Life Insurance FAQs

What is life insurance and why do I need it?

A death in the family is not only emotionally devastating, it can also take a tremendous toll on the future financial security of a family.  Suddenly, without the deceased’s income, paying the mortgage or providing for a child’s college education may become much more difficult.  Those who buy life insurance do so to help ensure their loved ones are taken care of financially.

Life insurance is a promise by an insurance company to pay those who depend on you a sum of money upon your death. In return, you make periodic payments called premiums.  Premiums can be based on factors such as age, gender, medical history and the dollar amount of the life insurance you purchase.  In the event of your passing, life insurance provides money directly to the individuals you select, your beneficiaries, who can use the money as they see fit, including:

• Replacing lost income
• Covering basic living expenses
• Paying household debts, estate taxes, and funeral expenses
• Funding a child’s education
• Supplementing retirement savings

 

What is term life insurance?

Term is basic life insurance, the kind you’d probably think of is someone asked you to describe the concept of life insurance.  You pay a premium and in return, the insurer guarantees to pay your beneficiary a lump sum of money if you die while the policy is in effect.

Term policies are sold for specific lengths of time, usually between 10 and 30 years.  Once the term expires, you stop paying premiums and the policy is no longer in effect.

Pros:

• Term is the most affordable life insurance you can buy.
• Term policies are easy to understand, so you don’t have to worry about any hidden fees, exclusions, or risks.
• You can cancel a term policy before it expires.

Cons:

• When the policy expires, so will your coverage; if you still want to be insured you’ll have to either shop for a new term policy or convert the policy to permanent coverage.

 

What is permanent life insurance?

Permanent life insurance never expires, and it includes a “cash value” component that grows (or in some cases shrinks) over the life of the policy.  This cash value means you can do things like borrow against your policy or cancel the policy for part of the cash value after a period of time.  There are several types of permanent life insurance: whole, universal, variable, and variable universal.

Pros:

• It can be useful as part of a highly customized personal financial or estate planning strategy.
• Term policies are easy to understand, so you don’t have to worry about any hidden fees, exclusions, or risks.
• You can cancel a term policy before it expires.

Cons:

• It’s far more expensive than term insurance.
• Because of the cost, people frequently buy less coverage than they actually need.
• It’s more complicated to buy because there are lots of ways to customize the policy for your specific goals.
• Depending on the type of permanent policy, you could see your death benefit shrink and/or premiums rise over time, or the cash value portion could decrease.

 

What type of life insurance is best, term or permanent?

It’s impossible to say because the kind of coverage that’s best for an individual depends on their particular circumstances and financial goals.  But generally speaking, term offers the greatest coverage for the lowest initial premium and is a great solution for people with temporary needs or a limited budget.

Permanent insurance may make more sense if there is the anticipation of a need for lifelong protection, or if the option of accumulating tax-deferred cash values is an attractive objective.  In fact, it doesn’t have to be one or the other.  Often, a combination of term and permanent insurance is the right solution.

 

Who owns life insurance in America?

Today, 54% of Americans (172 million) have some form of life insurance coverage (individual and/or group), 8 million more than in 2010.  Men are more likely to own life insurance at 62% than women at 56%.  The gap between husbands and wives is even more pronounced as 71% of husbands own life insurance compared with only 63% of wives.  Among millennials, 54% own life insurance now versus 47% in 2010.

 

Do Americans think they have enough life insurance?

About 33% of Americans believe they need more life insurance.  The mean life insurance coverage amount is $168,000 which is only about 3.4 years worth of income replacement.  Experts recommend individuals have enough life insurance to replace 7 years-worth of income.

About 40% of Americans say they wish their spouse or partner had more life insurance coverage.  57% of all Americans say they would have immediate or near-immediate trouble paying living expenses if their primary wage earner died.

 

Why do Americans own life insurance?

The top three reasons Americans give for owning life insurance are:

1. to cover burial and final expenses – 85%;
2. to help replace lost wages/income of a wage earner – 67%; and
3. to transfer wealth or leave an inheritance – 63%.

52% of Americans view life insurance as a good way to supplement their retirement income.

 

What prevents people from owning life insurance?

The two primary reasons that Americans give for not owning life insurance is that they think it’s too expensive and they have other financial priorities such as: paying living expenses, building savings, managing debt, and saving for retirement.  42% of Americans say they haven’t purchased life insurance because they don’t know how much they need or what type to buy

 

What are the tax advantages of life insurance?

Death benefits are generally received income tax-free by your beneficiaries. In the case of permanent life insurance policies, cash values accumulate on an income tax-deferred basis. That means you don’t have to pay income tax on any of the policy’s earnings as long as the policy remains in effect.

In addition, most policy loans and withdrawals are not taxable (although withdrawals and loans will reduce the cash value and death benefit)

 

What are accelerated death benefits and how do they work?

Many policies contain a provision that allows a terminally ill person to collect a significant portion of their policy’s death benefit while still alive.  The money can be used to get family finances in order, pay for uncovered medical expenses, or simply do certain things for or with your family and friends while you still can.

The amount taken out while still living is subtracted from the death benefit payments that your beneficiaries receive, along with any applicable interest charge for early payment of benefits.

 

Does it make sense to replace a policy?

Think carefully before replacing or dropping an in-force policy because:

• If your health status has changed over the years, you may no longer be insurable at standard rates.
• Your present policy may have a lower premium rate than is required on a new policy of the same type if only because you’re older.
• If you replace one cash-value policy with another, the cash value of the new policy may be relatively small for several years and may never be as large as that of the original policy.
• You will be subject to a new contestability period.

 

What happens if I fail to make the required premium payments?

If you miss a premium payment, you typically have up to a 31-day grace period during which you can pay the premium with no interest charged.  If you own a term policy and fail to pay your premium within the grace period, your insurance company will typically terminate the policy.

If you own a permanent policy and fail to pay your premium within the grace period, your insurance company, with your authorization, can draw from your policy’s cash value to keep the policy in force.

In some flexible-premium policies, premiums may be reduced or skipped as long as sufficient cash values remain in the policy.  However, this will result in lower cash values and a shortened coverage period.

 

What is a disability waiver of premium and how does it work?

A disability waiver of premium rider stipulates that if you become totally disabled for a specific period of time, you don’t have to pay premiums for the duration of the disability.  You might consider such a rider because disabling illnesses and injuries are much more common than most people realize.

If you become disabled and your income declines or disappears for a period of time, a disability waiver of premium can ensure that your life insurance policy will remain in force.

 

If I have life insurance through work, do I need additional life insurance coverage on my own?

All life insurance provided by or purchased through your employer is term insurance.  That means that when you leave that company, your life insurance coverage terminates.  Unlike with the coverage you had through work, for a policy you purchase on your own, you’ll have to be accepted by the insurance company (a process called underwriting).

If you have chronic health issues or pre-existing conditions that the insurance company considers risky, you may be declined for coverage.  So, it may be wise to supplement your life insurance coverage through work with coverage on your own while your health is good and the age-rated premiums are lower.