What determines my life insurance premium?

A: An insurance company bases your premium on the type and amount of insurance you buy and your chance of death while the policy is in effect. Other factors include the company's agent commissions, overhead, and expenses of doing business.

A company determines risk of death primarily by reviewing your age, gender, smoking habits, and medical condition. Companies usually classify individuals as "preferred" (below-average risk of early death), "standard" (average risk of death), or "substandard" (insurable, but with an above-average risk of death). Companies classify a small percentage as "uninsurable" (a high probability of early death). Find out the company's rates and what you must do to qualify for a preferred rate.

If a company determines that you are in a substandard class, it will rate your policy, which means your premiums will be above the standard premium. Shop around before paying a higher rate. Other companies may classify you differently. Some companies will remove a rated premium if you maintain good health for a specified period, give evidence that your health has improved, or change to a less-hazardous occupation. Companies often offer lower rates to nonsmokers.

How much coverage is enough?

A. There is no precise formula to determine how much coverage you need. Some consumer groups recommend five times your annual income with family responsibilities. Under this formula, a family with an income of $40,000 might need at least $200,000 worth of life insurance protection. Some insurance industry organizations recommend a policy that would pay 10 times your yearly income.

How can I get the most coverage for the least cost?

A. Term life insurance usually gives you the most coverage for the least cost. Also, you may save money, particularly in the purchase of cash value policies, by buying a policy with low administrative fees. A small number of companies sell these "low load" policies by mail or telephone.

How else can I save money on life insurance?

A. Group policies, available through your employer, may be cheaper than individual ones. If you enroll during the eligibility period or if coverage is guaranteed issue, you don't have to take a medical exam, nor do you have to answer health questions to qualify. Group insurance also may be available through professional, civic, or religious associations. These coverages generally terminate or reduce the death benefit to 50% at age 65.

Can agents offer student loans along with life insurance?

A. Some agents refer to student loans in their presentations. While agents may provide information about student loans, they cannot offer loans as an inducement to buy insurance.

Is it a good idea to replace a term life policy with a new one?

A. Price competition and new product development make it worthwhile to periodically review the price and coverage of your term life policy. Sometimes your policies will provide for a restart at lower rates with a medical exam. Remember that if you change policies, the two-year contestable period starts again.

Will I need life insurance when I retire?

A. If you are close to retirement, be sure to review your coverage and needs. With fewer responsibilities, you may want to reduce or even eliminate some of your policies.

Social Security and some retirement plans provide a continuing income for dependents after a retiree's death. For retirement income, many financial advisers suggest investing in IRAs, qualified tax deferred annuities, Keoghs, and deferred-compensation plans, which allow you to reduce taxable income and defer income taxes until you withdraw the money.

What are the tax consequences of life insurance?

A. Interest and dividends paid on a life insurance policy accumulate tax deferred. Life insurance policy withdrawals (cash surrenders) normally are nontaxable until the total amount withdrawn exceeds the total amount of premiums paid into the policy. Also, proceeds from loans made against the policy are normally not taxable. However, if the policy lapses, amounts borrowed in excess of premiums paid are taxable.

Death benefit proceeds are usually exempt from federal income tax but may be subject to estate taxes under certain conditions.

You should consult an accountant or tax attorney for more information about the tax consequences of life insurance.