In this post, we’ll address common life insurance questions that we hear from our customers.
We’ll discuss the parts of a life insurance policy, types of policies, beneficiaries, and where to buy life insurance.
What’s In a Life Insurance Contract?
A life insurance contract is made up of:
- Legal provisions
- Your application (which identifies who you are and your medical declarations)
- A policy specifications page that describes the policy you have selected, including any options and riders that you have purchased in return for an additional premium.
Life Insurance provisions describe the conditions, rights, and obligations of the parties to the contract (e.g., the grace period for payment of premiums, suicide and incontestability clauses).
Life Insurance Policy Specifications
Life insurance policy specifications describe the amount to be paid upon your death and the amount of premiums required to keep the policy in effect.
Riders & Options
If you have any riders and options added to the standard policy, they’ll be listed.
A rider is a provision for an insurance policy that adds benefits to or amends the terms of a basic insurance policy. Riders can provide additional coverage options or limit coverage.
Common Life Insurance Policy Riders
Waiver of premium rider, which allows you to skip premium payments during periods of disability
Guaranteed insurability rider, which permits you to raise the amount of your insurance without taking another medical exam
Accidental death and dismemberment benefits, this is usually paid in addition to the standard benefit payable in the event of an accidental death or loss of limbs
The insurer may add an endorsement to the policy at the time of issue to amend a provision of the standard contract.
Types of Life Insurance Policies
The two basic types of life insurance are term life and permanent (cash value) life.
Term Life Insurance Policies
Term life policies provides life insurance protection for a specific period of time. If you die during the coverage period, your beneficiary will receive the policy death benefit.
- If you live to the end of the term, the policy simply terminates, unless it automatically renews for a new period.
- Term policies are available for periods of 1 to 30 years or more. In some cases, they may also be renewed until you reach the age of 95.
- Premium payments may be increasing, as with annually renewable 1-year (period) term, or level (equal) for up to 30-year term periods.
Permanent Life Insurance
Permanent life policies provide protection for your entire life, provided you pay the premium to keep the policy in force.
Premium payments are greater than necessary to provide the life insurance benefit in the early years of the policy, so that a reserve can be accumulated to make up the shortfall in premiums necessary to provide the insurance in the later years.
Should the policyowner discontinue the policy, this reserve, known as the cash value, is returned to the policyowner.
Permanent Life Insurance Categories
- Whole life: You generally make level (equal) premium payments for life. The death benefit and cash value are predetermined and guaranteed. Any guarantees associated with payment of death benefits, income options, or rates of return are based on the claims-paying ability of the insurer.
- Universal life: You may pay premiums at any time, in any amount (subject to certain limits), as long as policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be decreased, and the cash value will grow at a declared interest rate, which may vary over time.
- Index universal life: This is a form of universal life insurance with excess interest credited to cash values. But, unlike universal life insurance, the amount of interest credited is tied to the performance of an equity index, such as the S&P 500.
- Variable life: As with whole life, you pay a level premium for life. However, the death benefit and cash value fluctuate depending on the performance of investments in what are known as subaccounts. A subaccount is a pool of investor funds professionally managed to pursue a stated investment objective. The policyowner selects the subaccounts in which the cash value should be invested.
- Variable universal life: A combination of universal and variable life. You may pay premiums at any time, in any amount (subject to limits), as long as policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be decreased, and the cash value goes up or down based on the performance of investments in the subaccounts.
Note: Variable life and variable universal life insurance policies are offered by prospectus, which you can obtain from your financial professional or the insurance company. The prospectus contains detailed information about investment objectives, risks, charges, and expenses. You should read the prospectus and consider this information carefully before purchasing a variable life or variable universal life insurance policy.
Life Insurance Beneficiaries
You must name a primary beneficiary to receive the proceeds of your insurance policy.
You may name a contingent beneficiary to receive the proceeds if your primary beneficiary dies before the insured.
Who Can Be a Beneficiary
Your beneficiary may be a person, corporation, or other legal entity.
You may name multiple beneficiaries and specify what percentage of the net death benefit that each will receive.
Carefully consider the ramifications of your beneficiary designations to ensure that your wishes are carried out as you intend.
Generally, you can change your beneficiary at any time.
Changing your beneficiary usually requires nothing more than signing a new designation form and sending it to your insurance company.
However, if you have named someone as an irrevocable (permanent) beneficiary, you will need that person’s permission to adjust any of the policy’s provisions.
Where to Buy Life Insurance
Buying a life insurance policy that makes the most sense for you is important.
People often get insurance coverage from:
- Employers (through a group life insurance plan offered by the employer)
- An association to which you belong (which may also offer group life insurance)
- A licensed life insurance agent or broker
- Directly from an insurance company
Any policy that you buy is only as good as the company that issues it, so investigate the company offering you the insurance.
Ratings services, such as A. M. Best, Moody’s, and Standard & Poor’s, evaluate an insurer’s financial strength.
Financial planners and wealth advisors will frequently include life insurance in your financial plan as well.