The subject of life insurance can be a difficult thing to discuss. Even though we are all going to die eventually, it is not a pleasant thought and oftentimes we try to avoid thinking or talking about it. However, because we live in an uncertain world where anything can happen at any time, it is essential that we make plans and prepare for a variety of unpleasant situations - including death. By purchasing life insurance, you are investing in the future of your loved ones. A life insurance policy will provide a financial cushion to your family in the event of your death. This means that if your family relies on you for income, you can have peace of mind knowing that funds from your life insurance policy will provide financially for your family if something happens to you.
Another difficulty when it comes to purchasing life insurance is that the process can seem ominously lengthy, complicated and confusing. However, having a better understanding of what life insurance is can alleviate this problem. You can achieve this by learning about several different things such as the types of life insurance policies available, the process of applying for life insurance, and what takes place with regard to life insurance in the event of your death.
Basically stated, a life insurance policy is a contract between a policyholder and an insurance company that states that in the event of the insured person’s death, the insurance company will pay out a certain amount of money to the insured’s beneficiary. In exchange for this eventual payout, the policyholder agrees to pay a premium. The premium can take two forms: regular payments or a lump sum. Typically, the policyholder and the insured are the same person, however it is possible for one to take out a policy on another person. For example, a wife may take out a policy on her husband, making her the policyholder while he is the insured person. Another example would be a business taking out a policy on a key member of the business whose death would cause a serious financial loss to the company.
Several categories and subcategories of life insurance exist. Before selecting a life insurance policy, it is important to be aware of the different options available to you. The two main types of life insurance policies are term and permanent. The difference between these two broad categories is that term insurance only applies to a set period of time, usually from one to thirty years. If the insured dies outside of the predetermined term the policy covers, then the insurance policy does not provide a payout. Permanent life insurance, however, typically applies for the entire life of the insured person, as long as he or she continues to meet the terms of the insurance contract, such as making regular premium payments.
Of the two main types of life insurance policies, term is the simpler and usually the more affordable option. This is because term life insurance policies only cover a specified amount of time, rather than the entire life of the policyholder, which means the risk of death for the insured is lower. The subcategories of term life insurance are level term and decreasing term. With level term insurance, the payout the insurer provides in case of death remains the same for the duration of the policy. With decreasing term, the payout amount incrementally decreases throughout the term of the policy. Usually the decrease occurs annually. Some term life insurance policies are return premium policies. This means that if a policyholder outlives his or her policy that at the conclusion of the policy term the insurance company will return a portion of the premiums that the insured paid.
Some interesting options when it comes to term life insurance plans are renewable and convertible policies. Renewable policies typically last for one to five years and allow the insured to renew the policy after the initial term has expired, as long as he or she has continued to pay the policy’s premiums. Convertible policies provide the insured with the option to convert his or her temporary policy into a permanent life insurance policy. An added benefit to convertible policies is that they usually do not require an additional medical examination as a typical permanent life policy would. However, most term insurance policies are not convertible or renewable after the insured reaches a certain age. The typical age cap for renewing or converting term insurance policies is 80.
Permanent life insurance is available in three basic forms: whole life, universal life, and variable life. A whole life policy, which is the most common form of permanent life insurance, provides a pre-specified payout upon the death of the insured, in addition to a savings account. In exchange, the policyholder pays a fixed monthly premium. Because the premium amount does not change throughout the life of the policy, whole life policies tend to be more expensive.
A universal life insurance policy operates in a more flexible manner than whole life. With universal life, a policyholder has a certain amount of leeway when it comes to how much he or she would like to pay in premiums. The insurance company establishes a minimum premium that the policyholder must pay so as to cover sales expenses, taxes, and the cost of the insurance itself. If the policyholder pays more than the minimum premium, than the insurance company credits the excess funds into a cash value account, where it can accrue interest. As money accumulates in the cash value account, the policyholder has the option to lower his or her premiums, with the cash value account providing any excess funds necessary to meet the minimum premium payment. An additional element of a universal life policy is that the policyholder may be able to increase his or her death benefit.
Variable life insurance policies tend to be a riskier form of permanent life insurance. These policies function in a similar way to universal policies in that any excess funds the policyholders contribute go into a cash value account. The insurance company invests the funds in the cash value account, and the accrued interest from those investments grows the value of the account, and therefore of the insurance policy. While this element of investment can quickly yield a large amount of growth, it also brings an inherent amount of risk.
A variable-universal life insurance policy is a hybridized form of variable life and universal life insurance policies. With this type of policy, the policyholder has access to the investment aspect of a variable policy, in addition to the flexibility of a universal policy. Like in a universal policy, variable-universal policies allow policyholders to modify their premium amounts to a certain extent, in addition to the possibility of increasing the death benefit amount.
Some life insurance policies also come with an option called an accelerated death benefit. When a policy includes an accelerated death benefit, the policyholder has the ability to receive a cash advance against the value of the death benefit. In order to receive this advance, the policyholder must develop a diagnosed terminal illness, have a long-term and costly medical condition, require nursing home care, or be permanently mentally incapacitated. The policyholder is then in a position to use the funds to pay for his or her treatment and cost of living.
An interesting aspect of permanent life insurance policies is the tax benefits they provide. Because permanent life policies have an investment component, the funds contributed into cash value accounts accumulate over time. The funds in these accounts are tax-sheltered. Also, when the insurance company pays out the death benefit to the beneficiary, the funds that he or she receives are not taxable. This could provide extensive financial benefits to those who wish to provide an inheritance to their children because it circumvents the expense of estate taxes.
Some important initial steps when it comes to acquiring life insurance are determining how much insurance you need and examining the different policy options available. If you have dependent children, you might want to consider getting a policy with a death benefit amount that will provide for their education and living expenses up until they are adults. Other financial aspects to examine include things such as whether or not you have a mortgage or other outstanding debts, the cost of your funeral arrangements, and any taxes that your beneficiary may owe upon your death. Another way of calculating the amount of life insurance you should purchase is to multiply your annual salary by the number of years you would like your dependents to maintain their current standard of living following your death.
After you have selected the type of policy and amount of coverage you need, you can begin the process of getting life insurance, which includes an application to the insurance company, a medical exam, and the underwriting process. Life insurance applications ask questions such as your height, weight, date of birth, blood pressure, cholesterol level, mental health conditions, and the medical history of yourself and your immediate family. They also require that you provide information related to your lifestyle such as whether you smoke, consume alcohol, or exercise regularly. Other lifestyle factors that the application may cover include your travel habits, driving record, and whether you participate in hazardous activities. For example, if you have a risky occupation like driving racecars, or a high risk hobby such as scuba diving, then the insurance company may deny you coverage or determine that you must pay a higher premium for your policy. It is also necessary to provide information related to your finances such as your credit history, annual income, and net worth. When answering these questions, it is essential that you answer honestly because fraudulent responses could lead to the insurance company raising your premiums, canceling your policy, or denying a payout to your beneficiary upon your death.
After submitting your application, you will typically undergo a medical exam so as to verify the answers you provided to the health-related questions on your application. Oftentimes you can elect to have the medical examiner come to your home for the exam. The examiner will bring any supplies that he or she will need to collect any necessary samples. These exams usually consist of a verbal questionnaire about your medical history such as what medications you take, any medical conditions you may have, details about your lifestyle, and any hospitalizations or procedures you may have undergone. The examiner will also ask about your family’s medical history. Many of the questions that a medical exam will cover are similar to those asked on your application. This is to ensure that you did not forget or conceal any pertinent information. Following the questionnaire, the medical examiner may collect samples of your blood or urine, in addition to measuring your height, weight, pulse, and blood pressure.
After undergoing the medical exam, your application and exam results will go through the underwriting process. Underwriting is essentially an investigation into and evaluation of the answers you provided on your application and during your medical exam. The underwriter has several goals such as ensuring that you gave accurate and truthful answers, and calculating the likelihood of your death based on those answers. This calculation will help the insurance company to make an informed decision about the potential risk of insuring you. Through this process, the underwriter will determine whether or not to provide you with a life insurance policy and will also decide the price of the premium for your policy.
After you receive your approval for life insurance, there are a few final steps you must complete. Firstly, you should look over the approval and make sure that the rate and coverage are what you need. At this point you may decide to purchase more coverage or a longer term. The next step is to let the insurance company know that you accept the policy. After you accept, the insurance company will send you a copy of the policy along with other important documents for you to review, sign, and return. These documents will acknowledge that you have received the policy and you accept its terms. The final step is to make your first premium payment. Once you have begun to pay your premium, your life insurance policy is in force. It is critical that you consistently pay your life insurance premiums because if you lapse on a payment, you may lose your coverage and need to reapply.
An important aspect of your life insurance policy is who you list as your beneficiary. The beneficiary of your policy is the person who the insurance company will pay in the event of your death. Policyholders have the option to list both a primary beneficiary and a secondary beneficiary. The secondary beneficiary is also referred to as the contingent beneficiary, and is only eligible to receive the death benefit from the insured if the primary beneficiary dies before the insured person dies. It is advisable to have both a primary and secondary beneficiary so as to ensure that it is clear who is to receive the proceeds from the death benefit payout. Policyholders also select whether their beneficiaries are revocable or irrevocable. The difference between the two is the policyholder can change the policy beneficiary without his or her consent when he or she is revocable, whereas with an irrevocable beneficiary, the policyholder needs the beneficiary’s consent to revoke his or her status as beneficiary.
It is also possible for the policyholder to name multiple beneficiaries. The two methods of doing this are called per stirpes, which is Latin for “by branch,” and per capita, which means “by head.” With per stirpes beneficiaries, the insurance company equally divides the death benefit between the branches of the family. To give an example, if the insured has two adult children who each have two children of their own, the payout will only be divided two ways amongst the branches of the family. Whereas with per capita beneficiaries, the insurance company equally divides the death benefit among each beneficiary. This means that if the insured has two adult children who each have two children of their own that the payout will be divided six ways amongst each member of the family.
Policyholders have a wide range of options when selecting beneficiaries. Many policyholders elect to have their family members as beneficiaries. For beneficiaries who are minors, policyholders must usually designate a legal guardian of majority age who will be the named beneficiary on the policy and will care for the children using the proceeds from the death benefit. Other policyholders prefer to create an estate or a trust and name the Executor of the estate or the trustee as the beneficiaries. Yet another option is for the policyholder to name a charity as the beneficiary on his or her policy.
In the event of your death, the beneficiary listed on your policy will file a claim with your insurance company in order to receive his or her payout. The beneficiary will need to submit a copy of the death certificate and may need to provide other documents depending on the requirements of the insurance company. Some companies require a statement from the beneficiary, a copy of the insurance policy, or a newspaper account of the death. The beneficiary should have a copy of the policy so that he or she will know what documents or actions are necessary for the filing process. After the beneficiary has filed his or her claim, several types of payout options are available. The insurance company can payout the death benefit in the form of a lump sum or in regular payments over a specified amount of time.
Depending on the circumstances of the insured’s death, the insurance company may decide to investigate the cause of death and the applicability of the life insurance policy. This depends on the terms dictated by the policy. As an example, if the insured dies while he or she is skydiving then the insurance company may not pay out the death benefit because typical insurance policies contain a clause stating that they do not cover death as a result of participation in high risk activities. Other common exclusion clauses in insurance policies include things such as suicide, or death in a restricted country or warzone. Another important factor to consider is that if the insurance company discovers that the insured lied on his or her application form, then the company may decide not to payout the death benefit to the beneficiary. It is also essential that the timeframe of the policy covers the period of time in which the insured died, and that the policyholder faithfully paid the premiums. If the policyholder does not meet these two conditions, then the insurance company has grounds for a claim denial.
It is also important to take heed of the contestability clause. Most life insurance policies typically include a contestability clause that states that the insurance company retains the right to contest an insurance claim if the insured dies within two years of purchasing his or her life insurance policy. The contestability period exists to ensure that the policyholder did not lie when completing the application or undergoing the medical exam. If the insurance company decides to contest a claim during the contestability period, then the company will request to evaluate the medical records and history of the insured. Depending on the results of the investigation, the insurance company may elect to deny the beneficiary’s claim.
Many people may put off purchasing life insurance because it can be a seemingly lengthy and difficult process. On top of that, many people do not like to consider the fact that one day they will die. However, purchasing a high quality life insurance policy can help to protect your family and loved ones in the event of your death. Dealing with the loss of a loved one is an extremely difficult experience but ensuring that your family will not have to worry about finances or funeral expenses can help to cushion the difficulty of that situation.
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