or state law. You cannot receive regular disability benefits or any underpayment that may be due for any month in which you violate a condition of your probation or parole.

If you leave the United States

If you are a U.S. citizen, you can travel to or live in most foreign countries without affecting your Social Security benefits. There are, however, a few countries where Social Security payments generally cannot be sent to. These countries are Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, Ukraine, Uzbekistan and Vietnam.

Let SSA know if you plan to go outside the United States for a trip that lasts 30 days or more. Tell SSA the name of the country or countries you plan to visit and the date you expect to leave the United States.

They will send you special reporting instructions and tell you how to arrange for your benefits while you are away. Be sure to notify SSA when you return to the United States.

If you are not a U.S. citizen and you return to live in the United States, you must provide evidence of your non-citizen status in order to continue receiving benefits. If you work outside the United States, different rules apply in determining whether you can get your benefits.

For more information, ask any Social Security office for a copy of Your Payments While You Are Outside The United States (Publication No. 05-10137).

If your citizenship status changes

If you are not a U.S. citizen, let SSA know if you become a U.S. citizen or if your non-citizen status changes. If your immigration status expires, you must give SSA new evidence that shows you continue to be in the United States lawfully.

If a beneficiary dies

Let SSA know if a person receiving Social Security benefits dies. Benefits are not payable for the month of death. That means if the person died any time in July, for example, the check received in August (which is payment for July) must be returned. If direct deposit is used, also notify the financial institution of the death as soon as possible so it can return any payments received after death.

Family members may be eligible for Social Security Survivors Benefits when a person getting disability benefits dies.

If you are receiving Social Security and Railroad Retirement benefits

If you are receiving both Social Security and Railroad Retirement benefits based on your spouse's work and your spouse dies, you must tell SSA immediately. You no longer will be eligible to receive both benefits. You will be notified which survivor benefit you will receive.

How to Report a Change

You can report a change by simply calling the Social Security Administration at (800) 772-1213 or visiting any SSA office. You can also visit the Social Security Administration website. If you send a report by mail, be sure to include the following information:

• Your name, and if different, the name and Social Security claim number of the person on whose account you get benefits
• Name of person(s) about whom the report is made
• Your Social Security claim number
• What new information is being reported
• Date of the change
• Your signature, address, phone number, and date

If you are getting benefits on somebody else's record (a spouse, for example), SSA needs his or her Social Security number as well.

Disability Case Reviews

Under federal law, all disability cases must be reviewed from time to time. This review is to make sure that people receiving benefits are still considered disabled and meet all other requirements. Your benefits generally will continue unless there is strong proof that your condition has medically improved and there is evidence that you are able to return to work.

Frequency of Reviews

How often your case is reviewed depends on the severity of your condition and the likelihood of improvement. The frequency can range from six months to seven years. Your Certificate of Award states when you can expect your first review. Here are general guidelines for reviews:

• Improvement expected-If medical improvement can be predicted when benefits start, your first review should be six to 18 months later.
• Improvement possible-If medical improvement is possible but cannot be predicted, your case will be reviewed about every three years.
• Improvement not expected-If medical improvement is not likely; your case will be reviewed only about once every five to seven years.

What Happens During a Review

After you get a letter announcing the review, someone from your Social Security office will contact you to explain the review process and your appeal rights. You will be asked to provide information about any medical treatment you have received and any work you might have done. Then your file will be sent to the state agency that makes disability decisions for Social Security. An evaluation team that includes a disability examiner and a doctor will carefully review your file and request your medical reports. If reports are not complete or current enough, you may be asked to have a special examination or test that the government will pay for.

Once a decision is reached, SSA will send you a letter explaining it. If SSA decides you are still disabled, your benefits will continue. If they decide you are no longer disabled, you can file an appeal (see below); otherwise, your benefits will stop three months after SSA determined that your disability ended.

The Ticket to Work Program

Even after you start receiving disability benefits, you may want to try working again. Under this program, Social Security and Supplemental Security Income disability beneficiaries can get help with training and other services they need to go to work at no cost to them. Most beneficiaries will receive a “ticket” that they can take to a provider of their choice who can offer the kind of services they need. To learn more about this program, ask for Your Ticket To Work (Publication No. 05-10061).

Note: For more information about helping you return to work, ask for Working While Disabled-—How We Can Help (Publication No. 05-10095). A guide to all of SSA employment supports can be found in the Red Book, A Summary Guide to Employment Support for Individuals with Disabilities Under the Social Security Disability Insurance and Supplemental Security Income Programs (Publication No. 64-030).

"Substantial" Work

To understand how work affects your disability benefits, you need to understand how Social Security measures your work. Disability benefits can be paid only if you are unable to do any "substantial" work, referred to as "Substantial Gainful Activity" (SGA) by the SSA. The amount of your earnings determines whether your work is substantial. The Substantial Gainful Activity (SGA) amount for persons with disabilities other than blindness is $1,070 per month in 2014. For persons who are blind, the amount of earnings that indicate SGA remains at $1,800 per month in 2014.

If you are self-employed, your disability is blindness, and you are age 55 or older, special rules apply.

Nine-Month Trial Work Period (TWP)

You can continue to receive benefits for up to nine months while you try to work. The months need not be consecutive, but they must take place within a 60-month period. Generally speaking, a "trial work" month is any month in which you earn over $720 in gross wages for 2011 (unchanged from 2010) or spend 80 hours in your own business (regardless of amount of earnings). You will receive your full benefits during this period as long as you report your activity and remain disabled. If you recover during a trial work period, your benefits will stop after a three-month adjustment period.

At the end of nine months of trial work, SSA will decide if you are able to do "substantial" work. If you can, your benefits will stop after a three-month adjustment period. If you are not able to work, your payments will continue.

36-Month Extended Period of Eligibility (EPE)

If your benefits stop because you have returned to work even though you are still medically disabled, you receive special "benefit protection" for the next 36 months. During that time, you can receive a benefit for any month your earnings fall below $1,000. You do not have to file a new application, but you do have to notify Social Security. If you are unable to continue working, your benefits continue indefinitely so long as you remain disabled.

Medicare Continues

If you are working even though you are still disabled, your Medicare coverage may continue for at least 39 months after the trial work period. Beyond that, you may purchase the coverage with a monthly premium.

Help With Work Expenses

If you need certain equipment or services to help you work, the money you pay for them can be deducted from your earnings in deciding whether you are doing "substantial" work. It does not matter if you also need the items or services for daily living (such as a wheelchair).

The cost of medical equipment, certain attendant care services, prostheses, and similar items and services is generally deductible. The cost of drugs or medical services is deductible only if required because of your condition.

Vocational Rehabilitation

When you applied for disability benefits, information about you and your impairment may have been sent to the state vocational rehabilitation agency. If they offer you services and you refuse them without good reason, your monthly benefits may be withheld. If you have not heard from them, but are interested in receiving rehabilitation services, you should give them a call.

Your disability benefits will continue while you receive rehabilitation services. Under a special rule, benefits can continue even if you medically recover while participating in an approved vocational rehabilitation or training program.

Note: For more information, review the Social Security booklet How Social Security Can Help With Vocational Rehabilitation (Publication No. 05-10050).

Benefits for Children and Students

If a child is getting checks on your account, there are several important things you should know about his or her benefits.

When a child reaches age 18, the child's benefits stop the month before the child reaches age 18, unless the child remains unmarried and is either disabled or is a full-time elementary or secondary school student.

About five months before the child's 18th birthday, the person receiving the child's benefits will get a form explaining how benefits can continue.

A child whose benefits stopped at 18 can have them started again if he or she becomes disabled before reaching 22 or becomes a full-time elementary or secondary school student before reaching 19.

If a child is disabled, the child can continue to receive benefits after age 18 if he or she has a disability. The child also may qualify for SSI disability benefits.

If a child at 18 is a student, the child can receive benefits until age 19 if he or she continues to be a full-time elementary or secondary school student. When a student's 19th birthday occurs during a school term, benefits can be continued up to two months to allow completion of the term.

Social Security should be notified immediately if the student drops out of school, changes from full-time to part-time attendance, is expelled or suspended, or changes schools. SSA should also be told if the student is paid by his or her employer for attending school.

SSA sends each student a form at the start and end of the school year. It is important that the form be filled out and returned to SSA. Failure to return the form could result in a suspension of benefits.

A student can keep receiving benefits during a vacation period of four months or less if he or she plans to go back to school full time at the end of the vacation.

A student who stops attending school generally can receive benefits again if he or she returns to school full time before age 19. The student needs to contact Social Security to reapply for benefits.

Benefits for the child of someone getting disability benefits always end if the child marries. The must be reported right away.

Your Right to an Appeal

If you disagree with SSA's decision, you can appeal it. You have 60 days to file a written appeal by mail or in person with any Social Security office. Generally, there are four levels to the appeals process. They are:

• Reconsideration. Your claim is reviewed by someone who did not take part in the first decision.
• Hearing Before an Administrative Law Judge. You can appear before a judge to present your case.
• Review by Appeals Council. If the Appeals Council decides your case should be reviewed, it will either decide your case or return it to the administrative law judge for further review.
• Federal District Court. If the Appeals Council decides not to review your case or if you disagree with its decision, you may file a civil lawsuit in a Federal District Court and continue your appeal all the way to the US Supreme Court if necessary.

If you disagree with the decision at one level, you have 60 days to appeal to the next level until you are satisfied with the decision or have completed the last level of appeal.

You have two special appeal rights when a decision is made that you are no longer disabled. They are:

• Disability Hearing. As part of the reconsideration process, this hearing allows you to meet face-to-face with the person who is reconsidering your case to explain why you feel you are still disabled. You can submit new evidence or information and can bring someone who knows about your disability. This special hearing does not replace your right to also have a formal hearing before an administrative law judge (the second appeal step) if your reconsideration is denied.


• Continuation of Benefits. While you are appealing your case, you can have your disability benefits and Medicare coverage (if you have it) continue until an administrative law judge makes his or her decision. However, you must request the continuation of your benefits during the first 10 days of the 60 days mentioned earlier. If your appeal is not successful, you may have to repay the benefits.

Annuities may help you meet some of your mid and long-range goals such as planning for your retirement and for a child's college education. This Financial Guide tells you how annuities work, discusses the various types of annuities, and helps you determine which annuity product (if any) suits your situation. It also discusses the tax aspects of annuities and explains how to shop for both an insurance company and an annuity, once you know which type you'll need.

How Annuities Work

While traditional life insurance guards against "dying too soon," an annuity, in essence, can be used as insurance against "living too long." In brief, when you buy an annuity (generally from an insurance company, that invests your funds), you in turn receive a series of periodic payments that are guaranteed as to amount and payment period. Thus, if you choose to take the annuity payments over your lifetime (keep in mind that there are many other options), you will have a guaranteed source of "income" until your death. If you "die too soon" (that is, you don't outlive your life expectancy), you will get back from the insurer far less than you paid in. On the other hand, if you "live too long" (and do outlive your life expectancy), you may get back far more than the cost of your annuity (and the resultant earnings). By comparison, if you put your funds into a traditional investment, you may run out of funds before your death.

The earnings that occur during the term of the annuity are tax-deferred. You are not taxed on them until they are paid out. Because of the tax deferral, your funds have the chance to grow more quickly than they would in a taxable investment.

How Annuities Best Serve Investors

Tip: Assess the costs of an annuity relative to the alternatives. Separate purchase of life insurance and tax-deferred investments may be more cost effective.

The two primary reasons to use an annuity as an investment vehicle are:

1. You want to save money for a long-range goal, and/or
2. You want a guaranteed stream of income for a certain period of time.

Annuities lend themselves particularly well to funding retirement and, in certain cases, education costs.

One negative aspect of an annuity is that you cannot get to your money during the growth period without incurring taxes and penalties. The tax code imposes a 10% premature-withdrawal penalty on money taken out of a tax-deferred annuity before age 59½ and insurers impose penalties on withdrawals made before the term of the annuity is up. The insurers' penalties are termed "surrender charges," and they usually apply for the first seven years of the annuity contract.

These penalties lead to a de facto restriction on the use of annuities primarily as an investment. It only makes sense to put your money into an annuity if you can leave it there for at least ten years and the withdrawals are scheduled to occur after age 59½. These restrictions explain why annuities work well for either retirement needs or for cases of education funding where the depositor will be at least 59½ when withdrawals begin.

Tip: The greater the investment return, the less punishing the 10% penalty on withdrawal under age 59½ will appear. If your variable annuity investments have grown substantially, you may want to consider taking some of those profits (despite the penalty, which applies only to the taxable portion of the amount withdrawn).

Annuities can also be effective in funding education costs where the annuity is held in the child's name under the provisions of the Uniform Gifts to Minors Act. The child would then pay tax (and 10% penalty) on the earnings when the time came for withdrawals.

Caution: A major drawback is that the child is free to use the money for any purpose, not just education costs.

Types Of Annuities

The available annuity products vary in terms of (1) how money is paid into the annuity contract, (2) how money is withdrawn, and (3) how the funds are invested. Here is a rundown on some of the annuity products you can buy:

• Single-Premium Annuities: You can purchase a single-premium annuity, in which the investment is made all at once (perhaps using a lump sum from a retirement plan payout). The minimum investment is usually $5,000 or $10,000.
• Flexible-Premium Annuities: With the flexible-premium annuity, the annuity is funded with a series of payments. The first payment can be quite small.
• Immediate Annuities: The immediate annuity starts payments right after the annuity is funded. It is usually funded with a single premium, and is usually purchased by retirees with funds they have accumulated for retirement.
• Deferred Annuities: With a deferred annuity, payouts begin many years after the annuity contract is issued. You can choose to take the scheduled payments either in a lump sum or as an annuity, that is, as regular annuity payments over some guaranteed period. Deferred annuities are used as long-term investment vehicles by retirees and non-retirees alike. They are used to fund tax-deferred retirement plans and tax-sheltered annuities. They may be funded with a single or flexible premium.
• Fixed Annuities: With a fixed annuity contract, the insurance company puts your funds into conservative fixed income investments such as bonds. Your principal is guaranteed and the insurance company gives you an interest rate that is guaranteed for a certain minimum period-from a month to several years. This guaranteed interest rate is adjusted upwards or downwards at the end of the guarantee period. Thus, the fixed annuity contract is similar to a CD or a money market fund, depending on the length of the period during which interest is guaranteed. The fixed annuity is considered a low-risk investment vehicle. All fixed annuities also guarantee you a certain minimum rate of interest of 3 to 5% for the entirety of the contract. The fixed annuity is a good choice for investors with a low risk tolerance and a short-term investing time horizon. The growth that will occur will be relatively low. Fixed annuity investors benefit if interest rates fall, but not if they rise.
• Variable Annuities: The variable annuity, which is considered to carry with it higher risks than the fixed annuity--about the same risk level as a mutual fund investment--gives you the ability to choose how to allocate your money among several different managed funds. There are usually three types of funds: stocks, bonds, and cash-equivalents. Unlike the fixed annuity, there are no guarantees of principal or interest. However, the variable annuity does benefit from tax deferral on the earnings.

Tip: You can switch your allocations from time to time for a small fee or sometimes for free.

The variable annuity is a good annuity choice for investors with a moderate to high risk tolerance and a long-term investing time horizon.

Caution: Variable annuities have higher costs than similar investments that are not issued by an insurance company.

Caution: The taxable portion of variable annuity distributions is taxable at full ordinary rates, even if they are based on stock investments. Unlike dividends from stock investments (including mutual funds), there is no capital gains relief (currently set to expire at the end of 2012).

Tip: Annuities are available that combine both fixed and variable features.

Tip: Before buying an annuity, contribute as much as possible to other tax-deferred options such as IRA's and 401 (k) plans. The reason is that the fees for these plans is likely to be lower than those of an annuity and early-withdrawal fees on annuities tend to be steep.

Tip: IRA contributions are sometimes invested in flexible premium annuities-with IRA deduction, if otherwise available. You may prefer to use IRAs for non-annuity assets. Non-annuity assets gain the ability to grow tax-free when held in an IRA. The IRA regime adds no such benefit to annuity assets which grow tax-free in or outside IRAs.

Choosing A Payout Option

When it's time to begin taking withdrawals from your deferred annuity, you have a number of choices. Most people choose a monthly annuity-type payment, although a lump sum withdrawal is also possible.

Caution: Once you have chosen a payment option, you cannot change your mind.

The size of your payout (settlement option) depends on:

1. The size of the amount in your annuity contract
2. Whether there are minimum required payments
3. Your life expectancy (or other payout period)
4. Whether payments continue after your death

Here are summaries of the most common forms of payout:

Fixed Amount

This type gives you a fixed monthly amount (chosen by you) that continues until your annuity is used up. The risk of using this option is that you may live longer than your money lasts. Thus, if the annuity is your only source of income, the fixed amount is not a good choice. And, if you die before your annuity is exhausted, your beneficiary gets the rest.

Fixed Period

This option pays you a fixed amount over the time period you choose. For example, you might choose to have the annuity paid out over ten years. If you are seeking retirement income before some other benefits start, this may be a good option. If you die before the period is up, your beneficiary gets the remaining amount.

Lifetime or Straight Life

This type of payment continues until you die. There are no payments to survivors. The life annuity gives you the highest monthly benefit of the options listed here. The risk is that you will die early, thus leaving the insurance company with some of your funds. The life annuity is a good choice if (1) you do not need the annuity funds to provide for the needs of a beneficiary and (2) you want to maximize your monthly income.

Life With Period Certain

This form of payment gives you payments as long as you live (as does the life annuity) but with a minimum period during which you or your beneficiary will receive payments, even if you die earlier than expected. The longer the guarantee period, the lower the monthly benefit.

Installment-Refund

This option pays you as long as you live and guarantees that, should you die early, whatever is left of your original investment will be paid to a beneficiary. Monthly payments are less than with a straight life annuity.

Joint And Survivor

In one joint and survivor option, monthly payments are made during the annuitants' joint lives, with the same or a lesser amount paid to whoever is the survivor. In the option typically used for retired employees (employment model), monthly payments are made to the retired employee, with the same or a lesser amount to the employee's surviving spouse or other beneficiary. The difference is that with the employment model , the spouse's (or other co-annuitant's) death before the employee won't affect what the survivor employee collects. The amount of the monthly payments depends on the annuitants' ages, and whether the survivor's payment is to be 100% of the joint amount or some lesser percentage.

How Payouts Are Taxed

The way your payouts are taxed differs for qualified and non-qualified annuities.

Qualified Annuity

A tax-qualified annuity is one used to fund a qualified retirement plan, such as an IRA, Keogh plan, 401(k) plan, SEP (simplified employee pension), or some other retirement plan. The tax-qualified annuity, when used as a retirement savings vehicle, is entitled to all of the tax benefits (and penalties) that Congress saw fit to attach to such qualified plans.

The tax benefits are:

1. Any nondeductible or after-tax amount you put into the plan is not subject to income tax when withdrawn
2. The earnings on your investment are not taxed until withdrawal

If you withdraw money from a qualified plan annuity before the age of 59½, you will have to pay a 10% penalty on the amount withdrawn in addition to paying the regular income tax. There are exceptions to the 10% penalty, including an exception for taking the annuity out in a series of equal periodic payments over the rest of your life.

Once you reach age 70½, you will have to start taking withdrawals in certain minimum amounts specified by the tax law (with exceptions for Roth IRAs and for employees still working after age 70½).

Non-Qualified Annuity

A non-qualified annuity is purchased with after-tax dollars. You still get the benefit of tax deferral on the earnings; however, you pay tax on the part of the withdrawals that represent earnings on your original investment.

If you make a withdrawal before the age of 59½, you will pay the 10% penalty only on the portion of the withdrawal that represents earnings.

With a non-qualified annuity, you are not subject to the minimum distribution rules that apply to qualified plans after you reach age 70½.

Tax on Your Beneficiaries or Heirs

If your annuity is to continue after your death, other taxes may apply to your beneficiary (the person you designate to take further payments) or your heirs (your estate or those who take through the estate if you didn't designate a beneficiary).

Income tax: Annuity payments collected by your beneficiaries or heirs are subject to tax on the same principles that would apply to payments collected by you.

Exception: There's no 10% penalty on withdrawal under age 59½ regardless of the recipient's age, or your age at death.

Estate tax: The present value at your death of the remaining annuity payments is an asset of your estate, and subject to estate tax with other estate assets. Annuities passing to your surviving spouse or to charity would escape this tax.

If a particular fund has a great track record, ascertain whether the same management is still in place. Although past performance is no guarantee, consistent management will grant you better odds.

How To Shop For An Annuity

Although annuities are typically issued by insurance companies, they may also be purchased through banks, insurance agents, or stockbrokers.

There is considerable variation in the amount of fees that you will pay for a given annuity as well in the quality of the product. Thus, it is important to compare costs and quality before buying an annuity.

First, Check Out The Insurer

Before checking out the product itself, it is important to make sure that the insurance company offering it is financially sound. Because annuity investments are not federally guaranteed, the soundness of the insurance company is the only assurance you can rely on. Consult services such as A.M. Best Company, Moody's Investor Service, or Standard & Poor's Ratings to find out how the insurer is rated.

Next, Compare Contracts

The way you should go about comparing annuity contracts varies with the type of annuity.

• Immediate annuities: Compare the settlement options. For each $1,000 invested, how much of a monthly payout will you get? Be sure to consider the interest rate and any penalties and charges.
• Deferred annuities: Compare the rate, the length of guarantee period, and a five-year history of rates paid on the contract. It is important to consider all three of these factors and not to be swayed by high interest rates alone.
• Variable annuities: Check out the past performance of the funds involved.

If a particular fund has a great track record, ascertain whether the same management is still in place. Although past performance is no guarantee, consistent management will grant you better odds.

Costs, Penalties, And Extras

Be sure to compare the following points when considering an annuity contract:

Surrender Penalties

Find out the surrender charges (that is, the amounts charged for early withdrawals). The typical charge is 7% for first-year withdrawals, 6% for the second year, and so on, with no charges after the seventh year. Charges that go beyond seven years, or that exceed the above amounts, should not be acceptable.

Tip: Be sure the surrender charge "clock" starts running with the date your contract begins, not with each new investment.

Fees And Costs

Be sure to ask about all other fees. With variable annuities, the fees must be disclosed in the prospectus. Fees lower your return, so it is important to know about them. Fees might include:

• Mortality fees of 1 to 1.35% of your account (protection for the insurer in case you live a long time)
• Maintenance fees of $20 to $30 per year
• Investment advisory fees of 0.3% to 1% of the assets in the annuity's portfolios.

Extras

These provisions are not costs, but should be asked about before you invest in the contract.

Some annuity contracts offer "bail-out" provisions that allow you to cash in the annuity if interest rates fall below a stated amount without paying surrender charges.

There may also be a "persistency" bonus which rewards annuitants who keep their annuities for a certain minimum length of time.

In deciding whether to use annuities in your retirement planning (or for any other reason) and which types of annuities to use, professional guidance is advisable.

Risk To Retirees of Using An Immediate Annuity

At first glance, the immediate annuity would seem to make sense for retirees with lump-sum distributions from retirement plans. After all, an initial lump-sum premium can be converted into a series of monthly, quarterly, or yearly payments that represent a portion of principal plus interest and is guaranteed to last for life. The portion of the periodic payout that constitutes a return of principal is excluded from taxable income.

However, this strategy contains risks. For one thing, when you lock yourself into a lifetime of level payments, you fail to guard against inflation. Furthermore, you are gambling that you will live long enough to get your money back. Thus, if you buy a $150,000 annuity and die after collecting only $60,000, the insurer often gets to keep the rest. Unlike other investments, the balance doesn't go to your heirs. Finally, since the interest rate is fixed by the insurer when you buy it, you may be locking yourself into low rates.

You can hedge your bets by opting for a "period certain", or "term certain" which, in the event of your death, guarantees payment for some years to your beneficiaries. There are also "joint-and-survivor" options (which pay your spouse for the remainder of his or her life after you die) or a "refund" feature (in which some or all of the remaining principal is resumed to your beneficiaries).

Some plans offer quasi-inflation adjusted payments. One company offers a guaranteed increase in payments of $10 at three-year intervals for the first 15 years. Payments then get an annual cost-of-living adjustment with a 3% maximum. However, for these enhancements to apply, you will have to settle for much lower monthly payments than the simple version.

Recently, a few companies have introduced immediate annuities that offer potentially higher returns in return for some market risk. These "variable immediate annuities" convert an initial premium into a lifetime income; however, they tie the monthly payments to the returns on a basket of mutual funds.

Older seniors-75 years of age and up- may have fewer worries about inflation or liquidity. Nevertheless, they should question whether they really need such annuities at all.

If you want a comfortable retirement income, consider a balanced portfolio of mutual funds. If you want to guarantee that you will not outlive your money, you can plan your withdrawals over a longer time horizon.