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Automobile Insurance

What is auto insurance?

Auto insurance protects you against financial loss if you have an accident. It is a contract between you and the insurance company. You agree to pay the premium and the insurance company agrees to pay your losses as defined in your policy.

Auto insurance provides property, liability and medical coverage. Property coverage pays for damage to or theft of your car. Liability coverage pays for your legal responsibility to others for bodily injury or property damage. Medical coverage pays for the cost of treating injuries, rehabilitation and sometimes lost wages and funeral expenses.

An auto insurance policy is comprised of six different kinds of coverage. Most states require you to buy some, but not all, of these types of coverage. If you’re financing a car, your lender may also have requirements.

Most auto policies are for six months to a year. Your insurance company should notify you by mail when it’s time to renew the policy and to pay your premium.

What is in a basic automobile insurance policy?

Your auto policy may include six coverages. Each type of coverage is priced separately.

  1. Bodily Injury LiabilityThis coverage applies to injuries that you, the designated driver or policyholder, cause to someone else. You and family members listed on the policy are also covered when driving someone else’s car with their permission.It’s very important to have enough liability insurance, because if you are involved in a serious accident, you may be sued for a large sum of money. Definitely consider buying more than the state-required minimum to protect assets such as your home and savings.
  2. Medical Payments or Personal Injury Protection (PIP)This coverage pays for the treatment of injuries to the driver and passengers of the policyholder’s car. At its broadest, PIP can cover medical payments, lost wages and the cost of replacing services normally performed by someone injured in an auto accident. It may also cover funeral costs.
  3. Property Damage LiabilityThis coverage pays for damage you (or someone driving the car with your permission) may cause to someone else’s property. Usually, this means damage to someone else’s car, but it also includes damage to lamp posts, telephone poles, fences, buildings or other structures your car hit.
  4. CollisionThis coverage pays for damage to your car resulting from a collision with another car, object or as a result of flipping over. It also covers damage caused by potholes. Collision coverage is generally sold with a deductible of $250 to $1,000—the higher your deductible, the lower your premium. Even if you are at fault for the accident, your collision coverage will reimburse you for the costs of repairing your car, minus the deductible. If you’re not at fault, your insurance company may try to recover the amount they paid you from the other driver’s insurance company. If they are successful, you’ll also be reimbursed for the deductible.
  5. ComprehensiveThis coverage reimburses you for loss due to theft or damage caused by something other than a collision with another car or object, such as fire, falling objects, missiles, explosion, earthquake, windstorm, hail, flood, vandalism, riot, or contact with animals such as birds or deer.Comprehensive insurance is usually sold with a $100 to $300 deductible, though you may want to opt for a higher deductible as a way of lowering your premium. Comprehensive insurance will also reimburse you if your windshield is cracked or shattered. Some companies offer glass coverage with or without a deductible.States do not require that you purchase collision or comprehensive coverage, but if you have a car loan, your lender may insist you carry it until your loan is paid off.
  6. Uninsured and Under insured Motorist Coverage
    This coverage will reimburse you, a member of your family, or a designated driver if one of you is hit by an uninsured or hit-and-run driver.Under insured motorist coverage comes into play when an at-fault driver has insufficient insurance to pay for your total loss. This coverage will also protect you if you are hit as a pedestrian.

Can I drive legally without automobile insurance?

NO! Almost every state requires you to have auto liability insurance. All states also have financial responsibility laws. This means that even though a state does not require liability insurance, you need to have sufficient assets to pay claims if you cause an accident. If you don’t have enough assets, you must purchase at least the state minimum amount of insurance. But insurance exists to protect your assets. Trying to see how little you can get by with can be very shortsighted and dangerous.

If you’ve financed your car, your lender may require comprehensive and collision insurance as part of the loan agreement.

Below is an example of the state minimum limits for auto liability insurance. The first number refers to liability limits for bodily injury for any one person, the second to limits for all persons injured, and the third refers to property damage liability limits. For example, 20/40/10 means coverage up to $40,000 for all persons injured in an accident, subject to a limit of $20,000 for one individual and $10,000 coverage for property damage.

What if I lease a car?

If you lease a car, you still need to buy your own auto insurance policy. The auto dealer or bank that is financing the car will require you to buy collision and comprehensive coverage. You’ll need to buy this type of coverage in addition to the others that may be mandatory in your state, such as auto liability insurance.

Collision covers the damage to the car from an accident with another automobile or object. Comprehensive covers a loss that is caused by something other than a collision with another car or object, such as a fire or theft or collision with a deer.

The leasing company may also require “gap” insurance. This refers to the fact that if you have an accident and your leased car is damaged beyond repair or “totaled,” there’s likely to be a difference between the amount that you still owe the auto dealer and the check you’ll get from your insurance company. That’s because the insurance company’s check is based on the car’s actual cash value which takes into account depreciation. The difference between the two amounts is known as the “gap.”

On a leased car, the cost of gap insurance is generally rolled into the lease payments. You don’t actually buy a gap policy. Generally, the auto dealer buys a master policy from an insurance company to cover all the cars it leases and charges you for a “gap waiver.” This means that if your leased car is totaled, you won’t have to pay the dealer the gap amount. Check with the auto dealer when leasing your car.

If you have an auto loan rather than a lease, you may want to buy gap insurance to protect yourself from having to come up with the gap amount if your car is totaled before you’ve finished paying for it. Ask your insurance agent about gap insurance or search the Internet. Gap insurance may not be available in some states.

Do I need automobile insurance to rent a car?

When renting a car, you need insurance. If you have adequate insurance on your own car, including collision and comprehensive, this may be enough.

Before you rent a car:

  • Contact your insurance company.
    Find out how much coverage you have on your own car. In most cases, the coverage and deductibles you have on your personal auto policy would apply to a rental car, providing it’s used for pleasure and not business. If you don’t have comprehensive and collision coverage on your own car, you will not be covered if your rental car is stolen or if it is damaged in an accident.
  • Call your credit card company.
    Find out what insurance your card provides. Levels of coverage vary. If you don’t have auto insurance, you will need to buy coverage at the car rental counter. The following types of coverage are available to you at the rental car counter:

    • Collision Damage Waiver (CDW)
      Sometimes called a Loss Damage Waiver (LDW), this coverage relieves you of financial responsibility if your rental car is damaged or stolen. The CDW may be void, however, if you cause an accident by speeding, driving on unpaved roads or driving while intoxicated. This coverage generally costs between $9 and $19 a day. If you have comprehensive and collision on your own car, you may not need to purchase this coverage.
    • Liability Insurance
      This provides excess liability coverage of up to $1 million for the time you rent a car. Rental companies are required by law to provide the minimum level of liability insurance required by your state. Generally, this does not offer enough protection in a serious accident. If you have adequate liability coverage on your car or an umbrella policy on your home/auto, you may consider forgoing this additional insurance. It generally costs about $9 to $14 a day. If you don’t own a car and rent cars often, consider purchasing a non-owner liability policy. This costs approximately $200 – $300 per year. Frequent car renters sometimes find this more cost-effective than constantly paying for the extra liability coverage.
    • Personal Accident Insurance
      This provides coverage to you and your passengers for medical/ambulance bills. This type of insurance, usually costs about $1 to $5 per day, but may be unnecessary if you are covered by health insurance or have adequate medical coverage under your auto policy.
    • Personal Effects Coverage
      This provides coverage for the theft of personal items in your car. However, if you have homeowners or renters insurance, you may be covered for items stolen from the car, minus your deductible. You need to have receipts or other proof of ownership. This type of insurance usually costs about $1 to $4 per day.

Some rental car companies combine personal accident and personal effects coverage together as one type of insurance, while others sell it individually.

The cost of insurance at the rental car counter will vary depending on the rental company, state, and location of the dealer and the type of car you rent. Some rental car companies may check your credit and driving history and may deny coverage. Check with the rental company to find out its policy.

Note: If you’re renting a car abroad, you may need an international driver’s license.

What are the driving laws in my state?

AUTOMOBILE FINANCIAL RESPONSIBILITY LAWS

Most states require car owners to buy a minimum amount of bodily injury and property damage liability insurance before they can legally drive their cars. All states have financial responsibility laws. This means that people involved in an automobile accident will be required to furnish proof of financial responsibility up to certain minimum dollar limits. To comply with financial responsibility laws, most drivers purchase automobile liability insurance. The insurance industry and consumer groups generally recommend a minimum of $100,000 of bodily injury protection per person and $300,000 per accident since accidents may cost far more than the minimum limits mandated by most states.

What’s the difference between cancellation and non-renewal?

There is a big difference between an insurance company canceling a policy and choosing not to renew it. Insurance companies cannot cancel a policy that has been in force for more than 60 days, except when:

  • You fail to pay the premium.
  • You have committed fraud or made serious misrepresentations on your application.
  • Your driver’s license has been revoked or suspended.

Non-renewal is a different matter. Either you or your insurance company can decide not to renew the policy when it expires. Depending on the state you live in, your insurance company must give you a certain number of days notice and explain the reason for not renewing before it drops your policy. If you think the reason is unfair or want a further explanation, call the insurance company’s consumer affairs division. If you don’t get a satisfactory explanation, call your state insurance department.

The company may have decided to drop that particular line of insurance or to write fewer policies where you live, so the non-renewal decision may not be because of something you did. On the other hand, if you did do something that raised the insurance company’s risk considerably, like driving drunk, the premium may rise or you may not have your policy renewed.

If your insurance company did not renew your policy, you will not necessarily be charged a higher premium at another insurance company.

How much insurance coverage do I need?

Almost every state requires you to buy a minimum amount of liability coverage. Chances are that you will need more liability insurance than the state requires because accidents cost more than the minimum limits. If you’re found legally responsible for bills that are more than your insurance covers, you will have to pay the difference out of your own pocket. These costs could wipe you out!

The Insurance Information Institute (I.I.I.) recommends that you have $100,000 of bodily injury protection per person and $300,000 per accident. If your net worth is more than $300,000, consider buying additional liability insurance. You may also consider purchasing an umbrella or excess liability policy. These policies pay when your underlying coverage is exhausted. Typically, these policies cost between $200 and $300 per year for a million dollars in coverage. If you have your homeowners and auto insurance with the same company, check out the cost of coverage with this company first. If you have coverage with different companies, it may be easier to buy it from your auto insurance company.

In addition to liability coverage, consider buying collision and comprehensive coverage. You don’t decide how much to buy. Your coverage reflects the market value of your car and the cost of repairing it.

Decide on a deductible—the amount of money you pay on a claim before the insurance company reimburses you. Typically, deductibles are $500 or $1,000; the higher your deductible, the lower your premium.

What determines the price of my insurance policy?

There are many factors that influence the price you pay for auto insurance. The average American driver spends about $700 a year. Your premium may be higher or lower, depending on:

  • Your driving record
    The better your driving record, the lower your premium. If you’ve had accidents or serious traffic violations, you will pay more than if you have a clean driving record. You may also pay more if you haven’t been insured for a number of years.
  • The number of miles you drive each year
    The more miles you drive, the more chance for accidents. If you drive a lower than average number of miles per year, less than 10,000, you will pay less. For instance, some companies will give discounts to policyholders who car pool.
  • Where you live
    Insurance companies look at local trends, such as the number of accidents, car thefts and lawsuits, as well as the cost of medical care and car repair.
  • Your age
    In general, mature drivers have fewer accidents than less experienced drivers, particularly teenagers. So insurers generally charge more if teenagers or young people below age 25 drive your car.
  • The car you drive
    Some cars cost more to insure than others. Variables include the likelihood of theft, the cost of the car, the cost of repairs, and the overall safety record of the car.
  • The amount of coverage
    Of course, like anything else, the more coverage you have, the more you pay. However, you may qualify for discounts.

What information do I need to give to my insurance agent or company?

Your insurance agent will ask you what make and model cars you own, roughly how many miles you drive each year, and what kind of liability coverage you will need. The insurance agent will also want to know how many people drive the cars, how old the drivers are, where you live, and driving records of each household member.

The insurance agent will then ask more detailed questions about your cars, such as their Vehicle Identification Numbers (VIN), whether they have passive restraint systems or air bags, anti-lock brakes or anti-theft devices. If you already have another insurance policy with the company for home or life insurance, you might receive a discount on your auto policy. You should also mention if you or other drivers in your household have completed safe-driving courses and if student drivers in your home are getting good grades—both of these may qualify you for discounts on your auto policy.

Once the insurance agent has assembled all of the information, he or she will quote you a premium. The premium will depend on all the factors above and on the deductibles you choose.

How do I insure my teenage driver?

As soon as your teenager begins to drive, notify your insurance agent that there will be an additional driver in the house. Since teenagers are inexperienced drivers, they tend to get into a lot of accidents. This will, unfortunately, be reflected in higher insurance rates. If you have a daughter, you can expect your insurance to go up as much as 50 percent. A son will increase your car insurance by as much as 100 percent. Consider also raising liability limits or buying an umbrella liability policy for additional protection.

How to Keep the Increased Cost to a Minimum

  • Insure your son or daughter on your own policy.
    It is generally cheaper to add your teenagers to your insurance policy than for them to purchase their own. If they are going to be driving their own car, insure it with your company so that you can get a multi-policy discount.
  • Let your insurer know if your teenager is going away to school.
    If your kids are living away at school–at least 100 miles from home–you will get a discount for the time they are not around to drive the car. This, of course, assumes that they leave the car at home!
  • Encourage your teen to get good grades and to take a driver training course.
    Most companies will give discounts for getting at least a “B” average in school and for taking recognized driving courses.
  • Shop around.
    Insurance companies differ dramatically in how they price policies for young drivers.
  • Pick a safe car.
    The type of car a young person drives can dramatically affect the price of insurance. You and your teenager should choose a car that is easy to drive and would offer protection in the event of a crash. You should avoid small cars and those with high performance images that might encourage speed and recklessness. Trucks and SUVs should also be avoided, since they are more prone to rollovers.
  • Talk to them about safe driving.
    Driving safely will not only keep your son or daughter alive and healthy, it will also save money. As your teenager gets older, insurance rates will drop–providing he or she has a good driving record.
  • Talk to your teen about the dangers of combining driving with alcohol, lack of sleep and distractions.
    Accidents occur each year because a teen driver was using a cell phone, playing the radio or talking to friends in the backseat. Also, teens should be careful not to provide distractions and to exhibit safe behavior when they are passengers in their friends’ cars.
  • Be a good role model.
    New drivers learn by example, so if you drive recklessly, your teenage driver may copy you. Always wear your seatbelt and never drink and drive.
  • Institute your own version of a graduated drivers licensing program.
    A number of states have reduced teen accidents by restricting the amount of time new drivers may be on the road without supervision. If your state doesn’t have such a program, you may institute this same policy with your own children. Also, take an active role in helping your teenager learn to drive. Plan a series of practice drives in a wide variety of situations–nighttime, rain and snow. Give them time to work up to challenges such as driving in heavy traffic, on expansive bridges or on freeways.

Should I purchase an umbrella liability policy?

If you are ever sued, your standard homeowners or auto policy will provide you with some liability coverage, paying for judgments against you and your attorney’s fees, up to a limit set in the policy. However, in our litigious society, you may want to have an extra layer of liability protection. That’s what a personal umbrella liability policy provides.

An umbrella policy kicks in when you reach the limit on the underlying liability coverage in a homeowners, renters, condominium, or auto policy. It will also cover you for things such as libel and slander.

For about $150 to $300 per year you can buy a $1 million personal umbrella liability policy. The next million will cost about $75 and $50 for every million after that.

Because the personal umbrella policy goes into effect after the underlying coverage is exhausted, there are certain limits that usually must be met in order to purchase this coverage. Most insurers will want you to have about $250,000 of liability insurance on your auto policy and $300,000 of liability insurance on your homeowners policy before selling you an umbrella liability policy for $1 million of additional coverage.

Will my automobile insurance cover a rental car after an accident?

Many drivers don’t think about their insurance coverage until after they have an accident and call their insurance company to file a claim to help pay for car repairs, a rental car and other expenses.

Unfortunately, many insured drivers are surprised to find out that their auto insurance does not automatically cover the cost of a replacement rental car after an accident. Since the average car is in the repair shop for two weeks after an accident, it can cost as much as $500 to rent a replacement car. But, some insured drivers pay little or nothing to rent a car because of an inexpensive but often overlooked option known as rental reimbursement.

Rental reimbursement coverage is available for only $1 or $2 a month with almost every auto insurance policy, but it is bypassed frequently by those who believe they will not have a car accident or those shopping only for the lowest cost premium. The cost of a rental replacement car adds up fast, so even if you don’t have an accident for eight or nine years, the coverage pays for itself when you need it most.

Sometimes working out the details of a claim with the auto insurance company can take time. Even if the accident is the other driver’s fault, you may have to wait several days or longer to get the other insurance company to agree to pay for a rental car. With your own coverage, there is no waiting.

How do I file a claim?

To file a claim, follow these steps:

  • Call your insurance agent as soon as possible, regardless of who is at fault. Find out whether you’re covered for this loss. Even if the accident appears minor, it is important that you let your insurance company know about the incident.
  • Ask your agent or company representative how to proceed and what forms or documents are needed to support your claim. Your insurance company will require a “proof of claim” form and, if there is one, a copy of the police report. Increasingly, companies allow you to monitor the progress of your claim on their web site.
  • Supply the information your insurer requests. Fill out the claim form carefully. Keep good records. Get the names and phone numbers of everyone you speak with and copies of any bills related to the accident.

Ask your insurance agent or company representative the following:

  • Does my policy contain a time limit for filing claims and submitting bills?
  • Is there a time limit for resolving claims disputes?
  • If I need to submit additional information, is there a time limit?
  • When can I expect the insurance company to contact me?
  • Do I need to get repair estimates for the damage to my car?
  • Will my policy pay for a rental car while my car is being repaired? If so, how much?

Remember, each state has its own laws governing the claims process. If you have any questions, call your agent, company representative or your state insurance department.

If I file a claim, will my premium go up?

You may be reluctant to file a claim because you fear that your premium will go up or your insurance will be canceled. Practices vary from company to company. In general, an insurer will increase your premium by specific percentages for each chargeable claim made against your policy above a specific dollar amount. A chargeable claim is one the insurer considers primarily your fault. The percentages and ceilings vary from company to company. These increases generally stay on your premium for three years following the claim.

Your company may also decide not to renew your policy if your driving record gets markedly worse or you have several accidents. Different insurers have different rules about what constitutes an unacceptably bad driving record. But some accidents, such as those caused by drunk driving, will probably trigger a non-renewal from virtually every insurance company.

If you have an accident but don‘t report it to your insurer, you are taking a risk, even if the damage seems minor. If the other driver sues you weeks or months later, your failure to report the accident might cause your insurer to refuse to honor the policy. And even if they do honor the policy, the delay will certainly make it harder for the insurer to gather evidence to represent you.

How are the value of my car and the cost of repair determined?

There are several standard guidelines for determining the value of your car for insurance purposes. You and your insurer can refer to one of the Blue Books, which list the depreciated value of all new and used cars. One Blue Book is published by the National Association of Automobile Dealers (http://www.nada.com). The other is published by Kelley Blue Book of Irvine California (http://www.kbb.com).

When you file your claim, your insurance company will refer you to a claims adjuster. The adjuster will verify the loss and determine what it will cost to repair the car. The adjuster’s estimate can serve as a benchmark to which to compare your own mechanic’s estimate.

No good adjuster or insurance company will expect you to sign an agreement accepting the insurer’s estimate as the total claim payment until you’ve established, to your own satisfaction, that it will cover the cost of repair. The insurer will expect you to get your own estimate from your mechanic, garage or car dealer. Don’t allow yourself to feel pressured into accepting the insurer’s estimate of repair costs without getting at least one estimate of your own.

Your insurance company can’t require you to have repairs done at a particular shop. But they can insist that you get more than one estimate for the work to be done on your car. Just as you want to make sure that your car is adequately repaired, the insurer wants to make sure it doesn’t pay a grossly inflated repair bill.

Don’t be surprised if your insurance company opts to pay for the lowest bid. You don’t have to accept that bid if you believe the low bid won’t adequately repair your car. Don’t hesitate to argue with the adjuster if you really believe his repair estimate is too low based on what your mechanic has told you.

One factor that could reduce the amount of your claim for a repair job is what insurance companies call betterment. If your old car is repaired with brand-new parts, your insurer may argue that the repairs have actually enhanced the car’s value and therefore they can legitimately reduce your claim by the difference between a used part and a new one.

It is up to your insurer to decide whether to pay for repairing your car or to declare it a total loss and pay you its book value. Most standard auto policies will not pay to repair a vehicle if the repairs cost more than the cash value assigned to the car. There won’t be any dispute about whether to repair the car if it was completely totaled. But you may argue about what the pieces of the car were worth when they were assembled as a car. For you to get a settlement higher than the Blue Book value of your car’s make and model, you will have to submit evidence such as mileage records, service history and affidavits from mechanics to show that your car was worth more. You’re entitled to the market price of the car you just lost. You shouldn’t get more or less than what you are due.

What are my rights when filing a claim?

As a policyholder, you have certain rights. Every state has laws protecting consumers. Your policy is a legal contract between you and your insurer. It defines your rights and obligations as well as the rights and obligations of the insurance company.

If you have any questions regarding your rights under the policy, talk to your insurance agent or company representative. You may also contact the insurance department of your state, your state attorney general’s office, or your state’s consumer affairs department.

Can my insurance company require me to use certain types of auto repair parts?

Your insurance company can’t require you to use only certain kinds of auto repair parts. However, if the insurance company’s rates are based on a certain type of part and you want something different, it can ask you to pay the difference if the part you want is more expensive.

The parts most frequently damaged in auto accidents are “crash parts”. These are the sheet metal pieces that cover the engine and frame of the car. These may be parts known as original equipment manufacturer (OEM) parts, or generic parts. These crash parts do not affect the safety of the car. The development of a market in generic parts has brought prices for car replacement parts down and saved consumers money.

In general, if generic parts have been ordered for the repair of your car, this information must be disclosed. The car repair order should state that the parts are not from the original manufacturer and the warranty may be different. Many generic parts are made at the same factories as OEM parts, and in fact very few OEM parts are actually made by car makers.

Insurance companies that use generic parts guarantee the parts they use. If the part doesn’t fit properly, the insurance company will generally put on an OEM part at no extra cost.

Some auto insurance companies offer their policyholders a choice between OEM and generic repair parts as part of an endorsement (addition to the policy that changes its terms and conditions) that includes other choices as well. Some always specify OEM parts for repairs and some use OEM parts for repairing recent model cars. A few states require insurance companies to offer generic parts when they exist and some may require OEM parts to be used.

Ask your insurance agent about your state and your insurance company’s claim settlement guidelines so that you’ll know what to expect if your car has to be repaired after an accident.

Business Insurance

How can I save money on my business insurance?

Here are a few ways to save money on business insurance:

  • Choose a higher deductible.
    Deductibles represent the amount of money you pay before your insurance policy kicks in. The higher the deductible, the less you will pay for the policy.
  • Buy a package policy.
    It can sometimes be cheaper to purchase a package policy, such as a Business owners Policy (BOP), rather than individual coverages. A package policy provides standard coverages and limits of liability that are appropriate for typical small-to-medium-sized businesses.
  • Work closely with your agent or broker.
    Your insurance professional can provide invaluable advice to help protect your business from unexpected disasters. But you need to keep him or her informed about any major changes in your business. This includes major purchases, expansions or changes in hiring or the nature of your operation. Also, ask for advice from your agent on the terms of disaster planning. Ask what you can do to both reduce risks like fire or work-related accidents, as well as the procedures that should be in place in case your business does suffer a major catastrophe.Having the right coverage and a well thought out disaster plan can save you money in the long run. It may even save your business from going under.
  • Ask about ways to prevent losses.
    You may be able to reduce your premium for certain types of coverage by following your insurer’s recommendations. These can include workplace safety, disaster preparation, and human resource intervention.

How do I insure my home business?

If you’re running a business from your home, you may not have enough insurance to protect your business equipment. A typical homeowners policy provides only $2,500 coverage for business equipment, which is usually not enough to cover all of your business property. You may also need coverage for liability and lost income. Insurance companies differ considerably in the types of business operations they will cover under the various options they offer. So it’s wise to shop around for coverage options as well as price.

Regardless of the type of policy you choose, if you’re a professional working out of your home, you probably need professional liability insurance. Some types of in-home businesses, such as those that make or sell food products or sell home-made personal care products, may have to buy special policies.

To insure your business, you have three basic choices, depending on the nature of your business and the insurance company you buy it from. They are:

  • Homeowners Policy Endorsement
    You may be able to add a simple endorsement to your existing homeowners policy to double your standard coverage for business equipment such as computers. For as little as $25 you can raise the policy limits from $2,500 to $5,000. Some insurance companies will allow you to increase your coverage up to $10,000 in increments of $2,500.You can also buy a homeowners liability endorsement. You need liability coverage in case clients or delivery people get hurt on your premises. They may trip and fall down your front steps, for example, and sue you for failure to keep the steps in a safe condition.The homeowners liability endorsement is typically available only to businesses that have few business-related visitors, such as writers. But some insurers will provide this kind of endorsement to piano teachers, for example, depending on the number of students. These endorsements are available in most states.
  • In-Home Business Policy/Program
    An in-home business policy provides more comprehensive coverage for business equipment and liability than a homeowners policy endorsement. These policies, which may also be called in-home business endorsements, vary significantly depending on the insurer.In addition to protection for your business property, most policies reimburse you for the loss of important papers and records, accounts receivable and off-site business property. Some will pay for the income you lose (business interruption) in the event your home is so badly damaged by a fire or other disaster that it can’t be used for a while. They’ll also pay for the extra expense of operating out of a temporary location.Some in-home business policies allow a certain number of full-time employees, generally up to three.In-home business policies generally include broader liability insurance for higher amounts of coverage. They may offer protection against lawsuits for injuries caused by the products or services you offer, for example.In-home business policies are available from homeowners insurance companies and specialty insurers that sell stand-alone in-home business policies. This means that you don’t have to purchase your homeowners insurance from them.
  • Business Owner’s Policy (BOP)
    Created specifically for small-to-mid-size businesses, this policy is an excellent solution if your home-based business operates in more than one location. A BOP, like the in-home business policy, covers business property and equipment, loss of income, extra expense and liability. However, these types of coverage are on a much broader scale than the in-home business policy.A BOP doesn’t include workers compensation, health or disability insurance. If you have employees, you’ll need separate policies for these types of coverage.
  • Automobile Coverage
    If you are using your car for business activities — transporting supplies or products or visiting customers — you need to make certain that your automobile insurance will protect you from accidents that may occur while you’re on business. Contact your home or auto insurer.

What does a business owner’s policy cover?

Insurance companies selling business insurance offer policies that combine protection from all major property and liability risks in one package. (They also sell these types of coverage separately.) One package purchased by small and mid-sized businesses is the business owner’s policy (BOP). Package policies are created for businesses that generally face the same kind and degree of risk. Larger companies might purchase a commercial package policy or customize their policies to meet the special risks they face.

BOP’s include:

  • Property insurance for buildings and contents owned by the company — there are two different forms, standard and special, which provides more comprehensive coverage.
  • Business interruption insurance covers the loss of income resulting from a fire or other catastrophe that disrupts the operation of the business. It can also include the extra expense of operating out of a temporary location.
  • Liability protection, which covers your company’s legal responsibility for the harm it may cause to others. This harm is a result of things that you and your employees do or fail to do in your business operations that may cause bodily injury or property damage due to defective products, faulty installations and errors in services provided.

BOP’s do NOT cover professional liability, auto insurance, worker’s compensation or health and disability insurance. You’ll need separate insurance policies to cover professional services, vehicles and your employees.

How can I insure my home-based business?

Let’s face it. Launching and running a business takes capital, motivation and yes, even physical stamina to handle the stress and demands of a new or growing venture. And it’s risky. In fact, one out of every five businesses fails within the first five years of opening.

Handling inventory, scheduling time, purchasing supplies, handling payroll — there are a myriad of procedures every home or small business entrepreneur needs to know, but one of the most critical and often neglected is buying proper insurance coverage.

TAKING A BUSINESS INVENTORY

What would happen if a fire or other disaster destroyed your property, making it impossible for you to get back to business right away? Would you remember what property had been destroyed? One way is by taking a complete inventory of all your personal business property, determining its value, and deciding what’s worth insuring. Having an up-to-date business inventory will help you get your insurance claim settled faster, verify losses for your business’ income tax return and help you purchase the correct amount of insurance.

Start by making a list of personal business property, describing each item and noting where you bought it and its make and model. Clip to your list any sales receipts, purchase contracts, and appraisals you have.

WHAT’S THE RIGHT COVERAGE FOR YOU?

Then there’s the question of what types of coverage you’ll need. Aside from personal business property, there is liability insurance, business income, insurance for the building, boiler and machinery, human failure, employee protection and management protection, among others. The type of coverage you need depends on a number of factors including what kind of business you operate.

HOW TO KEEP COSTS DOWN

Start your search for a policy with trade associations or business groups. In many cases, these organizations are able to provide reduced insurance rates based on the volume of business they can offer the insurance company. They’ve also negotiated coverage specific to your type of business, which can save you significant time in determining what you should cover. Also make sure that you are working with an agent that understands your type of business.

Do I need business interruption insurance?

Business interruption insurance can be as vital to your survival as a business as fire insurance. Most people would never consider opening a business without buying insurance to cover damage due to fire and windstorms. But too many small business owners fail to think about how they would manage if a fire or other disaster damaged their business premises so that they were temporarily unusable. Business interruption coverage is not sold separately. It is added to a property insurance policy or included in a package policy.

A business that has to close down completely while the premises are being repaired may lose out to competitors. A quick resumption of business after a disaster is essential.

Business interruption insurance compensates you for lost income if your company has to vacate the premises due to disaster-related damage that is covered under your property insurance policy, such as a fire. Business interruption insurance covers the profits you would have earned, based on your financial records, had the disaster not occurred. The policy also covers operating expenses, like electricity, that continue even though business activities have come to a temporary halt.

Make sure the policy limits are sufficient to cover your company for more than a few days. After a major disaster, it can take more time than many people anticipate to get the business back on track. There is generally a 48-hour waiting period before business interruption coverage kicks in.

The price of the policy is related to the risk of a fire or other disaster damaging your premises. All other things being equal, the price would probably be higher for a restaurant than a real estate agency, for example, because of the greater risk of fire. Also, a real estate agency can more easily operate out of another location.

Extra Expense Insurance

Extra expense insurance reimburses your company for a reasonable sum of money that it spends, over and above normal operating expenses, to avoid having to shut down during the restoration period. Usually, extra expenses will be paid if they help to decrease business interruption costs. In some instances, extra expense insurance alone may provide sufficient coverage, without the purchase of business interruption insurance.

Are there any disasters my property insurance won’t cover?

Yes. Floods, earthquakes and acts of terrorism are generally not covered.

Protection against flood damage

Property insurance policies usually exclude coverage for flood damage. Find out from your local government office or your commercial bank whether your business is located in a flood zone. Also ask around to find out whether your location has been flooded in the past. Government projects to map flood zones may be slow to keep up with new developments.

If you need to buy a flood insurance policy, contact your insurance agent or the National Flood Insurance Program. For more information about this program call 888-CALL-FLOOD or look at its web site http://www.fema.gov/business/nfip/. The federal government requires buildings in flood zones that don’t conform to flood plain building codes to be torn down if damage exceeds 50 percent of the market value. Consider purchasing “ordinance or law” coverage to help pay for the extra costs of tearing down the structure and rebuilding it. If your policy contains a coinsurance clause, make sure your property is sufficiently insured to comply with the clause.

Protection against earthquake damage

Coverage for earthquake damage is excluded in most property insurance policies, including homeowners and business owners package policies. If you live in an earthquake-prone area, you’ll need a special earthquake insurance policy or commercial property earthquake endorsement.

Earthquake policies have a different kind of deductible — a percentage of coverage rather than a straight dollar amount. If the building is insured for $100,000, with a 5% deductible, for example, in the event of an earthquake, your business would be responsible for the first $5,000 in damage.

Remember that business interruption insurance, which reimburses you for lost income during a shutdown, applies only to causes of damage covered under your business property insurance policy. If your business premises are shut down due to earthquake damage, you’ll need to have earthquake coverage to make a claim under a business interruption policy.

Protection against terrorist attack losses

Under the Terrorism Risk Insurance Act of 2002, only businesses that purchase optional terrorism coverage are covered for losses arising from terrorist acts. The exception is workers compensation, which covers injuries and deaths due to acts of terrorism.

How can I disaster-proof my business?

Businesses that recover quickly are those that plan in advance. This involves not only purchasing the right insurance, but also developing and maintaining an adequate recovery plan.

Minimize the risk of damage in advance of an emergency by:

  • Training employees in fire safety, particularly those responsible for storage areas, housekeeping, maintenance and operations where open flames or flammable substances are used.
  • Modernizing the electrical system since faulty wiring causes a large percentage of nonresidential fires.
  • Situating your business in a fire-resistant building – a structure made of non-combustible materials with firewalls that create barriers to the spread of fires – and in a building with a fire alarm system connected to the local fire department. It is also a good idea to have a sprinkler system to douse fires.
  • Limiting storm-related damage by making sure the building conforms to damage-resistant building codes.

Develop a disaster recovery plan by:

  • Keeping up-to-date, duplicate records of both computerized and written records. Under federal law, if companies fail to maintain and safeguard accurate business records, the company may still be held liable.
  • Identifying the critical business activities and the resources needed to support them in order to maintain customer service while your business is closed for repairs.
  • Planning for the worst possible scenario. Do research before a disaster strikes by finding alternative facilities, equipment and supplies, and locating qualified contractors to repair your facility.
  • Setting up an emergency response plan and training employees how to execute it.
  • Considering the resources you may need to activate during an emergency such as back-up sources of power and communications systems. Also, stockpiling the supplies you may need such as first-aid kits and flashlights.
  • Compiling a list of important phone numbers (including cell phone numbers) and addresses, including local and state emergency management agencies, major clients, contractors, suppliers, realtors, financial institutions, insurance agents, and claims representatives. The list should also include employees and company officials. Keep copies off the premises in case the disaster is widespread.
  • Deciding on a communications strategy to prevent loss of your customers. Clients must know how to contact your company at its new location. Among the possibilities to explore, depending on the circumstances, are posting notices outside the original premises; contacting clients by phone, e-mail or regular mail; placing a notice or advertisement in local newspapers; and asking friends and acquaintances in the local business community to help disseminate the information.
  • Review your plan on a regular basis and communicate changes to key employees.

How do I file a business insurance claim?

When a fire, accident or theft occurs at your business:

  • Contact your insurance agent and company right away. Any burglaries or theft should also be reported to the police immediately.
  • Read your insurance policy so that you know what your responsibilities are to your insurance company after a loss.
  • After a disaster, take steps to protect your property from further damage by making temporary repairs. If immediate repairs to equipment are necessary, save the damaged parts in case the claims adjuster is interested in examining them.
  • Get at least two bids on the cost to repair or replace damaged property.
  • When filing a business interruption claim, be able to show the income the business was generating both before and after the loss. Keep detailed records of business activity and the extra expenses of keeping your business operating in a temporary location during the interruption period. If you are forced to close down, include expenses that continue during the time that the business is closed, such as advertising and the cost of utilities.

What’s the difference between cancellation and non-renewal?

There is a big difference between an insurance company canceling a policy and choosing not to renew it. Insurance companies cannot cancel a policy that has been in force for more than 60 days except when:

  • You fail to pay the premium.
  • You have committed fraud or made serious misrepresentations on your application.

Non-renewal is a different matter. Either you or your insurance company can decide not to renew the policy when it expires. Depending on the state you live in, your insurance company must give you a certain number of days’ notice and explain the reason for not renewing before it drops your policy. If you think the reason is unfair or want a further explanation, call the insurance company’s consumer affairs division. If you don’t get a satisfactory explanation, call your state insurance department.

The company may have decided to drop that particular line of insurance or to write fewer policies where you live, so the non-renewal decision may not be because of something you did. On the other hand, if you did do something that raised the insurance company’s risk considerably, like committing fraud, the premium may rise or you may not have your policy renewed.

If your insurance company did not renew your policy, you will not necessarily be charged a higher premium at another insurance company.

Do I need workers compensation insurance?

Employers have a legal responsibility to their employees to make the workplace safe. However, accidents happen even when every reasonable safety measure has been taken.

To protect employers from lawsuits resulting from workplace accidents and to provide medical care and compensation for lost income to employees hurt in workplace accidents, in almost every state, businesses are required to buy workers compensation insurance. Workers compensation insurance covers workers injured on the job, whether they’re hurt on the workplace premises or elsewhere, or in auto accidents while on business. It also covers work-related illnesses.

Workers compensation provides payments to injured workers, without regard to who was at fault in the accident, for time lost from work and for medical and rehabilitation services. It also provides death benefits to surviving spouses and dependents.

Each state has different laws governing the amount and duration of lost income benefits, the provision of medical and rehabilitation services and how the system is administered. For example, in most states there are regulations that cover whether the worker or employer can choose the doctor who treats the injuries and how disputes about benefits are resolved.

Workers compensation insurance must be bought as a separate policy. Although in-home business and business owner’s policies (BOP’s) are sold as package policies, they don’t include coverage for workers’ injuries.

ADDITIONAL INSURANCE COVERAGES

Can I insure the life of a key employee?

The loss of a key person can be a major blow to a small business if that person is the key contact for customers and suppliers and the management of the business. Loss of the key person may also make the running of the business less efficient and result in a loss of capital.

Losses caused by the death of a key employee are insurable. Such policies will compensate the business against significant losses that result from that person’s death or disability. The amount and cost of insurance needed for a particular business depends on the situation and the age, health and role of the key employee.

Key employee life insurance pays a death benefit to the company when the key employee dies. The policy is normally owned by the company, which pays the premiums and is the beneficiary. Contact an insurance agent or broker whose specializes in key employee insurance for more on how much it may cost for your company.

Do I need professional liability insurance?

Professionals that operate their own businesses need professional liability insurance in addition to an in-home business or business owners policy. This protects them against financial losses from lawsuits filed against them by their clients.

Professionals are expected to have extensive technical knowledge or training in their particular area of expertise. They are also expected to perform the services for which they were hired, according to the standards of conduct in their profession. If they fail to use the degree of skill expected of them, they can be held responsible in a court of law for any harm they cause to another person or business. When liability is limited to acts of negligence, professional liability insurance may be called “errors and omissions” liability.

Professional liability insurance is a type of specialty coverage. Professional liability coverage is not provided under homeowners endorsements, in-home business policies or business owner’s policies (BOP’s).

Do I need a commercial auto insurance policy?

As a business owner, you need the same kinds of insurance coverage for the car you use in your business as you do for a car used for personal travel — liability, collision and comprehensive, medical payments (known as personal injury protection in some states) and coverage for uninsured motorists. In fact, many business people use the same vehicle for both business and pleasure. If the vehicle is owned by the business, make sure the name of the business appears on the policy as the “principal insured” rather than your name. This will avoid possible confusion in the event that you need to file a claim or a claim is filed against you.

Whether you need to buy a business auto insurance policy will depend on the kind of driving you do. A good insurance agent will ask you many details about how you use vehicles in your business, the person driving them, and whether employees, if you have them, are likely to be driving their own cars for your business.

While the major types of coverage are the same, a business auto policy differs from a personal auto policy in many technical respects. Ask your insurance agent to explain all the differences and options.

If you have a personal umbrella liability policy, there’s generally an exclusion for business-related liability. Make sure you have sufficient auto liability coverage.

What is employment practices liability insurance (EPLI)?

EPLI covers businesses against claims by workers that their legal rights as employees of the company have been violated.

The number of lawsuits filed by employees against their employers has been rising. While most suits are filed against large corporations, no company is immune to such lawsuits. Recognizing that smaller companies now need this kind of protection, some insurers provide this coverage as an endorsement to their Business Owner’s Policy (BOP). An endorsement will change the terms and conditions of the policy. Other companies offer EPLI as a stand-alone coverage.

EPLI provides protection against many kinds of employee lawsuits, including claims of:

  • Sexual harassment
  • Discrimination
  • Wrongful termination
  • Breach of employment contract
  • Negligent evaluation
  • Failure to employ or promote
  • Wrongful discipline
  • Deprivation of career opportunity
  • Wrongful infliction of emotional distress
  • Mismanagement of employee benefit plans

The cost of EPLI coverage depends on your type of business, the number of employees you have and various risk factors such as whether your company has been sued over employment practices in the past. The policies will reimburse your company against the costs of defending a lawsuit in court and for judgments and settlements. The policy covers legal costs, whether your company wins or loses the suit. Policies also typically do not pay for punitive damages or civil or criminal fines. Liabilities covered by other insurance policies such as workers compensation are excluded from EPLI policies.

To prevent employee lawsuits, educate your managers and employees so that you minimize problems. This can be done by:

  • Creating effective hiring and screening programs to avoid discrimination in hiring.
  • Posting corporate policies throughout the workplace and place them in employee handbooks so policies are clear to everyone.
  • Showing employees what steps to take if they are the object of sexual harassment or discrimination by a supervisor, and making sure supervisors know where the company stands on what behaviors are not permissible.
  • Documenting everything that occurs and the steps your company is taking to prevent and solve employee disputes.

What does kidnap and ransom insurance cover?

Depending on the type of policy, kidnap and ransom policies cover some of the expense of dealing with kidnappers and their demands.

Kidnapping for ransom money is on the upswing. Kidnap and ransom insurance is now available as part of a comprehensive business insurance package, as a stand-alone policy for individuals and from a few insurance companies as part of their homeowners insurance policy. Corporate policies generally cover most kidnapping-related expenses including hostage negotiation fees, lost wages and the ransom amount. Policies for individuals help pay for the cost of dealing with a kidnapping but do not reimburse for ransom payments.

Homeowners Insurance

What is homeowners insurance and who should buy this type of coverage?

Homeowners insurance is one of the most popular forms of personal lines insurance on the market today. The typical home owner’s policy has two main sections: Section I covers the property of the insured and Section II provides personal liability coverage to the insured. Almost anyone who owns or leases property has a need for this type of insurance. And many times, homeowners insurance is required by the lender as part of the requirements in obtaining a mortgage.

What is the difference between “actual cash value” and “replacement cost”?

Covered losses under a home owner’s policy can be paid on either an actual cash value basis or on a replacement cost basis. When “actual cash value” is used the policy owner is entitled to the depreciated value of the damaged property. Under the “replacement cost” coverage, the policy owner is reimbursed an amount necessary to replace the article with one of similar type and quality at current prices.

What are the policy limits (i.e., coverage limits) in the standard homeowners policy?

Coverage A and B provide protection to the dwelling and other structures on the premises on an all risks basis up to the policy limits. The policy limit for Coverage A is set by the policy owner at the time the insurance is purchased. The policy limit for Coverage B is usually equal to 10% of the policy limit on Coverage A. Coverage C covers losses to the insured’s personal property on a named perils basis. The policy limit on Coverage C is equal to 50% of the policy limit on Coverage A. Coverage D covers the additional expenses that the policy owner may incur when the residence cannot be used because of an insured loss. The policy limit for Coverage D is equal to 20% of the policy limit on Coverage A. The coverage limit on Coverage E – Personal Liability – is determined by the policy owner at the time the policy is issued. The coverage limit on Coverage F – Medical Payments to Others – is usually set at $1000 per injured person.

Where and when is my personal property covered?

Coverage C, which provides named perils coverage, applies to all your personal property (except property that is specifically excluded) anywhere in the world. For example, suppose that while traveling, you purchased a dresser and you want to ship it home. Your home owner’s policy would provide coverage for the named perils while the dresser is in transit – even though the dresser has never been in your home before.

Do I need earthquake coverage? How can I get it?

Direct damages due to earthquakes are not covered under the standard home owner’s insurance policy. However, unless you live in an area that is prone to earthquakes, you probably do not need this coverage. If you do live in a part of the country with high earthquake activity you may want to consider adding an earthquake endorsement to your home owner’s insurance policy. This endorsement will cover damages due to earthquakes, landslides, volcanic eruptions and other earth movements.

What factors should I consider when purchasing homeowners insurance?

There are a number of factors you should consider when purchasing any product or service, and insurance is no different. Here is a checklist of things you should consider when you purchase homeowners insurance. First and foremost, purchase the amount and type of insurance that you need. Remember that if your policy limit is less than 80% of the replacement cost of your home, any loss payment from your insurance company will be subject to a coinsurance penalty. Also, determine the amount of personal property insurance and personal liability coverage that you need. Second, determine which, if any, additional endorsements you want to add to your policy. For example, do you want the personal property replacement cost endorsement or the earthquake endorsement? Finally, once you have decided on the coverage you want in your home owner’s insurance policy, you can now decide which insurer you would like to purchase the insurance from. Some people like the idea of purchasing insurance from a mutual company rather than a stock company. You should also decide whether you would like an insurance agent to assist you in your purchasing decision or if you would like to buy the product directly from an insurer without the assistance of an agent.

What is the difference between an “all risks” policy and a “named perils” policy?

A named perils policy covers losses that are due to only those perils listed in the policy. The perils typically covered include fire, windstorm, hail, and other direct physical losses. An all risks policy covers losses that are due to any peril except those specifically excluded in the policy. It is important to note that all risks policy provides broader protection than do named perils policies.

What can I do to lower the cost of my homeowners insurance?

There are a number of things you can do to lower the cost of your homeowners insurance. The best thing to do is to shop around. It is not surprising to find quotes on homeowners insurance that vary by hundreds of dollars for the same coverage on the same home. When you shop, be careful to make sure each insurer is offering the same coverage. Many insurers use the ISO policy forms, but this is not always the case. Another way to lower the cost of your homeowners insurance is to look for any discounts that you may qualify for. For example, many insurers will offer a discount when you place both your automobile and homeowners insurance with them. Other times, insurers offer discounts if there are deadbolt exterior locks on all your doors, or if your home has a security system. Be sure to ask your agent or company about discounts any that you may qualify for. Another easy way to lower the cost of your homeowners insurance is to raise your deductible. Increasing your deductible from $250 to $500 will lower your premium, sometimes by as much as five or ten percent. However, be careful to make sure that you have the financial resources necessary to handle the larger deductible.

If I have an accident which I think is covered under my home owner’s policy, what should I do?

Insurance contracts are conditional contracts, meaning that policy owners have certain duties that they must perform if a covered loss occurs. Failure to complete these actions can, and sometimes does, result in non-payment by the insurance company for losses that otherwise would have been covered. Required duties include: (1) notifying the insurance company or the agent that a loss has occurred — this should be done as soon as you discover the loss; (2) protecting the property from further damage and/or to making any repairs necessary to prevent further damage; (3) preparing a detailed list of the personal items damaged which contains a description of the items, their actual cash value, or their replacement cost if you have added the replacement cost endorsement to your policy; (4) being prepared to show the company and/or the insurance agent the damaged items; (5) completing a statement for the insurance company that details the events that led to loss — for example, the time the damage occurred, the cause of the losses, etc.

Who pays for my legal defense costs if I am sued?

In the unfortunate event that you are sued, your home owner’s policy will not only cover the cost of your legal defense, but your insurance company will also provide the legal counsel.

Life Insurance

How much life insurance should an individual own?

Rough “rules of thumb” suggest an amount of life insurance equal to 6 to 8 times annual earnings. However, many factors should be taken into account in determining a more precise estimate of the amount of life insurance needed. Important factors include income sources (and amounts) other than salary/earnings, whether or not the individual is married and, if so, what is the spouse’s earning capacity, the number of individuals who are financially dependent on the insured, the amount of death benefits payable from Social Security and from an employer-sponsored life insurance plan, whether any special life insurance needs exist (e.g., mortgage repayment, education fund, estate planning need), etc. It is recommended that a person’s insurance adviser be contacted for a precise calculation of how much life insurance is needed.

What about purchasing life insurance on a spouse and on children?

In certain circumstances, it may be advisable to purchase life insurance on children; generally, however, such purchases should not be made in lieu of purchasing appropriate amounts of life insurance on the family breadwinner(s). It is of utmost importance that the income earning capacity of the primary breadwinner be fully protected, if possible, through the purchase of the required amount of life insurance before contemplating the purchase of life insurance on children or on a non-wage earning spouse. In a dual-earning household, it is important to protect the income earning capacity of both spouses. Life insurance on a non-wage earning spouse is often recommended for the purpose of paying for household services lost at this individual’s death.

Should term insurance or cash value life insurance be purchased?

Although a difficult question–one whose answer will vary depending on circumstances–several principles should be followed in addressing this issue. It must first be recognized that in any life insurance purchasing decision, there are at least two basic questions that must be answered: (a) “How much life insurance should I buy?” and (b) “What type of life insurance policy should I buy?” The question contained in (a) involves an “insurance” decision and the question contained in (b) requires a “financial” decision. The “insurance” question should always be resolved first. For example, the amount of life insurance that you need may be so large that the only way in which this needed amount of insurance can be afforded is through the purchase of term insurance with its lower premium. If your ability (and willingness) to pay life insurance premiums is such that you can afford the desired amount of life insurance under either type of policy, it is then appropriate to consider the “financial” decision–which type of policy to buy. Important factors affecting the “financial” decision include your income tax bracket, whether the need for life insurance is short-term or long-term (e.g., 20 years or longer), and the rate of return on alternative investments possessing similar risk.

How does mortgage protection term insurance differ from other types of term life insurance?

The face amount under mortgage protection term insurance decreases over time, consistent with the projected annual decreases in the outstanding balance of a mortgage loan. Mortgage protection policies are generally available to cover a range of mortgage repayment periods, e.g., 15, 20, 25 or 30 years. Although the face amount decreases over time, the premium is usually level in amount. Further, the premium payment period often is shorter than the maximum period of insurance coverage–for example, a 20-year mortgage protection policy might require that level premiums be paid over the first 17 years.

Can an existing life insurance policy be used to provide for the repayment of an outstanding mortgage loan?

Yes. The purchase of a new mortgage protection term insurance policy is usually not required by the lender. An existing policy, either term or cash-value life insurance, can be used for many purposes, including paying off an outstanding mortgage loan balance in the event of the insured’s death.

Credit life insurance is frequently recommended in conjunction with the taking out of an installment loan when purchasing expensive appliances or a new car, or for debt consolidation. Is credit life insurance a good buy?

Credit life insurance is frequently more expensive than traditional term life insurance. Further, if you already own a sufficient amount of life insurance to cover your financial needs, including debt repayment, the purchase of credit life insurance is normally not advisable due to its relatively high cost.

What is the tax treatment of life insurance cash values, dividends, and death benefits?

The “interest build-up” portion of the annual increase in the policy’s cash value is not taxed currently to the policy owner. Dividends generally are considered to be a “return of premium” and are not taxable to the policy owner. Although in the typical case, life insurance death proceeds will not be subject to income taxation, these proceeds may be subject to federal estate taxation. If the insured has any elements of ownership in the policy at the time of his/her death, the proceeds are includible in the insured’s gross estate for federal estate tax purposes. State inheritance taxes and federal gift taxes may also apply to life insurance policies/proceeds under specific circumstances. You should contact your tax adviser regarding questions concerning the possible income, estate and gift tax consequences surrounding any life insurance that you currently own or are contemplating purchasing.

What is participating whole life insurance?

Participating (par) whole life insurance has been marketed for many years in the U.S. The participating feature allows for the payment of dividends to policy owners when actual experience justifies such payment. Substantial amounts of participating whole life insurance are still sold today, principally by the large mutuals.

I have heard a lot about universal life insurance. How is this type of life insurance different from traditional whole life insurance?

Both traditional whole life (WL) and universal life (UL) products are examples of cash-value life insurance. However, there are several important differences between these two products. While WL policies contemplate the payment of fixed, level premiums and provide for level death benefits, UL policies offer adjustable death benefits and flexible premiums that can be varied according to changing circumstances. This is a rather simplistic comparison, however, since policy owner dividends under participating WL insurance contracts can be used to offset a portion of the premium payment otherwise required; in addition, dividends can be used to increase the policy’s death benefit. Because of these and other possible uses of policy owner dividends, an argument can be made that participating WL insurance possesses some (but not all) of the same flexibility/adjustability that is possessed by UL policies. Another important difference between WL and UL relates to product transparency. In UL policies, it is easy for policy owner’s to look at the internal operations of the policy and to examine the relationships among various policy elements (premiums, cash values, interest credits, mortality charges, and expenses) and how they interact with each other.

Which is a better buy – universal life (UL) or participating whole life (WL)?

There is no simple answer to this question. The best performing product (from a financial perspective), whether UL, WL or some other type of cash value life insurance, will likely be the one offered by the insurer that enjoys the best future experience as it relates to interest earnings, actual expenses and mortality costs. Insurers earning the highest investment income, and who also incur the lowest expenses and the lowest mortality costs, are in the best position to offer life insurance at the lowest cost. This is true whether the cash value life insurance product being offered is UL or WL. Thus, it will be necessary for prospective insured’s and their advisers to carefully examine the financial aspects of each product under consideration, irrespective of whether the product is UL or WL.

What is variable life (VL) insurance, and how is it different from universal life (UL) and participating whole life (WL)?

Variable life insurance is a type of fixed-premium whole life insurance policy where changes in the policy’s cash values and death benefits are directly related to the investment performance of an underlying pool of assets. Policy owner’s typically can choose among several investment options as to where the assets backing the policy’s cash values will be invested. The various investment options offered in the contract generally possess different risk/return relationships and frequently include a money market fund, a bond fund, and one or more common stock funds. Although the policy’s death benefit is directly related to the actual performance of the invested assets, the policy prescribes that the death benefit will not fall below a minimum amount (usually the initial face amount) even if the invested assets depreciate in value by a substantial amount. Because the policy owner assumes all of the investment risk, there is no similar “floor” below which cash values may fall. In recent years variable universal life (VUL) insurance has become a more popular product than VL. VUL combines features of both UL and VL and, in essence, is the flexible premium version of VL.