What is Life Insurance?
If you are someone who is learning about Life Insurance with no foundational knowledge, Life Insurance for Dummies is the place to start. Let’s start with what is life insurance- Life insurance is an agreement between the policyholder and an insurance company. The policyholder agrees to pay a premium and the life insurance company promises to pay the policyholder a designated lump sum payment in return. This sum of money is paid at the time when the insured person dies. The policyholder chooses who will be listed as their beneficiary and the listed beneficiary receives the policy death benefit amount when the insured dies.
So how does the cost of life insurance work? The cost of life insurance varies between each individual. Life insurance companies use mortality tables to help determine the costs of life policies. Your age and health will play a big factor on how much you will pay for life insurance. This is why it’s important to buy life insurance when you are young and healthy. Life insurance companies also take into consideration your lifestyle and family background as well. When breaking down the first Life Insurance for Dummies question- what is life insurance- here are some important life insurance facts:
- Insurer is the insurance company
- Insured is the person whose life the policy is based on
- Beneficiary can be a person, trust or other entity
- Owner of the policy is responsible for making premium payments
- Premium payments are most often monthly, quarterly or annually
- Person insured can be different from the owner of the policy
- Life insurance policies are legal contracts
- Life insurance is often purchase based on needs of individual/family
What are the different Life Insurance types?
Next, we need to ask- what are the different life insurance types? There are two main types.
Term Life Insurance – Provides protection for the individual for set period of time. This set period of time is usually 10, 20 or 30 years. In most traditional term insurance plans, your premium is locked in for length of your term you select. Once your policy term expires, some plans might give you the option to extend your coverage, usually at much higher rates. Term insurance is perfect for younger families who are looking for protection in the event one of the parents dies unexpectedly. Term insurance is often used to cover loss of income, paying off a mortgage, paying for college, and other expenses. Obviously, term insurance is less expensive than other life insurance options since it only covers you for set period of time. Term insurance premiums are based on the probability that someone will die within a set TERM. Term insurance is temporary coverage and does expire.
Permanent Life Insurance – Permanent life insurance is designed to protect you for a lifetime. Most common types of permanent life insurance are whole life insurance and universal life insurance. Does whole life insurance expire? Absolutely not! Whole life insurance is simply a life insurance policy that will remain in force for your lifetime assuming monthly payments are made. Whole life insurance is often called burial insurance, funeral insurance, and final expense insurance as well. Whole life insurance is a popular choice if you are looking for policy to protect you and your family at the time of your passing. Since your whole life policy will last your WHOLE life, your policy premiums tend to be higher than term life policies. However, the application process for whole life insurance is super simple compared to other traditional life insurance plans. In fact, most individuals are approved within 24 hours when applying for whole life insurance. Here are several benefits of whole life insurance that you need to know about:
Benefits of Whole Life Insurance
- Easy application with short approval process
- Whole life insurance doesn’t expire
- Whole life insurance policies build cash value
- Most whole life insurance plans provide living benefits
- Your monthly payment will NEVER increase
- Your death benefit will NEVER decrease
- Guaranteed issue plans available – no exams or health questions
Understanding life insurance for dummies means you must know what the types of life insurance are. To recap, the answer to our question- what are the different life insurance types- is term life insurance and permanent life insurance.
Does Life Insurance pay for Suicidal Death?
It is widely misunderstood how life insurance companies handle claims related to suicides so it isn’t surprising that a common question that comes up regarding life insurance for dummies is -does life insurance pay for suicidal death. Part of the basis for the confusion is that the answer is that it depends… It depends on what type of life insurance was purchased and how the life insurance was purchased. Most importantly, it also depends on when the life insurance policy went into effect. Some group life insurance plans that are paid by the employer, don’t have suicidal clauses. This assumes that the company pays the life insurance premiums and NOT the employee. Most individual life insurance policies have a suicide clause listed in their fine print. Some companies have a 2-year waiting period before paying out the death benefit.
What does it mean to have a waiting period? It simply means that if someone commits suicide within two years of taking out their life insurance policy, their death benefit wouldn’t be paid out. Most companies would return all premiums paid into the policy, less any outstanding loans if any. Its very important to ALWAYS check the policy in question for the specific verbiage on how it lists suicide. Once again, when asking does life insurance pay for suicidal death- remember there are many different life insurance companies and each company has different policies with different procedures. Plus, some states have different laws concerning insurance and suicide, so always follow up with the insurance company directly and your state agencies for clarification.
Can you purchase Life Insurance for Parents?
Yes… you can purchase life insurance for your parents. In fact, helping your parents take this step is important. Especially, if you would suffer a financial hardship after your parent’s death. First, your parents must consent to for you to take out a life insurance policy on them. Actually, consent is required for you take out a policy on anyone. Second, their must be insurable interest between you and the person you are wanting the policy on. Of course, child/parent relationship qualifies as insurable interest. Insurable interest is based on a relationship where there is common interest in another person continuing to live or die. So basically, the death of an individual causing the surviving person a financial hardship or loss would prove insurable interest. Third, it is important to think about who will be the owner of the policy. You could simply just help your parent through the process of buying their own life insurance policy. However, if you would like to be the owner of the policy, just make sure you have a life insurance expert walk you through the process on setting this up correctly. For tax purposes, the setup is important.
What is Guaranteed Issue Life Insurance?
A very common question regarding permanent or whole life insurance is- what is guaranteed issue life insurance? Guaranteed issue life insurance is life insurance policy where your acceptance is guaranteed. This means you can’t be turned down for this type of life insurance and you are automatically approved. Guaranteed issue whole life insurance is great for individuals with severe health conditions, for those who can’t get approved for traditional life insurance. Once again, guaranteed issue life insurance requires NO medical exams and NO health questions are asked. So, you can expect the process to be super simple since no underwriting is needed. When considering life insurance for dummies- understanding guaranteed issue policies is crucial because it is the last resort for those who are otherwise declined for coverage.
It is important to know that this type of insurance is considered high-risk for insurance companies. Therefore, rates on guaranteed issue plans tend to be higher. Also, you need to know that ALL guaranteed issue life insurance plans come with a mandatory 2 year waiting period. This means your death benefit wouldn’t be paid out until after two years. However, if you were to pass away within the first two years of taking out your policy, all your monies would be returned plus an extra 10 percent interest with most companies. The two most common guaranteed issue life insurance companies are AIG and Gerber Life Insurance. Both are large reputable burial insurance companies who have been offering this type of guaranteed issue insurance for many years.
What is a Life Insurance Broker?
A life insurance broker is an organization or individual who sells life insurance for several different life insurance companies. This type of life insurance broker is called a noncaptive agent or also an independent agent. Once again, life insurance brokers represent multiple insurance companies. On the other hand, insurance agents or captive agents ONLY offer insurance from one single carrier who they work for. In our opinion, working with an life insurance broker with multiple companies IS THE ONLY WAY TO GO. First, they get to shop your specific health conditions against multiple companies, you will get the best price life insurance plan possible. Plus, you need to understand that EVERY insurance company views your specific health conditions completely different. One company might be more lenient on your current health issues versus another company. Basically, using an independent life insurance broker gives you options, which in turn often results in the best price and BEST plan for your specific health conditions.
Is Life Insurance tax-deductible?
Since premium payments are made with after tax dollars, your beneficiary won’t have to pay tax on the death benefit amount. Once again, the money you receive from an insurance policy after a family member dies is not counted as taxable income so you don’t have to pay taxes on it. There is no need to report it to the IRS. However, the IRS does state if you earned any interest from a life insurance policy, this would be taxable and you should report as interest received. Often if the life insurance death benefit is paid to a trust, you could be subject to pay estate taxes. This is why some individuals setup an irrevocable life insurance trust. ILIT’s are perfect vehicle for death benefits to pass tax free to beneficiaries.
IRS views premium payments on personal life insurance as personal expense, so the payments you make are not tax-deductible. So, unfortunately your life insurance premiums can not be counted against your income for tax purposes. In certain circumstances, employers who provide group term life insurance to its employees as a benefit, may deduct premium payments from their taxes. Its best to consult your tax professional on this topic when asking is life insurance tax-deductible. So, is life insurance taxable? Most of time it is not.
How to pay for a funeral with life insurance?
Let’s say… you are the beneficiary on a life insurance policy of a loved one who just passed away. You may be in the position of needing to make final arrangements for your family member. Often the beneficiary wonders how to pay for a funeral with life insurance benefits. First, its recommended for seniors to contact your life insurance agent if possible. Your life insurance agent can help walk you through the process including how to file a claim and with filing the necessary paperwork. If you don’t know who the agent is or can’t get ahold of them, contact the insurance company directly. Here are a couple of things you MUST do:
- Obtain multiple copies of the death certificate from funeral director
- Contact the insurance company
- File a claim with the insurance company
- Complete all claim paperwork
- Continue to follow up with insurance during the claim process until payment
Once the claim has been filed, the funds should be on the way shortly after. This process could take up to 30 days, depending on the insurance company but most of time it’s usually 2-3 weeks. Insurance companies usually pay the death benefits directly to the beneficiary in one lump sum. If the life insurance settlement is a large sum of money, you can also choose to be paid in installments by the insurance company as well.
The best way to pay for a funeral is with cash or check if you have the funds available. Then you could just reimburse yourself when the funds arrive from the insurance company. However, if you don’t have the fund to pay up front, you do have a few options. First, some funeral homes might allow you to make a small cash payment and then a promise to pay the outstanding balance when the funds arrive. Another option, is called a life insurance policy assignment that you can make with the funeral home. This agreement just tells the funeral home that there is a policy in force and it will pay for funeral expense once the funds have been released.
How to Find out if someone has Life Insurance?
In our life insurance for dummies guide, one of the questions that comes up is how to find out if someone has life insurance. Perhaps a family member has passed away and you have searched high & low and you can’t find any paperwork to see if they had a life insurance policy? What do you do? One option is using a site like MissingMoney.com. This site allows you to search names of relatives to see if any missing money from life insurance policies has been unclaimed. Missingmoney.com is a great to find unclaimed life insurance policies on your family members and other hidden assets that have been unclaimed that you might not of know about. Another great resource to find out if someone has life insurance is your State Commissioner’s office. Each State has a department that focuses on this specifically and could be a great help for what you may need. This life insurance for dummies question comes up a lot.
What is a Beneficiary?
The person who receives financial protection from a life insurance plan is called the beneficiary. First, its very important to make sure you have elected a beneficiary on your life insurance policy. Not doing so can cause a mess depending on what State you live. Also, choosing the RIGHT beneficiary is super important as well. Assurance Life always reminds its customers to make sure to pick your beneficiary wisely and it is someone you trust 100 percent. You want to make sure your beneficiary will do the right thing once they have received the life insurance proceeds from your life insurance policy. Unfortunately, we have heard some horror stories when it comes to beneficiaries not using the monies it was intended for. Just choose wisely!
What is a Cremation Insurance policy?
A cremation insurance policy is a small whole life insurance policy used to cover one’s cremation costs after their passing. This type of policy has the same benefits as whole life insurance such as:
- Permanent coverage that can’t be cancelled
- Premium payment can’t INCREASE
- Death Benefit won’t DECREASE
- Some plans don’t even ask health questions
People getting cremated in the US is on the rise. In fact, over 50 percent of Americans are now choosing cremation over burial. The main reason is cremation is less expensive compared to burial expenses. The cost of cremation, memorial services, urn and a place to hold the urn, could range from $2000-$8000 depending what options you choose and what state you live in. Burial costs are directly tied to cost of real estate, so this is why burial expenses have risen over the last few years. A traditional burial can cost anywhere from $8000 to $15000 depending on different options. Cremation insurance policies are a great option to protecting your family from financial hardship after a loved one passes away. Once again, Assurance Life has cremation insurance plans that don’t even ask any health questions, so you are automatically approved. Ask us how!
When helping people build a foundation for understanding how life insurance works, the life insurance for dummies top ten questions just scratches the surface of all there is to know about how life insurance works. These are the most frequently asked questions and it gives you a place to start about finding a broker and getting a quote for you or a loved one so you can have life insurance protection. If you have any questions please contact us at 800-57-0810 and one of our licensed agents would be happy to assist you. Assurance Life is an independent broker with access to over 25 of the nations leading insurance companies.