Life insurance is something that most people misunderstand how life insurance works. The way life insurance is structured, owned and who the beneficiaries are is important information. This article examines those along with other questions.
6 Things That You Should Know About Your Life Insurance Policy
Life insurance is one of the most misunderstood things in this world. Here are 10 things that you should know about your existing life insurance.
- Is the company that issued the policy a stock or a mutual company? There is a big difference in those two little words. Stock companies are in business for the benefit of their stock holders. If the stock company doesn’t make money for its stock holders it will go out of business. This means that when it comes to paying claims they are more likely to challenge the payment of claims, less likely to pay dividends etc. Many times, stock companies will charge a lower premium and could have an easier underwriting process. This can be deceiving. The reason is there are typically clauses in the policy which will enable the company to avoid payment of claims. A mutual company exists for the benefit of the policyholders. This means that profits from operations and investments are shared with the policyholders. Mutual companies have a tougher underwriting process and many times have higher initial premiums. Mutual companies will be more likely to pay reasonable claims and will usually offer dividends to benefit the policyholder.
- If the policy term or whole life? There are only two types of life insurance, term and whole life. Term is less expensive monthly. Term is like renting the coverage and is typically used for short term needs. Term is an excellent way to get a large amount of coverage for a lower price. Whole life is designed for longer term needs. Term is like buying your coverage and can be used for things other than simply death benefit. Whole life is more expensive monthly but can have a lower net cost over time. While there are other names used for policies they are simply term, whole life or a combination labeled differently.
- Is your policy an individually written or a group policy? Policies which are individually underwritten stay with you if the policy remains in place. The underwriting for an individual policy is stricter but once it is approved stays with you. Group policies are usually acquired through your employer or some type of association. The underwriting is less strict but the coverage usually ends when you leave the sponsoring company or association. Some group policies are portable, meaning you can take it with you.
- Who is the beneficiary of the policy? One of the most commonly overlooked and ignored features of life insurance is the beneficiary designation. A typical example is when a person either gets married or divorced, they forget to change their beneficiary designation. This means that the proceeds could possibly go to an unintended person. This designation can’t be overwritten by a will. You should make a habit of checking your beneficiary designations annually.
- Who is the owner of the policy? This sounds like a simple question but it is very often one that people don’t know the answer to. They also don’t usually realize the consequences of who owns a life insurance policy. In most cases, the insured is the owner. This means that the proceeds will be included in the owner’s estate upon their death. While in most cases life insurance proceeds are income tax free, being part of the deceased estate could trigger estate taxes. This can be dealt with by changing the owner designation or through your will. The other thing to remember is that only the owner has legal access to information regarding the life insurance policy.
- Is there any value to the policy other than death benefit? Term policies have no value other than death benefit. Whole life and some combination policies can offer access to cash. This cash is available to the owner of the policy. This means that the insured, if they are the owner, can receive a benefit even when they are alive. The amount varies as does ability to access the cash.
Being aware of what you have and how it works, regarding life insurance, can save both you and your family headaches down the road. We included some links to other websites that could help you educate yourself.