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Life Insurance - Frequently Asked Questions
Why should I invest in life insurance?
A life insurance policy will provide cash to the beneficiary of your choosing. That cash can then be used for any purpose. The payment is usually received income tax-free. The income can provide for a number of benefits, namely:
- It can be used as an income for children and/or spouse
- It may be used to pay for funeral expenses
- The income can be used to pay off a loan or a mortgage
- It might be used to finance the education of your child
- It can be used to protect your assets
Cash value life insurance provides for a variety of living benefits*. This might include:
- The building up of a cash sum which is available to borrow from should there be an unexpected financial requirement
- It can act as a supplemental retirement income, or can serve to pay towards long-term care
- It can help to reduce the financial burden that terminal illness in the family may cause. Policyholders can collect a certain portion of death benefits earlier (before death) in order to cover these types of extraordinary expenses
- A guarantee for money to be paid to individuals that are selected by the policyholder – this money can be paid out at the time when it is required most
* The living benefits will either reduce or terminate the life insurance death benefit.
Different types of life insurance – what's available?
These days, there are thousands of life insurance policies which are available from a large range of companies. These policies can be tailored to fit your specific needs, although most policies do fall under two basic groups, which are term insurance and permanent/ cash value insurance.
Level Term Insurance offers protection for a limited and specific period of time, generally provided in 5-year segments, for example 10, 15, 20 or more years. With respect to most level term policies, the cost will cover only the policy expenses and will provide for death benefits. This type of policy does not accumulate any cash value. This is the least expensive choice of life insurance initially, however, over the long term it can prove to be the most costly. Term insurance nevertheless can normally be converted into a permanent insurance policy.
Permanent/ Cash Value Insurance is designed in such a way as to remain in force throughout the policy holder's entire life. The main advantages with this type of policy is that it includes a premium which typically will not increase over time. Furthermore, the cash value attached to the policy will accumulate over the lifetime of that policy. Whole life offers a cash value which can be accessed should there be a need. This form of policy can offer a guaranteed income upon retirement.
Annual Renewable Term Insurance is a life insurance policy which has to be renewed on a year-to-year basis. Typically, this form of policy is owned by those who have short-term life insurance requirements, such as those who need some financial protection during the final years of an equity loan or mortgage, or parents who are currently putting their children through college.
How can I ascertain how much life insurance I will need?
Professional advisors suggest that life insurance should equate to between seven and ten times the policyholder's annual income. Nevertheless, this is merely a general rule, and there are of course a variety of other factors that ought to be considered prior to making a final decision on the amount of insurance that is needed.
These factors include whether or not there are other income sources, for example, dividends from investments, any other life insurance policies, pension plans in place, or other assets. If you are married, then not only your spouse's earning capacity, but also the number of dependents you have, and for how long they will remain financially dependent, may significantly impact your need for coverage. After all, this can also include money required for your children's education, as well as paying off other liabilities such as loans or a mortgage.
Determining life insurance needs accurately
It is without question extremely useful to create a conceptual budget with respect to your family's financial needs in the event that you die prematurely. The budget should include daily living costs such as utility bills, food, taxes, insurance, etc., as well as the requirement for future cash necessities for matters such as paying off a mortgage, children's educational costs, expenses involved in relocation, and so forth.
Should I also insure my spouse and children?
In the situation where the household has a dual income, the income-earning capacity from both spouses should be protected. Where one of the spouses does not work, life insurance is still recommended in order to cover payments towards childcare and household services which may be necessary should the at-home spouse pass on.
Life insurance on the children can be advisable in some cases, although it's best avoided if that reduces the purchasing options for life insurance with respect to the main income earner. Many insurers do offer a variety of “children's insurance benefit” riders which tend to be inexpensive. These can provide for a small amount of life insurance coverage which is enough to pay for funeral expenses and other costs.
Group life insurance
A variety of insurance providers offer organizations and employers a fringe benefit to their employees of life insurance with group life insurance policies. Mostly however, this insurance will only provide enough coverage to equate to one or two times that of the employees' annual salary, which is of course far less than the amount recommended (seven to ten times employee annual salary is the general recommendation). Furthermore, typically, the insurance is non-transferable, so if you do change or lose your job, you will not be able to maintain the coverage.
Policy riders – what are they?
Policy riders can be added to a base life insurance policy as an additional benefit. The rider enables you to fit your life insurance coverage to your particular needs. There are costs involved when adding riders because they entail extra financial commitment as well as additional risks for the insurance company. Popular riders include:
Waiver of premium: should you incur some form of disability, your insurance company will waive any requirement to pay premiums, usually for up to 6 months, but will still continue your coverage. Once 6 months has elapsed, all premiums are refunded to you, back to the date when the disability took place.
Future premiums continue to be waived until you've made a full recovery.
Accidental death benefit: this rider will add further death benefit to your policy if the insured party dies in an accident. Typically, the amount added will not exceed that of the face amount pertaining to the base policy.
Purchase option rider: this rider allows you to invest in additional insurance without the requirement for answering any health questions. Furthermore, there is no requirement for a medical exam or to show proof of insurability at any point of time in future.
Cost of living rider (COLA): the COLA rider enables you as the policy holder to increase your policy's face amount, depending on increases in the Consumer Price Index. In essence, a COLA is a good way to have your insurance coverage stay in line with inflation. This rider is not available in all states.
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How are death benefits, life insurance cash value funds, and dividends taxed?
The policyholder's insurance policy's increase in cash value will not incur a current income tax liability. Generally, dividends are considered as “return of premium” and are therefore not taxable. Nevertheless, if the dividends and cash value are withdrawn, the excess over and above premiums paid may be liable to tax.
In most cases, the life insurance death proceeds belonging to the beneficiary are not subject to any income taxation. The proceeds may however be counted in with the insured party's estate as a federal estate tax, should the insured party have ownership in the policy upon death.
Federal gift taxes and state inheritance taxes can also apply to the proceeds of life insurance in certain situations. You should meet with your tax advisor if you have any questions regarding estate, possible income, as well as gift taxes which are connected to life insurance that you currently own or are intent on purchasing.
Filing a death claim – what information is required?
A death claim can be filed in one of two ways by either a beneficiary or a beneficiary's representative. They can call 800-234-5433 and speak with the life claims department, or file the claim online.
How to file a death claim?
In order to file a death claim, you require the insurance policy, as well as information regarding the cause and manner of death, and also a certified copy of the death certificate. Occasionally, medical history information is also required, in addition to medical treatments undergone and doctor's names.
How to choose a dependable life insurance company?
All life insurance companies are regulated within state laws. State insurance departments monitor life insurance operations within their border, the goal being to assure the consumer that the company is well managed and also have enough financial reserves to meet their contractual obligations as and when the need arises.
What are the main differences between life insurance company offers?
Some life insurance companies are vast, offering life insurance as well as casualty (home and auto) insurance. Others focus only upon life insurance and annuities. Some will only offer specific products to seniors, to small businesses, or 'niche' products like variable life. According to LIMRA, there are now approximately 1,600 companies within the U.S. that offer life insurance policies.
Furthermore, life insurance companies tend to distribute products differently. Many companies are involved with a particular regional or national agency system, in which case, the company is authorized to train and retain agents to sell the company's lines. Nevertheless, a growing number
of companies prefer to sell their insurance products to the consumer on a 'direct basis'.
