Getting a life insurance policy can be confusing. Before you sign a long-term contract with an insurer, it's best to know exactly what you're getting into.
Thankfully, we're here to help. Here are answers to many of the most common questions about life insurance policies.
Understanding Life Insurance
If you're new to the concept of life insurance, don't worry. In this section, we'll help you understand how a life policy works and how it can benefit you.
What is life insurance?
Life insurance is a risk management vehicle. It's designed to pay out a sum of money (called the death benefit) to beneficiaries if the insured person passes away within the coverage period.
The death benefit is equal to the life insurance policy's face value. Depending on your contract with the insurer, the benefit can range from $10,000 to $1,000,000 or more.
Who would need life insurance?
An income earner with dependents should be the first to consider buying life insurance. Surviving family members can use proceeds from the policy to pay for the following:
Daily living expenses
Aside from breadwinners, stay-at-home parents, young adults, people with debt, and seniors should also consider buying life insurance. This will help them gain the peace of mind of knowing that they won't leave their family with a financial burden if they pass away unexpectedly.
What are life insurance premiums?
Life insurance premiums refer to the payment you send to the insurer in exchange for coverage. Premiums can be paid annually, semi-annually, quarterly, or monthly.
Are life insurance premiums tax-deductible?
No, they are not tax-deductible. That's because buying life insurance is considered a private contract between you and the insurer.
How much does life insurance cost?
Generally, a healthy 30-year-old woman can get a 20-year term life insurance policy with a coverage amount of $1 million for $356 annually. A 30-year old man can get the same term insurance policy for $455 annually.
It's best to ask your life insurance agent for quotes for different types of insurance from various companies. This will help you compare and see which life insurance plan fits your budget.
What happens if I fail to pay premiums?
If you fail to pay your premiums, your policy will lapse. This will result in the total cancellation of your life insurance coverage.
What are life insurance riders?
Life insurance riders refer to additional benefits that are bundled with your policy. Examples include:
Accidental death benefit rider: This entitles your family to claim additional benefits from the insurer in case you pass away from an accident.
Long-term care benefit rider: This enables you to claim part of your death benefit from an insurer in case you need it to pay for long-term care.
Return-of-premium rider: This rider allows you to get back the premiums you've paid to an insurance company if your term policy expires.
Can I buy multiple life insurance policies?
As long as you can pay all the premiums due, you can purchase multiple life insurance policies to get the amount of coverage you need. You can also opt to just get one policy then add riders to get the benefits you need.
Types Of Life Insurance
Generally, you can choose between term and permanent life insurance. Term insurance provides coverage for a certain period of time while permanent insurance provides coverage for the rest of the insured person's life.
What is permanent life insurance?
Permanent life insurance never expires. It is composed of two parts: the insurance component and the investment component. The latter has a cash value that grows on a tax-deferred basis.
Once the cash value reaches a certain amount, you can begin taking a loan against the policy. You need to pay the loan back before you pass away or else it will be deducted against the death benefit of your policy.
In some cases, the cash value may also be used to pay off the remaining premiums. This prevents the policy from lapsing even if you're no longer sending any money to your insurer.
What are the benefits of a permanent insurance policy?
A permanent policy can be a great way to get coverage while growing your assets at the same time. It also doesn't expire, so your loved ones are guaranteed to receive money after you pass away.
What are the types of permanent life insurance?
The most common types of permanent life insurance include the following:
Traditional whole life insurance: This type of permanent insurance has a set premium amount and death benefit. It also has a cash value that grows at a steady rate.
Universal life insurance (UL): This type of policy has an adjustable premium and benefit amount. Its savings component earns interest based on market rates.
Variable life insurance: This type of life insurance has a set premium amount. You can invest some of your premiums in stocks, bonds, and other money market funds. While it has the potential to have a cash value that grows faster than other insurance products, you may also lose money depending on the performance of your investments.
Variable universal life insurance (VUL): This type of policy combines the best aspects of UL and variable life insurance. You are able to adjust the premium or the benefit amount, while also being able to invest the cash value portion in various money market funds.
What is term life insurance?
A term policy provides coverage for 1-30 years, depending on your contract with your insurer. Once it expires, you have the option to convert it into a permanent policy, allow it to terminate, or renew it at a higher cost.
Unlike a permanent life insurance policy, a term policy does not accumulate cash value.
What are the types of term life insurance?
Term life policies come in various forms, such as the following:
Level term: Level term policies have unchanging premiums throughout the life of the policy. It also has a death benefit that doesn't change in value.
Decreasing term: Decreasing term policies refer to those with a death benefit that decreases over time. Most people purchase a decreasing term policy to help their families pay off a loan in case they pass away before the loan's maturity date. The benefit is usually proportionate to a person's outstanding loan balance.
Renewable term: Renewable term policies refer to term life insurance that you can renew at the end of the term. Premiums rates for the policy will be recomputed upon renewal.
Group term: Group term life policies are usually bought by employers or trade organizations for their members. If a person leaves their employer or retires, they will lose their group term coverage.
What are the benefits of a term policy?
Term life insurance is a lot more affordable compared to permanent policies. If you're wondering whether or not you should buy life insurance because of the cost, you'll be happy to know that you can get insured at a very affordable rate by getting term policies.
Understanding Life Insurance Proceeds
Since proceeds from an insurance policy can be used as a form of income replacement, many people buy it to provide financial protection for their families. In this section, we'll talk about the death benefit and how it can protect your loved ones.
How much coverage do I need?
Most people suggest that you should have a life insurance policy with a coverage amount that's about 10 times your annual income. That way, your family can use money from the policy to cover their living expenses for the next decade.
You should also add up the balance from your existing debts. This will give you peace of mind knowing that your family won't be left with a financial burden if you pass away without paying off all your dues.
Finally, you shouldn't forget about your burial expenses. Arranging a funeral can cost thousands of dollars, so it's best to have a life insurance policy that can help your loved ones pay for your memorial service.
If you have more questions on the amount of coverage you need, don't hesitate to reach out to your life insurance agent. They'll help you calculate how much coverage you should buy to ensure that your loved ones gain adequate financial protection.
Who can I list as a beneficiary?
Usually, a beneficiary is a close family member or relative. However, you can also list a business, a charity, or a trust as a beneficiary. You can even list multiple beneficiaries and assign what percentage of the death benefit they'll receive.
Additionally, you can list contingent beneficiaries for your life insurance policy. Contingent beneficiaries are entitled to claim the death benefit if all the primary ones have either passed away or have refused to file a claim.
Keep in mind that a beneficiary must have insurable interest in order to be listed. That means that the beneficiary should suffer some kind of financial loss upon the death of the insured.
How can my beneficiary claim the death benefit?
A beneficiary can claim the death benefit from your life insurance company if you pass away within the coverage period. They'll need your death certificate and a copy of your policy documents. Make sure your loved ones know where to locate your policy documents so they won't have trouble filing a claim.
Are death benefits tax-free?
Generally, death benefits are tax-free. However, some people choose to get their benefit in installments so that part of the money can stay with the insurance company and earn interest. If your beneficiary chooses to claim installments instead of a lump sum, their benefits may be subject to tax.
Additionally, proceeds from your life insurance policy may be subject to estate tax if you choose to name your estate as the beneficiary.
What if my beneficiary dies?
As the policy owner, you're allowed to review and change your beneficiaries from time to time. If a beneficiary passes away, it's a good idea to contact your insurance company to make updates.
How is the death benefit paid out?
In most cases, insurance companies pay out the benefit as a lump sum. However, some people choose to enter an annuity contract with a life insurance company. This means they'll only receive part of the benefit annually, while the rest stays with the insurer to gain interest.
What might cause a life insurance claim to be denied?
There are several reasons that an insurer may refuse to pay out the death benefit. Here are some of those reasons:
The policy lapsed due to unpaid premiums
The insured person passed away in a manner that's excluded from the contract (examples include dying from suicide or getting killed while committing a felony)
The insurer finds that the owner has falsified or misrepresented some information during the application process
Can I find out if a loved one had a life insurance policy?
There are no organizations or official records you can refer to in order to see if a person had an insurance policy. However, you can try the following:
Contact their employer/s to see if they were covered by a group policy
Check their personal files to see if they have receipts from insurers
Contact their bank to see if they listed a policy as collateral
Choosing An Insurer
Once you've decided to buy life insurance, one of the major decisions you'll make is choosing a life insurance company. In this section, we'll talk about how to select from all the life insurance companies out there.
How do I know if an insurer is trustworthy?
Before you pick a specific life insurance company, it's best to get to know them first. After all, you want to be sure that they'll honor your contract once your beneficiaries make a claim.
You can check an insurance company's rating from third-party firms like Moody's, Fitch, or S&P Global. These firms specialize in reviewing the trustworthiness and creditworthiness of other business entities.
What if my insurer goes out of business?
If an insurer goes out of business, you can seek help from a guaranty association for help. They exist to help policy owners get payouts or transfer your policy to another company.
Additionally, life insurance companies are required to maintain a specific amount of cash so they can continue to pay out benefits in case they struggle financially.
Applying For Life Insurance
When you buy life insurance policies, you'll need to complete an application process. In this section, we'll talk about how this process works and how it can affect your premium rates.
How do I buy life insurance?
You can purchase a life insurance policy directly from an insurer. You can also seek help from an independent agent.
An independent agent will educate you on the different types of insurance and weigh your options. They're also not connected to a specific company, so they can give you an objective opinion on the type of policy you should apply for.
How do I apply for life insurance?
When you apply for a life insurance policy, you'll need to complete an application form, submit the necessary paperwork, and sign a waiver permitting the life insurance company to review your medical records. You'll also undergo a phone interview and a medical exam.
If your application is approved, your life insurance company will notify you to request payment. The policy goes into effect after you pay your first premium.
People with preexisting health conditions or high-risk hobbies like skydiving may be denied life insurance coverage. In case you need life insurance but failed to qualify for the policy you want, you can talk to your agent and ask about your options.
How does underwriting work?
Life insurance companies review applications through a process called underwriting. This process allows them to determine how much risk they're taking on by providing a person with coverage.
Usually, people are divided into various risk classes. Those with chronic health conditions or risky occupations/hobbies are put in a higher risk class and are charged more expensive premiums.
Note that the underwriting process varies depending on the insurer. So, one company may list you as high-risk while another may list you as moderate risk. You can apply for another company in case one of them denies you coverage or puts you in a high risk class.
Can I refuse to disclose information?
Life insurance companies typically verify the information you provide on your application by checking your health records with the Medical Information Bureau. They can also run a prescription search to see what type of medications you've been prescribed.
Finally, if a life insurance company approves your application but finds out you've misrepresented some pieces of information, they can cancel the policy or deny benefits to your family. They can do this within the contestability period, which typically lasts two years after the policy was approved.
Do I need to take a paramedical exam?
Most life policies will require you to take a medical exam. For this, you'll need to undergo a physical exam and submit urine and blood samples. Keep in mind that these samples will be tested for potential drug use.
The medical exam is a way for the life insurance company to determine your health condition. This will be their basis for determining your risk class.
Can I refuse to take a medical exam?
Depending on the type of coverage you want, you may skip the medical exam. For example, you're only required to answer a few health questions when applying for simplified issue policies. The same is true for accelerated underwriting insurance.
Be sure to consult your agent so you can learn more about these options. Doing this will help you get life insurance even if you don't want to take a paramedical exam.
How do I prepare for the paramedical exam?
To get optimal results for your physical exam, make sure to skip caffeine, sugar, and alcohol a day before your test. You might also need to fast a few hours prior.