20 Common Questions & Answers About Life Insurance
You may be asking yourself if you should be considering purchasing life insurance. Perhaps you think that you are to young or that you have no health issues, so you are unsure on the matter of life insurance. It is important to remember that a medical catastrophe or accident may happen at any time. Here are 20 of the most common questions asked about life insurance to help you as you make your decision.
Life insurance is insurance that pays a money amount to the beneficiary (another person that you specify) that is listed by the insured in the event of the insured’s death. Basically, life insurance is a contract between you and the insurance company where the insurance company agrees to pay money to the loved one you designate to receive the money, if you die, as long as your life insurance premiums, also known as your payments, are current.
2. What are some reasons as to why I should purchase life insurance?
Life insurance will pay money to your family when you pass. The money received, called a death benefit, can provide financial security to your family. If you are the primary wage earner, life insurance can aid your family in overcoming any financial burdens while coping with their loss.
3. What is a beneficiary?
A beneficiary is the individual or organization to whom your death benefit is paid in the event of your death. You may choose a spouse, child, friend, or domestic partner as the individual. Often, a non-profit organization can be a beneficiary. It is also recommended to have a contingent beneficiary. A contingent beneficiary is a secondary beneficiary. The contingent beneficiary receives the death benefit in the event you outlive your primary beneficiary.
It is very important that you name a beneficiary and contingent beneficiary. If you do not, then your life insurance death benefit will become part of your estate upon your death. While life insurance benefits can be paid to your beneficiary immediately upon your death, if the benefit becomes part of your estate, then it will have to be probated along with the rest of your estate, which could take some time.
4. Will my beneficiary have to pay income tax on my death benefits?
Generally your beneficiary will not have to pay federal income tax on the death benefit that they receive. However, your beneficiary may have to pay income tax on any interest that is garnered from the benefit. For example, if your life insurance policy had a benefit of $70,000 and your beneficiary received $70,000, then no income tax would be owed. If your policy had garnered interest on a $70,000 policy and paid $70,100, then your beneficiary would be responsible for the $100 interest the benefit paid.
5. How much life insurance should I purchase?
Every person has different needs. The largest factors to take into consideration are your basis of income and your financial obligations. It is recommended by the majority of financial advisors that you take a take out a life insurance policy that will pay your beneficiary an amount equal to seven to ten times the amount of your annual income.
6. What are the different types of life insurance?
There are basically two types of life insurance. These are term life insurance and permanent life insurance. Term life insurance is insurance that pays during a certain time period. For example, those persons who owe on a mortgage or are paying college tuition for a dependent may purchase term life insurance in order to cover these expenses should you pass away while owing on these financial obligations.
Permanent life insurance is life insurance that offers protection for the entire time of coverage as long as the premiums are paid and kept current.
You can also learn about all types of life insurance here.
7. How does term life insurance work?
Term life insurance gives you life insurance for a specified period of time. This time period can range anywhere from one year to 30 years. Benefits are paid only if you die within the time period specified by the policy. The premiums, or payments, may remain the same for the length of the policy, or they may increase at a certain period specified in the policy. Term life policies may be renewed when the term expires. However, the rates generally increase upon renewal.
Term life insurance may cost less than permanent life insurance. It is possible to purchase a term life insurance policy that refunds all of the premiums paid on, or an allotment of the premiums paid in, if no death benefit is paid during the time frame in which the term life insurance policy was in effect. Term life insurance policies that allow for this payment usually cost more than policies that do not provide this return.
8. How does permanent life insurance work?
Permanent life insurance policies are also called cash value policies. They offer life insurance for the duration of your life as long as the premiums are paid. These types of policies can accumulate cash value over time. There are several different types of permanent life insurance policies. You can also learn about all types of life insurance here. These include:
- Whole life- Whole life is the most common and most popular type of permanent life insurance. The cash value of the policy increases at a specific, fixed rate. Generally, the policy premiums and the benefits paid remain the same for the duration of the policy.
- Variable life- Variable life insurance policies are policies where you are able to choose different investment options for your premiums. Premiums you pay may be invested in stocks or bonds of your choice. Your cash value and the death benefits paid will vary depending on the performance of the investment options chosen. Federal law requires that you be given a statement prior to purchasing this type of insurance policy which outlines the objectives of your investments. This statement also outlines the risks involved when purchasing this type of insurance, and will give you a list of the possible risk factors. Benefits and the value of the policy will fluctuate with the market. The majority of variable life insurance policies generally guarantee that the death benefit payable will not go below a certain monetary amount.
- Universal life- Universal life insurance policies give the holder the option of setting the amount of the death benefit paid out and the amount of the premiums paid each month. Universal life insurance policies can also be made up of a combination of a whole life policy and a variable life policy. You, the insured, can choose to invest a portion of the premiums into stock or bonds.
9. Do I have to have a medical exam in order to purchase life insurance?
That depends on the type of life insurance you purchase. Group life insurance policies, which are life insurance policies usually offered through your place of business do not require medical exams unless you are planning on purchasing a large amount. You may then be required to submit to a medical exam. Group life insurance enrollment is usually held one per year during an employer’s annual enrollment.
Life insurance policies that are referred to as simplified life insurance policies generally do not require a medical exam. These policies generally pay out a lower face value than regular life insurance policies, which require a medical exam. Simplified plans may require that you fill out a questionnaire prior to enrollment.
Guaranteed issue policies do not require a medical exam or that you answer health related questions. However, these policies are more expensive than other type of policies and also pay lower benefits.
10. If I choose a policy which requires a medical exam, what can I expect from the medical exam?
Typically, you can expect to answer questions about your family’s health history along with your own health history. You can also expect to be measured, weighed, and have your blood pressure taken. Blood and urine samples may also be required. All of the information gathered along with your age and gender are taken into consideration to determine which rate class you belong in.
11. What if I don’t qualify for a preferred rate class? Can I retake my medical exam later?
Those who do not qualify for a preferred rate based on health factors may re-take the medical exam. For example, if you are 40 years old and take the medical exam and it is shown that you are a smoker, who is 30 pounds overweight, and a smoker, you probably will not fall into a preferred rate class. However, if you buy your life insurance policy and pay higher premiums and then lose the 30 pounds, quit smoking, and lower your blood pressure, you can request that you be re-evaluated for your rate plan. This, in turn, can lower your rates. However, if you request a re-evaluation and have a new medical condition that appears during the medical exam, your rates cannot be increased. It is forbidden for an insurance company to raise your premiums during a medical re-evaluation.
12. I am healthy, young, and single. Do I really need to consider buying life insurance?
This is the best time for you to purchase life insurance. While the odds are in your favor that you will continue to live for a much longer lifespan, now is the time in your life when you will be able to purchase life insurance for a much lower rate than if you wait until you feel that you need life insurance. In addition, if you have any dependents in your future, you will have the low rate locked in. This assures that as you age, your premiums cannot be raised, even if you suffer from worsening health.
13. Am I allowed to have more than one life insurance policy?
Yes, you are allowed to have multiple life insurance policies. These can be purchased from the same or from different life insurance companies. For example, you may have a life insurance policy through your employer and you may then decide that you need to purchase an additional whole life policy, because the group life insurance from your employer may be to small to pay both burial and funeral expenses and provide for your family. After purchasing your whole life insurance policy, you may have one or more dependents who head to college. Upon examination, you may come to the conclusion that if you were to die, the current policies would not cover expenses for your family in addition to college tuition. You may then choose to add a term life insurance policy, as college tuition would be a short-term need. You should be aware that if you appear to be purchasing more life insurance than insurance companies believe you need, based on your life situation, life insurance companies may question and investigate to find out why you are purchasing so much life insurance.
14. Can I purchase a life insurance policy on someone else?
You can purchase life insurance on other individuals as long as you can prove that you have what is termed as an “insurable interest” on the individual. Insurable interest means that you personally know the individual and that you have a relationship with them. Individuals you can legally take policies out on include your spouse or domestic partner, dependents, and business partners. Generally, you must have the individuals permission to take out a life insurance policy on his or her life, although some states do allow an exception in the case of spouses and minor children. It must be noted that the maximum amount of life insurance that you may purchase on a minor child is $10,000 to cover burial expenses.
15. If I purchase life insurance and hold it for a while and then hear about a great new type of life insurance should I cancel my existing policy and purchase a new one?
Canceling life insurance policies in order to purchase a new policy can be very risky. It can end up costing you a great deal of money. While a cheaper life insurance policy may sound better to you, bear in mind that the first year or so of premiums you paid merely covered the insurance company’s cost of issuing the policy and covering you. By canceling to buy a new policy, you will be paying those same charges all over again to the different company. Also, if you have aged or your medical status has changed, your premiums may end up costing you more and your death benefit may be less. It is always wise to research any type of policy prior to purchase. It is also prudent to keep your old insurance policy active until you have had a chance to examine your new policy and ensure that it is acceptable.
16. How does a life insurance company determine my premium?
A life insurance company takes into account the type and amount of life insurance you wish to purchase along with your chance of death while the policy is active. This is determined by your lifestyle and medical exam as mentioned above. The insurance company then adds in their cost, overhead, and salaries into determining the premium.
To get the best rate available, you would want to be classified as a preferred risk. This means that you have a below average chance of dying when purchasing the policy, and means the lowest of premiums. You may also be classified as standard, which means the insurance company believes you have an average risk of dying, or substandard, which means your risk of death is determined to be higher, yet still insurable by company standards. Those classified as substandard will pay the highest of premiums.
17. Are people ever considered uninsurable by life insurance companies?
Some companies may rate certain individuals as uninsurable. These are people that the life insurance company believes will probably suffer an early and fairly immediate death. However, just because one company deems an individual as uninsurable does not mean that another company will decide the same. Classifications vary from company to company based on different forms of criteria. If you are denied several times by several different companies, then you may want to consider investing in a guaranteed issue policy as discussed above.
18. What happens if I don’t make my payments and keep up with my premiums?
Usually, if you don’t make your premium payment, the life insurance company will give you a 30 day grace period in which you may still make your payment. If you don’t make the payment within this time period, your policy could lapse. This would depend on the type of life insurance policy you have. For example, if you are carrying a permanent policy, your life insurance company may us your available cash value to cover the payment and ensure that your policy does not lapse.
19. What happens if my policy does lapse?
If your policy does lapse because you did not pay your premium, then one of two things may happen. If you are carrying one of the several types of permanent life insurance policies, then you may use the available cash balance to pay your premiums and reinstate your life insurance policy. However, if you are carrying term life insurance coverage, and do not pay the premium within the specified grace period, then your policy will lapse and end. You will not be able to reinstate it and you will lose any premiums that you have already paid into the policy.
20. Should I purchase a basic life insurance policy, or should I add on some of the extra items?
The extra items are referred to as riders. Whether or not you choose to add riders to your policy depends on you and your specific circumstances. Some riders that you may want to consider include a disability waiver, accidental death benefits, and accelerated death benefits.
Disability waivers guarantee that if you become disabled, you do not have to pay premiums for the time period in which you are deemed disabled. Accidents, injuries, and sickness which can cause a disability are very common in all age groups. By adding on this waiver, you insure that your life insurance policy is kept in force even if your income drops.
Accidental death benefits are riders which will pay an extra amount in the event of your dying from an unforeseen accident.
Finally, accelerated death benefits, also referred to as living benefits, allow for you and your family to receive funds from your life insurance policy prior to your death. These monies can be used for circumstances such as a long-term terminal illness, confinement to a nursing home or hospice, and to pay for home health care.
It is important that you consider all your options when purchasing life insurance. You may want to consult with family and friends when making this important decision. You may also seek referrals and information from a professional such as an accountant or attorney. Research any company that you interested in purchasing life insurance from and ask questions. Ask for explanations for benefits or clarification on any information that you do not understand. The purchase of life insurance is a major decision that should not be taken lightly.