Who needs life insurance?
Life insurance is a financial planning tool. Its main purpose is to replace income that is lost when a wage earner dies. As such, it is an efficient way to protect your survivors and dependents against financial hardship, and to ensure that they are not burdened with significant debt when you die. Individuals who have the greatest need for life insurance are principal wage earners, parents, or people on whom others depend financially. Life insurance can also be a useful way of ensuring that your mortgage is paid off, if you die. It can be used to put aside money to complete your children's education in the event of your death. And it is a mechanism for leaving money to organizations or charities of your choice.
How much life insurance do I need?
In order to decide how much life insurance you need, it is important to carry out a financial needs analysis. You can do this yourself, although a trained and licensed life insurance agent can help you conduct a more thorough review. You should take into consideration what immediate financial needs there will be after your death to cover such expenses as medical bills, funeral expenses and estate taxes. Keep in mind also what costs would be involved in a readjustment period for family members or friends who relied on your financial support. Other items to factor in are monthly bills and other ongoing expenses, rent or mortgage payments, day-care costs, and tuition fees. A general rule of thumb is that you should buy life insurance that is equal to five to seven times your current net income. You can visit our Purchase Insurance Area where we provide you with a calculator to help you determine the minimum amount of life insurance you should have.
What kinds of policies are there?
There are two basic kinds of life insurance: permanent and term. As the name implies, permanent insurance is best suited to cover long-term and permanent financial needs, such as funeral expenses, income for your survivors and dependents, and capital gains taxes at death. Term insurance, on the other hand, is designed to look after shorter-term financial needs, such as mortgages, education and other expenses when children are young, and some business commitments.
Permanent insurance provides lifelong protection and it is known by several names: whole life, universal life, variable life. This kind of life insurance has several features. First of all, premiums remain level over the lifetime of the policy. Second, reserves in the policy accumulate as a cash value. You may borrow against this cash value, or you may receive it if you surrender your policy. Third, non-forfeiture options allow you to use the cash value to pay premiums, to buy a lesser amount of permanent insurance with no further premiums, or to purchase an equal amount of term insurance. Participating policies receive their share of the financial success of the life insurance company in the form of dividends which are declared annually and paid to policyholders.
Term insurance provides protection for a specified period of time (1, 5, 10, or 20 years, or to age 60 or 65) and it pays a benefit only if you die during the term of the policy. Premiums remain level during the term chosen, but they increase when the term is renewed. This kind of policy does not have a cash value or non-forfeiture options. One form of term insurance, called Term to 100, provides protection to age 100, but doesn't pay dividends or include cash values.
Group life insurance is made available by most employers and unions. It is usually term insurance to age 65, and often does not require a medical examination or other evidence of insurability. Care should be taken to determine if your insurance coverage can be converted to individual insurance at the termination of your employment.
Whom should I name as a beneficiary?
You can name an individual to receive the proceeds of the policy, or you can name your estate or a trust. If you name a beneficiary in your policy, the money goes directly to that person or organization, and does not go through your estate, thus avoiding having to pay probate fees or taxes. Another advantage to naming a spouse, child, grandchild or a parent as a beneficiary is that the money is exempt from seizure by creditors. You also have the option of naming an irrevocable beneficiary, which means that the policyholder cannot change the name of that beneficiary without his or her consent. This money is also protected from creditors and doesn't become part of your estate. You may also name a contingent beneficiary, in the event that the primary beneficiary you have named is not alive at the time of your death. And if your beneficiary dies before you, or at the same time, the money will go to your estate, unless you have named a contingent beneficiary. And finally, you can name a registered charitable organization as beneficiary, in which case the premiums can be tax deductible.
When do I pay my premiums and what happens if I stop paying them?
Most people choose to pay their premiums on a monthly basis, often through automatic bank withdrawals, but you can opt for annual, semi-annual or quarterly payments. You may choose to determine the number of years you want to pay premiums so that at some future point you will know that your policy is all paid up. If you stop paying your premiums for whatever reason, you have 31 days to make the payment after the due date. If you do not pay within that time, your policy will lapse, that is terminate. It can be reinstated, but this will require payment of overdue premiums, with interest, and may require a medical examination. In most policies there are riders that can help you in the event that you are having difficulties paying your premiums.
Should I buy life insurance advertised on the Internet?
As with all purchases of life insurance, before you buy a policy, review your benefits carefully and read all the fine print for exclusionary clauses. Direct marketing of life insurance is a legitimate business, but a life insurance policy purchase should not be entered into without careful thought and review.
What happens when I apply for life insurance?
Be sure that you are honest in answering the questions on the application form. Life insurance is a "good faith" legal contract, and if you lie or withhold information, the policy could be null and void. Your signed application allows the underwriting department of the insurance company to verify your medical records and to assess the risks you present, by virtue of your health, age, gender, family history, financial situation and occupation. If you are a non-smoker and can state that you have not smoked for at least a year, you will qualify for lower premium rates. Depending on all these factors, the insurance company may ask that you undergo some form of medical examination.
Should I be concerned about an insurance company possessing confidential information about me?
Everyone working for an insurance company must comply with strict and elaborate privacy rules. Your consent is required for any information to be gathered about you, and this information may not be used for purposes other than qualifying for life insurance. Medical information about you can be released only to you and only by your personal physician. You may also request that an insurance company reveal what information they have on file for you. Medical information is shared among some 750 life insurance companies in
What if I change my mind after I apply for life insurance?
If you decide that you do not want to go through with your purchase of life insurance after you have applied, you can return your policy to the insurance company within 10 days of receiving it. The policy will be cancelled and your paid premiums will be refunded to you. This is called the "10-day free look" or the "rescission right".
What should I know before I replace a policy?
If you are thinking about replacing a life insurance policy, do not make a hasty decision. A precipitous decision could result in a loss of coverage, an unnecessary increase in cost, or the need to offer proof of insurability through medical exams because of your older age or of being in poorer health. Review your reasons for changing policies and seek trustworthy advice on the pros and cons of other policies. Also explore whether your existing policy can be changed to meet your new needs at a reasonable cost. And by all means ask your agent to assist you in this review of your financial situation and your insurance needs. If you decide to go ahead and replace a policy, your agent must fill out a disclosure form that explains the pros and cons of both the old and the new policy. Read this document carefully before you sign it. And finally, make certain that you do not cancel your old policy until you have the new one in hand. A termination notice must be signed in order for the old policy to be cancelled.
Can I borrow against my life insurance policy?
Depending on the policy, you can borrow any amount up to the cash value of your permanent life insurance policy by requesting a loan through your agent or directly by calling your insurance company. No credit checks are required and the interest you will pay on this loan will usually be very reasonable. You can pay back the loan in a lump sum or in installments. In some cases these loans can be taxable, so check this out before you request the loan. If you die before you have paid back the loan, the outstanding balance and interest will be deducted from the death benefit.
What kind of insurance do I need as an entrepreneur?
If you are self-employed, or are running a small business, you should look into liability and disability insurance, as well as group life and health insurance for yourself and your employees.
What are living benefits?
On a voluntary basis, and upon request by policyholders, insurance companies make available to terminally ill patients a portion of their death benefit, usually up to 50% of the benefit, or in the range of $50,000, although awards can be higher than that. Your request must be accompanied by medical documents indicating you are terminally ill, and often you must seek a release from the beneficiary agreeing to this prepayment. Living benefits, or accelerated, as they are also called, can make a significant difference in the quality of health care terminally ill patients can afford, and they can also improve the quality of life for people in the latter stages of their illness. Another option for AIDS or cancer patients wishing to obtain an early payment of a death benefit is a viatical settlement company. These are not insurance companies. They sometimes offer up to 80% of the death benefit, but the remainder of the benefit does not go to the beneficiary. Care should be taken in dealing with these organizations and you should check to make sure that they are legal, since in some jurisdictions they are deemed to be trafficking illegally in life insurance.
What happens when someone files a claim?
To file a claim the beneficiary must contact the agent or the insurance company and provide them with proof of death, a doctor's statement, or a death certificate. Claims should be made within 90 days to 12 months after the death. The claim is usually paid within a week to 10 days, unless an investigation is needed to determine the cause of death, or if death occurs during the first (3) three years the policy has been in force (the contestable period). Interest will be paid from the date of death. Most beneficiaries prefer to take the proceeds of the policy in a lump-sum payment, although there may be other settlement options for leaving the money with the insurance company.
Are death benefits taxable?
In most countries, the death benefit of a life insurance policy is not taxable in the hands of a beneficiary.
What happens if the cause of death is suicide?
If death by suicide occurs the premiums paid during the policy term will be returned to the beneficiary.
