Life Insurance Common Questions
Why do I need life insurance?
If you provide financial support for people who are depending on you, you need life insurance. In a typical family, the loss of a wage earner can have a devastating impact on the survivors’ financial security or their ability to maintain their standard of living. Death benefits received by a family can help provide adequate income for the family, pay off the mortgage on the family home, cover final expenses such as the decedent’s medical bills, ensure that the children are able to go to college or protect other assets from liquidation to pay bills. In addition, if you own a small business you may need life insurance to protect your business interest from the death of a key employee or owner, or to provide collateral for a business loan. Many small businesses also purchase life insurance to fund agreements between the owners for the purchase of an owner’s share of the business at death.
How much life insurance do I need?
How much insurance an individual needs varies widely, depending on the potential for financial loss if you die. One simple method is to multiply your annual gross income by a multiple of years, such as 7. Another method is to estimate how much of your income is needed to meet annual expenses and multiply that number by some multiple of years. The latter would not include the portion of your income that you currently put into savings or investments. Beyond that, it depends on your particular circumstances (e.g., whether you have considerable net worth or few backup resources) and whether you want insurance for other purposes, such as educational funds for your children in the event you aren’t there to provide them. In addition, your particular needs may require a combination of several policies, which can change as your financial situation evolves. For more in-depth analysis of your needs, you may want to consider working with one of our financial consultants.
What’s the difference between term life insurance and universal life insurance?
Term life insurance is the most economical type of life insurance. It provides death benefit coverage at a guaranteed premium for a specific period of time – usually five to 30 years depending upon which product you choose. At the end of the term, the coverage ends or the policyholder may have the option of paying an annually increasing premium to continue the death benefit coverage.
Universal life insurance are designed to continue coverage for as long as the policyholder pays sufficient premiums. This can also be a very flexible type of insurance where the policyholder may select a level death benefit or one that may increase over time. The policyholder also may decide how much premium he or she will pay and the frequency of payments. Some universal life policies provide both a death benefit and the potential for accumulating cash value, which may be tapped to fund future financial needs. The decisions made by the policyholder impact how long the death benefit will last and whether or not there will be cash value in the policy.
Why consider “cash-value” insurance policies such as universal life?
In addition to providing life insurance protection, cash value policies offer the added advantage of providing a “savings” element. The cash values are not guaranteed in universal life insurance policies. However, when there are cash values, the policyholder can make use of them through policy loans or withdrawals for a variety of purposes. In addition, cash values grow on a tax-deferred basis enhancing their value to the policyholder. Accessing cash values through policy loans or withdrawals can affect the available death benefit and may have tax implications.
Cash values may be accessed to:
• Pay for tuition and other educational costs for yourself, your spouse or your children
• Supplement retirement income
• Provide a down payment on, or reduce the size of, a mortgage on a house
• Pay future premiums on a life insurance policy
What should I consider when naming a beneficiary for my life insurance?
Your beneficiary is the person or entity, such as a trust, that will receive any benefits payable from your life insurance policy when you die. The beneficiary of a life insurance policy must have an insurable interest in the life of the person insured. This generally means that the beneficiary must be someone who would suffer some economic loss if the insured person died. For example, your beneficiary could be a member of your family who depends on you or a business you own or even a bank who has lent you money. Some things to keep in mind when identifying a beneficiary for your life insurance policy include:
- Be very specific in wording beneficiary designations so there is no confusion after your death as to your intent. This will help prevent delays in paying benefits to the beneficiary and reduce the risk that a dispute over the death proceeds will occur. To add clarity, include the relationship of the beneficiary to you. Here are a few examples: “John P. Doe, son of the insured, ” “The children of the marriage of Jeff and Mary Doe, ” or “The Jeff and Mary Doe Irrevocable Trust, dated March 14, 2004.” Your insurance company or agent can assist you with basic wording, or consult with your attorney to assist with more complex situations.
- Consider naming a “contingent” or secondary beneficiary just in case you outlive your first beneficiary or you and your beneficiary die simultaneously.
- Name a specific beneficiary, or class of beneficiaries, rather than having the proceeds of your life insurance policy paid to your estate. Death benefits paid to specific beneficiaries avoid going through probate at your death and are often received by your heirs faster than assets that are in the estate and subject to a probate process.
- Remember to keep your beneficiary designation up to date as your circumstances change so the death benefits are paid to the person you want.
When will my life insurance policy become effective?
The date the life insurance goes into effect depends on a few things. In most situations, coverage is not in effect until underwriting approval is obtained and the first premium is paid. Other things, such as signatures on forms or acknowledgement of continued good health at the time you receive the life insurance policy may be required before the policy is in effect. If you decide to purchase the policy, always check to see precisely when the insurance becomes effective.
As a single person, do I need life insurance?
It depends. You may want to consider these options: Even if you have no dependents now, you may later. And the younger you are when you purchase life insurance the less expensive it will generally be. In addition, even if you don’t have anyone dependent upon you for support, you may still need some life insurance to help ensure that your debts are paid at your death and that your family does not have to pay for your funeral and other final expenses.
What happens if I fail to make the required premium payments?
It depends on the type of life insurance policy you have. With term life insurance, you must pay the premium on time, or within the stated grace period, or your policy will lapse. If you own a universal life insurance policy, the policy may lapse unless the policy contains provisions to prevent this from happening and there is sufficient cash value in the policy. Even if your universal life insurance policy lapses, however, you may still receive some benefit under what is called a “nonforfeiture provision”. Finally, some universal life insurance policies contain provisions that automatically pay the required charges or actual premium for you out of cash values within your policy. As long as the values are sufficient to pay the required amount, the policy will stay in force. Individual policies vary so be sure to check your own policy to see what happens if you fail to pay the premium on time.
What are nonforfeiture provisions and how do they protect me?
All universal life insurance policies have one or more nonforfeiture provisions that can provide you some benefit if you cancel or lapse your policy when there are cash values in the policy. These may vary depending on the type of policy you own. You should check your life insurance policy or call your insurance company for information on what options your policy includes. Typically there are four types of nonforfeiture options:
- The first is the ability to surrender the policy for its then cash surrender value. If you have owned your policy long enough, and paid premiums sufficient to create cash values within your policy, this cash – less any penalties for early surrender – will be paid to you if you cancel your policy.
- If you don’t want to take the cash and still need some death benefit, some types of life insurance policies allow the cash value of the policy to purchase term life insurance with the same death benefit as the original life insurance policy. The duration of the term life insurance will be based on your age and the amount of cash value available at the time the policy lapses.
- The third choice is to apply the cash value to the purchase of a policy with a lower death benefit that will not require the payment of additional premiums.
- Finally, some policies contain provisions that will automatically pay the premium due out of the existing cash values if the policyholder fails to do so.
What if I become disabled and can’t pay the premiums?
Provisions or riders that provide additional benefits can be added to a policy, for an additional premium, that will keep the policy in force if the policyholder is disabled and unable to work. Most of these provisions take effect after the disability has lasted for six months.
What other benefits are available on life insurance policies?
Life insurance policies often contain additional benefits. Some of these benefits are added to a policy at an additional cost using riders that are added to the basic policy. The riders available will vary, but some of the more common are:
- Accidental death benefit riders that provide an additional death benefit if the insured dies as the result of an accident
- Spousal riders that provide coverage on the insured’s spouse
- Children’s rider that provides some unit of coverage on all children of the insured usually from birth until a specified age such as 21. When the child reaches the specified age the coverage is usually convertible to individual universal life insurance on the child up to 5 or 10 times the original term life insurance amount.
- Waiver of premium or disability riders are designed to keep the policy in force if the policyholder is disabled and unable to work for at least 6 months.
- Accelerated death benefit riders allow for the early payment of some portion of the death benefit in the event the insured is terminally ill.
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