Life Insurance FAQs

Life insurance has several purposes. Its most  important function is to replace the earnings that would cease at the  death of the insured.

For businesses, life insurance is a way to protect  key employees and the business itself. A third purpose is to use life  insurance to pay potential estate taxes. 

If you die during your earning years, your  family could suffer a severe economic loss as a result of losing your  current and future income. Unfortunately, your family would still have  to pay its regular bills, the mortgage, and outstanding debts, and  perhaps even continue saving for college and retirement. Unless you're  independently wealthy, achieving these goals may be virtually impossible for your family with the loss of your steady income. Life insurance  offers a way for your family to continue living comfortably and without worry. 

Employers often purchase life insurance policies on key employees to insure against the loss of services or income that  might result after an employee's death. Here, the proceeds from the policy are paid to the company. Life insurance works for business partners too, where one business partner purchases a policy to insure against the financial loss that might result from the other partner's  death or to buy out the partner's heirs.

Life insurance is also used to pay potential  federal estate taxes. Since these taxes must be paid in cash, life  insurance can be a good way to ensure the fulfillment of this  obligation. 

Everybody!  

You should probably consider buying life insurance if any one of the following is true:

• You are married and your spouse depends on your income
• You have children
• You have an aging parent or disabled relative who depends on you for support
• Your retirement savings and pension won't be enough for your spouse to live on
• You have a large estate and expect to owe estate taxes
• You own a business, especially if you have a partner
• You have a substantial joint financial obligation such as a  personal loan for which another person would be legally responsible  after your death

In all of these cases, the proceeds from a life  insurance policy can help your loved ones continue to manage financially  during the difficult weeks, months, and years after your death. The proceeds can also be used to meet funeral and other final expenses,  which can run into thousands of dollars.

If you're still unsure about whether you should buy life insurance, a good question to ask yourself is: If I died today with no life insurance, would my family need to make substantial financial sacrifices and give up the lifestyle to which they've become  accustomed in order to meet their financial obligations (e.g., car  payments, mortgage, college tuition)?

Once you decide you need life insurance, don't  put off buying it. Although no one wants to think about and plan for his  or her own death, you don't want to make the mistake of waiting until  it's too late.

Once you purchase a life insurance policy, make  sure to periodically review your coverage- especially when you have a  significant life event (e.g., birth of a child, death of a family  member)- and make sure that it adequately meets your insurance needs.The most common mistake that people make is to be underinsured. If you need help reviewing your  coverage, contact your insurance agent or broker.

A life insurance contract is made up of legal provisions, your application (which identifies who you are and your medical declarations), and 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.

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).

The policy specifications page describes the amount to be paid upon your death and the amount of premiums required to keep the policy in effect. Also stated are any riders and options added to the standard policy. Some riders include the waiver of premium rider, which allows you to skip premium payments during periods of disability; the guaranteed insurability rider, which permits you to raise the amount of your insurance without a further medical exam; and accidental death benefits.  

The insurer may add an endorsement to the policy at the time of issue to amend a provision of the standard contract.  

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. 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 each is to receive. You should 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. 

Your insurance premiums will increase as your life  expectancy decreases--the older you get, the more life insurance is going to cost you. Whether you buy permanent or term life insurance, it  will usually cost you less while you're young. 

If you're at high risk for a medical condition  that might make it too expensive or impossible for you to get insurance later (e.g., a family history of cancer), consider buying life insurance  while you're still young and healthy.

If you buy term insurance, ask about a  renewability provision. Although your premiums may increase at renewal  time because your life expectancy is shorter, you'll be able to renew  your policy without having to prove your insurability again. Please note  that several factors affect the cost of life insurance, such as your  current health, whether or not you are a smoker, and any pre-existing  conditions.

One of the advantages of cash value life insurance is that any earnings in the cash value do not incur a current tax liability. In general, any earnings in the cash value are allowed to grow on a tax-deferred basis until one of the following events occurs:  

• The policy is surrendered--you cash it in  
• The policy is transferred for value--you sell it or assign it, etc.  
• The policy ceases to meet the IRS definition of a life insurance contract  

Typically, there is no tax liability until one of these events occurs because of the substantial limitations and restrictions on receiving distributions from the cash value.

Some life insurance policies (known as participating policies) pay dividends to their policyholders. Dividends are generally not taxed as income to you. Instead, they are considered a return of your premium regardless of whether you receive them in cash, use them to purchase additional coverage, use them to reduce future premiums, or leave them invested with the insurance company. However, if your dividends exceed the total premium payments for the insurance policy, the excess dividends are considered taxable income. 

If you leave your dividends invested with the insurance company, the interest earned on this investment will be considered taxable income.  

The type of life insurance you purchase for yourself, your family or your business depends on what your long-term savings and financial goals are. 

The most common types of individual life insurance are:

• Whole Life:
• Term Life:
• Indexed Life: 

Business insurance comes in a variety of forms as well, including:

• Key Man Insurance:
• Buy/Sell Insurance:
• Another Type of Insurance:

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