Ask the experts: common life insurance questions
- Coverage clarity
- Life insurance
Life insurance offers peace of mind and financial protection for your loved ones but it’s often misunderstood. There are many common questions about life insurance from our customers, likely the same questions that you have. Whether you're new to life insurance or seeking to deepen your understanding, the answers in this guide will help you be better able to navigate the complexities, make informed decisions and be certain that your financial plans align with your goals and the needs of those you care about most.
Table of contents
- What is life insurance?
- Why do I need life insurance?
- How does life insurance work?
- What are the different types of life insurance?
- How much life insurance do I need?
- How much does life insurance cost?
- Can I get life insurance with pre-existing conditions?
- What happens if I miss a premium payment?
- Can I change my life insurance policy?
- When should I review my life insurance policy?
- What happens to the payout when I die?
- Can I borrow against my life insurance policy?
- What are the tax implications of life insurance?
- Do I need life insurance if I have benefits at work?
- Where can I buy life insurance?
- How can I save money on life insurance?
- What happens if I outlive my term life insurance policy?
- Can I cash in my life insurance policy?
Life insurance is a contract between you and an insurer. You pay premiums and they provide financial security for your loved ones in the event of your death. It covers expenses like funeral costs, debts, living expenses, and education. Some policies also accumulate cash value, serving as a savings option.
There are several compelling reasons to consider life insurance.
- Income replacement – If you're the primary breadwinner, life insurance means your family can maintain their lifestyle and financial stability by replacing lost income.
- Debt coverage – Life insurance helps settle outstanding debts like mortgages, car loans and credit card balances, preventing your family from financial strain after your passing.
- Estate planning – It's a valuable tool for estate planning that distributes your assets as you wish, especially important if you have complex finances or estate tax concerns.
- Funeral expenses – Life insurance covers funeral and final expenses, sparing your family from financial stress during an already difficult time.
- Legacy and education – Leave a lasting legacy or support your children's education by designating the death benefit for these purposes.
Life insurance is simple: you pay premiums to an insurance company in exchange for financial protection for your loved ones. Your policy does come with some unique phrases to understand though.
- Premiums – Regular payments you make to the insurer based on factors like age, health, policy type and coverage amount.
- Death benefit – The money the insurer pays your beneficiaries when you pass away, helping cover expenses like funerals, debts and living costs.
- Beneficiaries – The people you choose to receive the death benefit.
- Underwriting – The process of the insurer assessing your risk based on factors like health and age to determine your premium rates and policy approval.
- Payouts – The amount your beneficiaries receive after your passing once they’ve filed a claim and provided the appropriate paperwork to your insurance company.
- Policy options – Term life insurance (for a specific term) or whole life insurance (lifelong coverage with a cash value component).
The main types of life insurance are term life insurance, whole life insurance and universal life insurance. Each type serves different purposes and has unique features, making it important for you to consider your life stages and goals when deciding which to get.
Term life insurance
Term life insurance is the simplest and most affordable form of life insurance. It provides coverage for a specified term, often 10, 20 or 30 years. If the policyholder passes away during the term, the death benefit is paid to the beneficiaries.
- Temporary coverage – Term life insurance is designed to provide coverage for a specific period. If you outlive the term, the policy expires and there is no payout.
- Affordable premiums – Term policies generally have lower premiums compared to other types of life insurance.
- No cash value – Term policies do not accumulate cash value over time. They are purely for protection, not savings.
- Example – A young, married individual with children might choose a 20-year term life policy to protect their family's financial security until the children are financially independent. The lower premiums make it an attractive option for young families.
Whole life insurance
Whole life insurance, also known as permanent life insurance, provides lifelong coverage. It combines a death benefit with a cash value component, which grows over time.
- Lifelong coverage – Whole life policies do not expire as long as premiums are paid.
- Cash value accumulation – A portion of the premium payments goes toward building cash value within the policy. This cash value can be accessed during the policyholder's lifetime.
- Higher premiums – Whole life insurance tends to have higher premiums compared to term life insurance.
- Example – An individual in their 40s or 50s might opt for whole life insurance to have lifelong coverage and use the cash value component for supplemental retirement income.
Universal life insurance
Universal life insurance is a flexible form of permanent life insurance that offers adjustable premiums and death benefits. It also includes a cash value component.
- Flexibility – Policyholders can adjust premium payments, death benefits and the timing of cash value withdrawals.
- Cash value growth – Like whole life insurance, universal life policies accumulate cash value over time.
- Investment options – Some universal life policies allow policyholders to invest part of their cash value in various investment options.
- Example – A business owner with variable income might choose universal life insurance for its flexibility with changing financial circumstances. They can increase or decrease premiums as needed and use the cash value as a financial safety net.
The right amount of life insurance coverage is as unique as you are and depends on striking a balance between providing financial security for your loved ones and keeping your premiums manageable. Here are some common ways to calculate your necessary coverage.
- Income replacement – Estimate your annual income, multiply by years needed, add expenses, subtract savings and other policies to determine what you need as a death benefit.
- Expenses and debts – List current expenses and debts, consider future expenses, subtract savings and existing coverage. The difference between this and the income replacement method is that here you’re aiming for your beneficiaries to have a $0 balance at the end, not have money to live on.
- DIME method – Debt (existing and anticipated) + Income (annual income x number of years your dependents will live off of it) + Mortgage (remaining balance) + Education (estimated future costs) = Total coverage needed. A simplified guideline but may not cover all expenses.
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The cost of life insurance varies significantly and depends on several factors. Understanding these factors can help you get a clearer picture of what you can expect to pay for coverage. Here are some of the key elements that influence life insurance premiums.
- Age – Younger individuals pay lower premiums as they are expected to have better health and longer life expectancy.
- Health – Medical history and lifestyle may affect premiums. Some insurance companies assess risks based on pre-existing conditions, family history and habits like smoking. However, not all companies require a health assessment for all policies.
- Coverage – The higher your death benefit, the higher your premiums. More coverage represents higher financial risk for the insurer.
- Term length – Short-term policies have lower premiums as the likelihood of payout during a shorter term is lower than long-term policies.
While it might be more challenging to secure coverage with pre-existing conditions, it is still possible. Some policies do not require a medical check and others will insure policyholders with pre-existing conditions with certain conditions.
- Higher premiums – Pre-existing health conditions can lead to higher premiums, depending on condition severity and insurer guidelines.
- Guaranteed issue policies – Designed for those struggling with health issues, these have higher premiums, lower coverage and no medical exam or age requirements.
- Simplified issue policies – Less strict than traditional underwriting, these policies require some health questions and streamline the application process.
It's important to remember that even with pre-existing conditions, obtaining life insurance is often possible and can provide valuable financial protection for your loved ones. While premiums may be higher, the peace of mind and financial security it offers can outweigh the costs.
Life insurance relies on consistent premium payments to remain active. To avoid missed payments, set up auto-pay, maintain an emergency fund or communicate with your insurer for solutions during financial difficulties. If a missed payment is inevitable or unexpected, there may be options available to address the situation.
Consequences of missed payments
- Lapse in coverage – Failure to pay within the grace period results in a policy lapse, ending coverage.
- Loss of benefits – A lapsed policy means losing death benefits and any cash value (in permanent life insurance).
- Reinstatement challenges – Reinstating a lapsed policy may require overdue premium payment with interest, updated health info and potential new medical exams.
- Grace period – Many policies have a grace period of around 30 days for late payments to help policyholders avoid lapses.
Life insurance policies can often be adjusted to better align with your changing needs and circumstances. Here, we'll look at the flexibility of life insurance policies, the process of making modifications and when it might be suitable to make changes.
- Adding riders – Enhance coverage with riders like critical illness or accidental death for extra benefits.
- Adjusting coverage – Modify the death benefit to align with changing needs, affecting premiums.
- Changing payment frequency – Switch premium payment frequency to match your budget.
Modifying a policy
- Contact your insurer – Discuss changes with your insurance company or the VIU by HUB Advisory Team for the necessary forms and guidance.
- Complete forms – Update your forms and provide updated health information.
- Review and approval – Your insurance company will assess the impact your changes will make on your policy and premiums.
- Confirmation – Approved changes are confirmed, including premium or coverage adjustments.
When to make changes
- Life events – Marriage, childbirth, or divorce can impact insurance needs.
- Financial changes – Significant income shifts may require coverage or premium adjustments.
- Health changes – Improved health can lower premiums; deteriorating health may require adjustments or additional coverage.
- Retirement planning – As retirement approaches, adapt your policy to align with retirement goals.
Regularly reviewing your life insurance policy is necessary to keep it in line with your goals. These reviews give you the opportunity to reflect on life changes that could impact your coverage needs. By taking the time to review and note these changes, you’ll be able to adjust your premiums and coverage to better represent your current needs. What events should trigger a review?
- Marriage or divorce
- Home purchase or sale
- Career changes
When you pass away, the death benefit from your life insurance policy is paid out to your designated beneficiaries. The way this payout is structured, and its tax implications, varies depending on your policy and the choices you make. Consult your agent or financial advisor for information specific to you and your policy.
- Lump sum – This is the most common option, providing the entire tax-free death benefit in one payment. Your beneficiaries receive the full amount and can use it as needed.
- Installments – Some policies offer the option for beneficiaries to receive the death benefit in multiple installments over a specified period. This approach provides a steady stream of income.
- Annuities – In some cases, beneficiaries can choose to receive the death benefit as an annuity. An annuity provides regular payments over an extended period or for the remainder of the beneficiaries' lives.
- Interest option – Certain policies offer an interest option, where the insurance company holds the death benefit and pays beneficiaries interest on the balance.
- Income tax – Generally, life insurance death benefits are tax-free at the federal level. This means that beneficiaries typically receive the full amount of the death benefit without owing income tax on it. However, if the death benefit is paid in installments with interest, the interest portion may be taxable as income.
- Estate tax – In some cases, the death benefit may be included in the policyholder’s estate for estate tax purposes. This can impact the overall estate tax liability if the estate exceeds the estate tax exemption threshold.
- Inheritance tax – Some states impose inheritance tax on beneficiaries. The rules and rates vary by state, so check the tax laws in your state.
Yes, you can borrow against certain life insurance policies, like whole life or universal life, through policy loans. Policy loans allow you to access a portion of your policy's cash value, which accumulates over time. This is not considered taxable income and typically comes with a lower interest rate compared to traditional loans. However, any outstanding policy loans can impact the death benefit your beneficiaries receive upon your passing. The loan amount plus any accrued interest will be deducted from the death benefit.
Life insurance offers several tax benefits, notably the tax-free death benefit. When your beneficiaries receive the death benefit upon your passing, it's generally not subject to federal income tax. This can provide your loved ones with a substantial financial cushion without any tax implications. To better understand life insurance taxation, consult a tax professional in your state who knows federal and state tax laws and regulations that may apply.
While employer-provided life insurance is valuable, it often has limitations – including coverage that might not fully meet your needs, a lack of customization options and the risk of losing coverage when changing jobs. In contrast, an individual life insurance policy is customizable to suit your needs regarding the type, coverage amount and beneficiaries. More importantly, individual policies stay with you regardless of job changes, providing uninterrupted protection.
There are several avenues for purchasing life insurance, each with its own advantages and disadvantages. Here are some of them to help you decide which is right for you.
- Personalized guidance – Agents offer tailored advice based on your unique financial situation.
- Multiple options – Independent agents work with multiple insurers, giving you a range of choices.
- In-person service – If you prefer face-to-face interactions, agents provide that personal touch.
- Possible bias – Agents may be influenced by commissions from insurance companies.
- Limited choices – Captive agents represent only one insurer, limiting your options.
- Impartial advice – Brokers are unbiased professionals who work on your behalf, offering guidance.
- Access to many carriers – Brokers have access to a wide range of insurers, increasing your chances of finding the right coverage.
- Customization – Brokers help tailor your policy to your specific needs.
- Broker fees – Some brokers charge fees, potentially increasing policy costs.
- Less personalization – Brokers provide expertise but may not offer the same personalized service as dedicated agents.
- Convenience – You can research, compare and buy policies online from the comfort of your home.
- Transparency – Compare policies, coverage and quotes from multiple insurers for informed decisions.
- No sales pressure – Explore options at your pace without sales pressure.
- Limited personal guidance – Online platforms lack personalized guidance found with agents or brokers.
- Complexity – Understanding insurance terms and details can be challenging without expert help.
VIU by HUB is in a unique position as an online broker with licensed agents standing by. Unlike some brokers mentioned above, our services are free and our large network of insurance carriers means we can offer you more personalization. No matter how you want to approach buying life insurance, VIU by HUB is here for you. However, if you prefer to do it alone, no hard feelings. In that case, we recommend that you check the financial stability of insurance companies that you are considering and review customer feedback. Taking these steps will help to be sure that your insurance carrier can properly support you through the years. You should also compare quotes from multiple companies to get the best coverage at the best price.
Life insurance doesn't have to break the bank. To save money on your life insurance premiums, consider these tactics.
- Compare multiple quotes – Don't settle for the first policy you find; compare quotes from various insurers.
- Choose the right policy – Choose term life insurance if you have specific coverage needs and avoid over-insuring.
- Improve health – A healthy lifestyle can lead to better rates, as insurers consider your health.
- Bundle policies – Save by bundling life insurance with other policies like auto or home insurance.
- Make annual payments – Pay annually, rather than monthly, for potential premium discounts.
- Evaluate riders – Choose riders carefully; some may not offer significant benefits and can increase premiums.
- Regular policy reviews – Regularly update your policy to match your changing needs and finances.
- Consult a broker – Brokers can find the best policy for your budget by accessing multiple insurers.
If you outlive your term life insurance policy, several outcomes and choices come into play. Firstly, your coverage ends and there is no payout. You can renew the policy, although you should expect higher premiums to reflect the fact that you are older than when you first bought it. Alternatively, you can convert your term policy into a permanent life insurance policy. This conversion allows you to maintain coverage for life and build cash value within the policy.
You need to carefully evaluate your needs and financial situation when deciding whether to renew or convert. Renewal may be suitable for temporary needs, while conversion provides lifelong coverage and potential financial benefits. Consulting with your insurance agent or financial advisor can help you make an informed decision based on your specific circumstances and goals.
Cashing in a life insurance policy involves surrendering the policy in exchange for its cash value to get immediate access to it. The decision to cash in a policy or keep it is entirely up to the policyholder but surrendering the policy reduces the cash value and terminates future coverage. Carefully evaluate the consequences and explore alternative options, such as policy loans or conversions, before deciding to cash in a life insurance policy.
Remember that when considering life insurance, your needs and circumstances are unique, and you should tailor your policy accordingly. For personalized guidance and additional information about these or any other life insurance questions, insurance brokers like VIU by HUB are here to assist you in making the best choices to safeguard your loved ones and secure your financial legacy. Don't hesitate to reach out for expert advice as you navigate the world of life insurance.
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