A very common asset that is included in many people’s long-term financial planning is life insurance. A life insurance policy is a way to protect your loved ones by giving them the money they might require after your passing. For instance, you might buy life insurance to pay for your children’s college education or to assist your spouse with paying the mortgage or other regular expenses.
It’s crucial to comprehend how life insurance functions and how your beneficiaries will be paid out when you purchase a policy. This can assist you in selecting the payout option that best works your estate planning objectives.
- Life insurance is a legal agreement between a policyholder and an insurer that specifies how much of a death benefit will be paid out in the event of the insured person’s demise.
- Life insurance comes in a variety of forms, including term and permanent.
- As soon as the insured’s death occurs, a life insurance company should be contacted to start the claims and payout procedure.
- No matter if they are people or organizations, it’s important to always specify life insurance beneficiaries.
- A beneficiary may receive a life insurance payout in a variety of ways, including lump-sum payments, periodic payments, annuities, and retained asset accounts.
Basics of Life Insurance
An insurance contract type is life insurance. When you buy a life insurance policy, you consent to pay premium payments to maintain your coverage. The person or people you designated as beneficiaries of the policy may pay a death benefit from the life insurance company in the event of your passing.
Some life insurance policies may provide both living and death benefits. You can access the death benefit of your insurance policy while you’re still alive by adding a living benefit rider. This kind of rider is useful if you have a terminal illness and need money to pay for medical care.
According to Ted Bernstein, owner of Life Cycle Financial Planners LLC, “some life insurance companies have designed policies that allow their policyholders to draw against the face value of the policy in the event of a terminal, chronic, or critical illness.” “These policies allow the policyholder to be their own life insurance policy’s beneficiary.”
It’s important to think about the following when purchasing life insurance:
- How much coverage do you require?
- Choosing between a term life and a permanent life insurance policy
- How much you will pay in premiums
- If any, which riders would you like to add?
- The variations in life insurance quotes for each prospective policy
A life insurance calculator can be useful in determining a death benefit in terms of coverage amounts. While a permanent life insurance policy covers you for life as long as premiums are paid, term life insurance only protects you for a predetermined term of time. Term life insurance typically costs less than permanent life insurance, but the latter can provide advantages like cash value building.
The type of policy, the size of the death benefit, the riders you choose, and your general health can all affect how much a life insurance premium will cost. A paramedical exam is frequently required as a part of the underwriting procedure.
You can combine life insurance and long-term care insurance with hybrid life insurance policies.
What Is Covered by Life Insurance?
The death benefit of your life insurance policy may be used to pay for a variety of costs. A life insurance policy can fill in the gaps left by the loss of a partner, spouse, parent, or other source of income to pay for obligations like rent or mortgage payments, funeral and burial costs, school tuition, personal debt like credit card balances or student loans, and even to pay up for lost income to cover daily expenses.
Of course, many people who buy life insurance protect their beneficiaries from monetary hardship.
You can buy an insurance policy to leave an inheritance to your grown children or grandchildren, a member of your extended family, or a charitable organization. You may be able to access your life insurance proceeds while you are still alive under some policies, such as whole or universal life insurance. As long as you continue to pay premium payments, you might be able to borrow against your policy to pay for a home or your kids’ college. These life insurance policies can be helpful if you are unable to pay the loan, even though you run the risk of lowering the death benefit.
Normal coverage for homicide, natural causes of death, and accidents is included in the policy. Although it is advisable to research the policy you want to buy, in some cases, it covers suicide. In some cases, there may be conditions that must be satisfied before beneficiaries receive their death benefits.
Permanent life insurance versus term life insurance
Term life insurance offers coverage for a predetermined amount of time, frequently in 15-, 20-, or 30-year policies, although timeframes may differ depending on the insurer. Even if all premium payments have been made, the death benefit of a term life insurance policy is not paid out once the term of the life insurance policy expires. In contrast to permanent life insurance, term life insurance premiums are typically more reasonable.
Term life insurance can be helpful if you want coverage during your peak earning years or while your child or children are still young to give your partner, spouse, or children some financial protection. There is no cash value in term life insurance, and you cannot borrow money against the death benefit. Some term life insurance plans can be extended, converted into whole or universal life plans, or both, but the premiums will be significantly more expensive than they were initially.
Whole and universal are the two types of permanent life insurance. A death benefit and a cash value account are combined in all permanent life insurance policies. The insured may borrow money against your life insurance policy if it is permanent. Your beneficiaries will get less money if you don’t pay it back. Some insurance policies pay dividend payments on earnings, which can be used to cover much higher term life insurance premiums.
As long as you continue making premium payments, you are covered by both whole and universal life insurance. However, as you borrow against your death benefit, it decreases.
How Much Does Life Insurance Cost?
The type of insurance you buy, the insurer selling the policy, your general health and wellness, and in some cases, your family history, are some of the variables that affect the cost of life insurance. For instance, if you choose a 20-year term life insurance policy and are a healthy adult, you could pay as little as $30 per month for a death benefit of $500,000 instead. Term life insurance is less expensive than whole or universal life insurance, and the cost of insurance increases with age.
Depending on your age, health, and the amount of the death benefit, whole or universal life insurance can cost you anywhere from $125 to over $200 a month.
Selecting a Beneficiary for Life Insurance
You must choose one or more beneficiaries as part of the process when buying life insurance. This is the person you want to receive your insurance policy’s death benefit after you pass away. A beneficiary of life insurance could be:
- a partner
- young adult
- Business associate
- philanthropic organization
- a faith
A single beneficiary or a primary beneficiary and one or more contingent beneficiaries are both acceptable choices. When the primary beneficiary of your life insurance policy passes away, a contingent beneficiary would be entitled to death benefits from your policy.
A life insurance policy’s beneficiaries cannot include minor children.
Putting in a Claim
A life insurance policy does not always pay out death benefits. The life insurance company must first receive a claim from the beneficiary. This can be done online or via paper claims filing, depending on the insurance company’s policies. Regardless of how you end to file, the company typically needs paperwork and supporting documentation to process the claim and pay out.
Your beneficiaries might be asked to submit the claims form and a copy of the policy. They must also include a certified copy of the death certificate, which can be obtained from the county, municipality, hospital, or nursing home where the insured person passed away.
According to Bernstein, policies owned by revocable or irrevocable trusts must guarantee that the insurance company has a copy of the trust agreement naming the owner and beneficiary.
There isn’t a set period of time within which you must submit a life insurance claim, but the earlier you do so, the better.
Expire Date of Benefits
Benefits from life insurance are typically paid when the insured person passes away. Beneficiaries submit a certified copy of the death certificate along with a death claim to the insurance company. In many states, insurers have 30 days to examine the claim before they must decide whether to pay it, reject it, or request more information. A company will typically give a justification if it rejects your claim.
According to Chris Huntley, founder of Huntley Wealth & Insurance Services, most insurance companies pay claims within 30 to 60 days of the date of the claim.
He continues, “There is no set period of time.” However, insurance companies are compelled to pay claims as soon as possible after receiving legitimate proof of death in order to avoid paying outsized interest fees.
Delays in Payment
There are a number of circumstances that could result a payment delay. If the insured passes away within the first two years of the policy’s issuance, beneficiaries may experience delays of six to twelve months. The one- to two-year contestability clause is the cause.
This clause is found in the majority of policies, and it enables the carrier to check the initial application to make sure fraud was not committed. The benefit will typically be paid as long as the insurance company cannot demonstrate that the insured lied on the application, according to Huntley. The majority of policies also include a suicide clause that enables the company to withhold benefits in the event that the insured commits suicide within the first two years of the policy.
Get help right away if you or someone you know is struggling with depression or mental health issues. You are not by yourself. Get in touch with the National Suicide Prevention Lifeline at 1-800-273-8255 or through live chat if you or a loved one is thinking about taking your own life. It offers free and private support and is open twenty-four hours a day, seven days a week.
When homicide is listed on the insured person’s death certificate, payments might also be postponed. In order to eliminate the beneficiary as a suspect in this case, a claims representative may speak with the detective assigned to the case. The payment is withheld until any lingering questions about the beneficiary’s possible role in the insured’s death are answered. If charges are filed, the insurance company may withhold the payout until the allegations are dropped or the victim is found not guilty.
Payout delays could also happen if:
- The insured person passed away while engaging in illegal activity, such as drunk driving.
- On the application for the policy, the insured party lied.
- The insured failed to mention health conditions or dangerous pastimes or endeavors like skydiving.
- When an insured person passes away within the first two years of a policy, insurance companies have the right to postpone payments for six to twelve months.
Additionally, you have a say in how your death benefit will be distributed after your passing. The payout options that are available to you and your beneficiaries are listed below.
Beneficiaries have typically received lump-sum payments of the proceeds since the industry’s inception more than 200 years ago. According to Richard Reich, president of Intramark Insurance Services, Inc., the majority of policies still have a lump sum payout option as their default option.
Annuities and Installments
According to Bernstein, payments made to the beneficiaries of modern life insurance policies have significantly improved. These consist of an annuity option or an installment-payout option where the proceeds and accrued interest are distributed on a regular basis over the beneficiary’s life. The policy holder has the option to choose from these options a guaranteed, predetermined income stream that will last for five to forty years.
According to Bernstein, “the majority of life insurance buyers prefer the installment option for income-protection life insurance to ensure the proceeds will last for the required number of years.
Recipients should keep in mind that any interest income they receive is taxable. If the death benefit is substantial, it might be better for you to end the lump sum rather than payments over time because you’ll end up paying more in taxes on the interest.
Consult an insurance agent or estate planning lawyer to determine which payout option would be most appropriate.
Account for Retained Assets
Some insurers provide checkbooks as opposed to lump sums or recurring payments to beneficiaries of sizeable policies. The insurance company keeps the payout in an account and lets you write checks against the balance, acting as a bank or financial institution. While not allowing deposits, such an account would still pay interest to the beneficiary.
Accelerated death benefit is the term for this situation. (Explore accelerated benefit riders in more detail for related insight.) Traditionally, life insurance policies only make payments upon the death of the policyholder. You should discuss whether this choice makes sense for you with your insurance agent.
The Procedure for Term Life Insurance
The easiest type of insurance to buy is frequently term life insurance. Depending on the type of policy, a medical exam may or may not be required, and the policy will last for a predetermined period of time, frequently 20 or 30 years. You pay monthly premiums for your death benefit, and the insurance company pays your beneficiaries if you pass away before the term is up. Your policy expires when you reach the maximum term allowed.
The Operation of Whole Life Insurance
Whole life insurance, as opposed to term, is a long-lasting type of insurance that provides a fixed death benefit over the policyholder’s lifetime. When compared to term life insurance, whole life insurance has higher life insurance premiums. There is a cash-value account in whole life that can grow as interest is accumulated at a fixed rate and on a tax-deferred basis.
You can take out a loan against your whole life insurance policy, but since the benefit serves as the collateral, if you don’t pay it back, your benefit will decrease. Your policy will be cancelled if you don’t pay the premiums or the loan back. You may be required to pay taxes on any money you borrowed if it is deemed to be income.
What Is the Process of Universal Life Insurance?
Another type of permanent life insurance is universal life insurance, which is similar to whole life. Both a death benefit and a cash value account are provided by these policies. If you pay your monthly premiums, universal life insurance follows you throughout your life. There are three types of universal life insurance: variable, guaranteed, and indexed. With all three, however, you have the freedom to alter your death benefit or lower your premiums (unlike with other policies). Earnings from your cash value account may be used to pay your account’s premiums.
Can Someone With a Pre-Existing Condition Get Life Insurance?
You might find it challenging, but not impossible, to purchase life insurance if you have pre-existing conditions. Coverage will vary depending on a number of variables, most notably your personal health situation. Some pre-existing conditions, such as diabetes, hypertension, and anxiety, may be covered with higher premiums depending on the life insurance company.
How much money must be deposited into a life insurance policy before it begins to pay out?
As soon as it is in effect, life insurance will begin to pay out in the event of the insured’s death. Typically, this counts as the initial premium payment. However, some life applications offer the choice to bind a specific amount of coverage while the underwriting process is underway in the case that the applicant passes away before the policy is issued (known as a binder). The binder is typically paid for up front when the application is taken and, once accepted, will either be returned or applied as credit toward the first premium.
Life insurance policies give both policyholders and their loved ones the assurance that financial hardships can be avoided in the unfortunate event of a person’s death. You can proceed with your plans to purchase coverage with confidence if you are aware of how the process works, from buying life insurance to making a claim and receiving a payout.