Life Insurance FAQs Library
What is Life Insurance?
In its most simple definition, Life Insurance is a contract between a policyholder and an insurance company. In return for a regularly-paid premium, the insurance company promises to pay the policyholder a pre-specified amount of money upon the death of the person named in the Life Insurance policy as the “insured.” It’s important to note that the policyholder and the “insured” don’t have to be the same person.
This is the amount of money paid to the beneficiary upon the death of the insured.
What is a beneficiary and why is it important to designate one?
A policy beneficiary is the person (or persons) who receives the death benefit upon the death of the insured. Without a named beneficiary, the policy itself dictates who receives the payout. These automatic beneficiaries are stipulated by the policy terms. Such automatic beneficiaries could include:
If your estate becomes the beneficiary, it becomes subject to estate taxes. This is a compelling reason to have named beneficiaries on the policy.
As with the need to annually reassess your coverage needs, it’s important to also regularly review your beneficiaries list. Has someone died? Has there been a birth? Have you recently gotten married or divorced? All of these, along with other life events, can cause a need to change your named beneficiaries.
What happens if my primary beneficiary dies?
You can always name a new primary beneficiary. However, if you’ve named a contingent beneficiary (also called a secondary beneficiary) in the policy, this new person will become the primary beneficiary.
In contrast to Permanent Life Insurance policies, Term Life Insurance policies don’t build cash values over time. These policies provide coverage for a pre-determined number of years, which is called the “term.” The term is specified in the insurance contract. The primary advantage of Term Life Insurance compared to Permanent policies is cost: Term Life policies are typically significantly less expensive.
What is Permanent Life Insurance?
A Permanent Life Insurance policy provides coverage for the insured’s entire lifetime. In contrast to Term Life polices, Permanent Life policies build cash value over time. Assuming the policyholder keeps premiums paid and up-to-date, Permanent Life policies guarantee a payout upon expiration. There are three primary types of Permanent Life Insurance policy:
Why do I need Life Insurance?
What would happen to your family if you died unexpectedly or after a long illness? Would there be sufficient money for your spouse to pay the bills? What about sending your kids to college? What about your own student loans? What about your funeral and its associated costs?
Would there be sufficient money to cover all these expenses without requiring loans or, worse, driving your household to bankruptcy? Life Insurance can help provide solutions to these problems. It can provide the security of knowing your family will be taken care of if you leave them behind.
Although Life Insurance through your job is a valuable benefit, such coverage is usually limited to between $10,000 and $20,000. For most people—especially those with families—this is far from sufficient coverage. Additionally, unless you take out premium coverage from your job, you’ll likely lose coverage if you switch jobs. As such, Life Insurance as a work benefit should be considered supplemental coverage.
The answer to this question is a definite “maybe.” It depends on your company’s size, how many employees it has, and other factors. How many of your company’s employees have opted for premium Life Insurance coverage? These factors will have an impact on the group-based rates your company can offer for optional policies.
Before purchasing any kind of life insurance, it’s important to “shop around,” comparing rates, policy types, etc. Call us. Our large pool of providers allows us to do the shopping around for you. Chances are, we can find you a comparable policy with comparable—if not better—rates than those offered through your job.
Exact calculations of the amount of coverage you need are difficult. However, you can make dependable estimates based on a number of factors. Ask yourself:
Remember: The prices of just about everything rise over time. You need to take inflation into account when making coverage estimates. For instance, if your children are young and won’t go to college for 10 or more years, the price of a college education will probably be significantly greater by the time they graduate high school.
This largely depends on a number of factors, including your age, the age of your children, the amount of money remaining on your mortgage, how much you’ve saved for retirement, and other factors.
For example, the younger your children are, and the higher the amount remaining on your mortgage, the longer you’ll want to stretch your coverage. Also, if you’ve got lots of money saved for retirement, you probably won’t need coverage for as long a time. Call our office. We’ll be happy to review your coverage factors and needs in depth.
How much should I expect to pay for Life Insurance?
This depends on a number of factors, including:
There are a number of steps you can take to make your premiums as low as possible:
I’ve heard there are certain tax advantages associated with Life Insurance. Is that true? What are they?
Yes. Life Insurance coverage offers a number of tax-based benefits. For one, any death benefit paid to your beneficiaries is generally exempt from taxation at the local, state, and federal levels. If you’ve purchased a Permanent Life Insurance product, its cash values accrue on a tax-deferred basis; you won’t pay taxes on those monies until receiving a payout. Additionally, any loans or withdrawals you make on a Permanent Life policy won’t be taxed.
Over the course of a lifetime, your coverage needs will be extremely fluid. That’s why it’s important to annually or even bi-annually assess your current coverage and needs. Have those needs changed over the last year?
To take out a Life Insurance policy on you, the prospective policyholder must have an insurable interest in your life. Those with insurable interest usually include family members, but can also, in some cases, include employers, business partners, certain organizations, and even major creditors.
Is the beneficiary I name required to have an insurable interest?
No. As the policyholder on your own life, you can name any beneficiaries you want.
What becomes of the cash value after a policy is fully paid up?
On a fully paid up policy, the insurance company uses the cash value to pay the premiums. You will no longer need to pay premiums to be covered for the rest of your life. However, if you take cash from the policy, you might be required to resume paying premiums or have to opt for a smaller death benefit.
What is the current cash value of my policy?
Who gets my policy’s cash value after I die?
Generally, no one. Although some policies pay both the death benefit and the cash value at the time of death, typical policies only pay the stipulated death benefit. In other words, with most policies, the cash value at the time of death is irrelevant. It’s important to note that, if you take out a loan on the policy that’s outstanding at the time of death, your beneficiary will receive a payout that’s less that the policy’s face amount.
What is an accelerated death benefit? How does this type of benefit work?
An accelerated death benefit allows a terminally-ill insured person to receive a significant part of the death benefit while still alive. It’s important to note, however, that the amount taken out will be subtracted from the death benefit, as will interest on the early payout.
Most providers will require a medical exam before issuing a standard Life Insurance policy. If you’re in reasonably good health, this is a good thing. Policies that don’t require a medical exam tend to be far more expensive.
What are policy riders?
Can I purchase a policy for my children?
How long does approval take?
How soon does the coverage start?
Coverage starts after approval and immediately upon receipt of the first payment.