Life insurance is the all about you because it protects those who depend on you.
Life insurance, as the name implies, insures your life and is paid to your beneficiaries when you die. The death benefit payment can be used for everything from your final expenses to replacing your lost earnings. Life insurance benefits may also be used to pay off a mortgage or fund a college education when children come of age.
Life insurance can’t replace you, but it can help to ease the financial burden of those you leave behind.
Here are five things to consider when buying life insurance:
Who needs life insurance?
There are some who believe only people who have dependents need life insurance. I disagree; I believe everyone who is alive should have at least enough life insurance to pay for their final expenses and to cover any debt that might be passed on to your survivors.
The median cost of final expenses as reported by the National Funeral Directors Association are about $7,000, and the average credit card debt according to the Federal Reserve is also around $7,000. Minimal life insurance coverage helps remove the stress of financial worry from your family.
How much life insurance do you need?
As your responsibilities grow, so should the amount of life insurance you carry. A goal of life insurance is to leave your loved ones without the burden of your debt. Large debts like mortgages, student loans, credit cards, and car loans should be covered by sufficient life insurance to pay them off when you are gone.
To determine the minimal amount of life insurance you need, you need to look at what your current debt is as well as what you anticipate it growing to in the next five years.
As your family grows, so does your need for insurance. Even in cases where both parents work outside of the home, the loss of one income can result in tremendous financial hardship for the surviving parent and children.
Providing for full income replacement for at least a few years relieves your family from the added suffering of financial strain in addition to your absence. Long-term goals, such as college, should also be considered when calculating your life insurance needs.
Are all life insurance policies the same?
All life insurance policies are the same in that they are contracts between you and your insurance company to pay a pre-determined amount of money to your beneficiaries in the event of your death.
However, there are four specific types of life insurance policies which differ in the way the way their premiums are collected and how their value is accumulated:
- Term life – This is the simplest form of life insurance; Every dollar you pay in your premium is applied to the coverage. The contract is for a limited period of time (one year, five years or 10 years), after which the contract ends and your coverage is terminated.
- Whole life – As the name implies, it is intended to be kept for your entire (whole) life. The policy remains active as long as you continue to pay your premiums. Unlike term life insurance, only a portion of your premium accumulates as cash value.
- Universal life – Like whole life insurance, universal life insurance is considered permanent and remains active as long as you pay your premiums. This is a hybrid product where a portion of the premium is used to pay for permanent term insurance and the remainder accumulates as cash value.
- Variable life – With qualities similar to both whole life and universal life, this type of insurance is permanent. Usually more expensive than other types of permanent insurance, it offers you choice in the type of investment (stocks, bonds, etc.) that your cash value is invested in.
The policy players
There are four players involved in life insurance policies: 1) The insurance company, 2) The insured, 3) The beneficiary, and 4) The policy owner. Two of these life insurance policy players can be the same but no one person can be all three.
The insured – You, the person whose life is insured.
The policyholder or owner – This is the person who owns the policy and is the only one who can make decisions about the it, including who the beneficiary is.
The beneficiary – The person or persons who will receive the proceeds of the insurance when the insured dies.
Who’s who and insurable interest – Obviously the insured can’t be the beneficiary, but the beneficiary can be the policyholder. In most cases the policyholder is also the insured. In order for you to be the owner of a life insurance policy when someone else is the insured, you must have what is called an “insurable interest” between you and the insured. This just means that you as the policyowner need to receive a financial benefit from the insured (i.e., if you are a dependent family member, business partner, or employer of the insured).
Filing a claim
The most difficult time for most beneficiaries is the death of a their loved one, which is also when they must file a claim.
Fortunately, the process has become less cumbersome in recent years thanks to the Internet and the ability to electronically file a claim. The process is straightforward and can usually be completed in as few as three steps:
- Locate the policy – You will need the policy in order to identify the name of the insurance company and your policy number.
- Call the company – Once you are in touch with a claims representative, they will tell you what you need to do to process your claim. Generally, you will have to either download or wait for claim forms to arrive by mail. You will need to fill them out and return them to your insurance company along with a certified copy of the death certificate.
- Receiving the proceeds – You will also be asked how you wish to receive the death benefit proceeds. There are usually three options to choose from: a single lump sum payment, installment payments, or leaving the money on deposit with the insurer who will usually pay interest and possibly dividends on the balance.
The option that’s best for you depends on your immediate needs. For example, if you do not have enough money to pay for final expenses or your personal expenses a lump sum payment may be right for you.
If you do not have an urgent need for the money, but do expect to need it over an extended period of time, installment payments might be your best choice. Finally, if you do not have an immediate or anticipated need, leaving it with the insurance company may be the best way for you to go.
If you are unable to find your policy or are unsure of whether or not there you are the beneficiary of other policies, the American Council of Life Insurers (ACLI) will help you track down policies that are in force (active). The process costs $75 per search for each insured person, and can be started by using the MIB Policy Locator Service.
