Life Insurance Questions & Answers
- Is my Life Insurance Rate Guaranteed?
In a word, yes. Your life insurance rate is fixed, and will last the full length of your insurance policy. At your first application for life insurance, the rate had not been decided, though general questions about your age, health, sex etc. were used to give the Company a reasonable idea of what price to charge. Other mitigating factors would cause that to change.
The underwriting period takes anything from a month to six weeks, and only begins in earnest after you have participated in medical examinations, as well as filled out the application fully. Your regular doctor will usually be asked to give a copy of your medical records to the Company, who will analyze these records, in conjunction with their own lab results, to ensure that you are ready to proceed with the policy. After this has all been completed, your final rate will be decided.
When the policy is signed, sealed, and delivered, the set rate will remain constant, no matter how long the term. As these are level term insurance policies, it is guaranteed there will be no change in price.
Is it true, that after 10 years, the proceeds of a variable life policy and the cash value are tax-free if you want to withdraw money?
If you feel the need to withdraw money, then it is possible to get a hold of the cash value of your policy, but it is probable that you will lose some of your insurance cover. Usually, money from a life insurance policy is untouchable. Remember, this information relates solely to variable life insurance, for example, variable insurance life is different; therefore it will have separate rules and regulations. A policy loan can be used to lay your hands on life insurance money. As is permissible with other policies, variable life enables you to take out loans based on the cash value of your policy.
Policy loans are not tax free though, despite the fact they are not taxable income. Interest paid in this instance, can be put back to your cash value, leaving the bizarre situation where you are creditor and debtor. Again, like normal loans, failure to repay policy loans will see money taken off your death benefit. Variable policies forbid partial withdrawals of the cash value, though this is allowed with other cash value policies.
Such withdrawals will cost you part of your insurance coverage, and your beneficiary could receive less money, because partial surrender often results in cancellation of a portion of the insurance policy. With a life insurance policy, withdrawals are not subject to taxation until the amount exceeds the premium you paid, but again, the spectre of surrender fees rears its head. In some cases, you can get hold of all surrender value money, but your coverage will cease to exist, leaving you unprotected.
The whole purpose of a life insurance policy is to protect you for life. Therefore, these policies generally forbid you to have any chance of receiving this money before you die. This rule is seldom broken, and when it is, medical bills for you are about the only reason. Those who are terminally ill may have their policy bought by a charity, who does so in order to free up funds for the patient to get proper care. These are also called viatical associations. Besides these occurrences, there is no other way to access life insurance money while you are still alive.
- What can I do to lower the cost of my life insurance policy?
The rate you pay depends on factors that you cannot control, such as age and hereditary health problems, and areas that you can take charge of, such as your lifestyle. All things being equal, an older person will pay more than a younger person, as in simple mathematical terms, the youthful individual has longer to live. Do not despair however, despite being unable to control things like the aging process, there are ways and means to reducing your life insurance policy cost.
Six Smart Ways to Save on Life Insurance
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Beware the small print, and stealth charges.
Most insurance companies will give you the option of paying monthly. While paying your premium in small amounts seems like an ideal scenario, it may well be costing you more than if you paid the sum in its entirety up front. Indeed, if they are readily offering it, then it probably is more expensive. Compare the prices between monthly payments and the whole amount, and act whatever way suits your budget best.
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Don't fall at the feet of riders.
A rider' is something that is added to the policy, with the basic premise of offering more complete cover, but it usually costs more. For example, a cost of living rider would increase benefits according to inflation. They usually only cover occurrences that are unlikely, and are therefore, an unnecessary expense. Often, these riders only cover things that are already accounted for in your policy.
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Kick the habit.
Adopting a healthier lifestyle can serve as a double boost, for your life span, and your wallet. Smokers in particular are heavily penalized, so besides the money you would save from not buying the cigarettes, you will also have cheaper insurance. If you are a heavy smoker, and die of a smoking-related malady, but have lied on the insurance form, the company can void your policy, leaving your family nothing. Slimming down also falls into the savings category.
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Look for a company that carries out individual testing.
Many companies will tar one condition with a brush, assuming that everyone who has it is at the same risk. Look for an organization that analyze single cases, and makes their decision from there.
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Do your Calculations
Getting the best deal could be as easy as rounding up figures. Use your mathematical skills to discover how much life insurance you get for a round figure like $11,000. Do this by dividing the premium by the term, and calculate from there. The price alters once you approach large figures like $210,000, so keep your eyes peeled, and calculator at the ready.
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Don't take the first quote — Compare multiple quotes online
This is common sense, with so many companies to choose from, each offering various prices, you would be foolish not to do your homework. Go online and compare the quotes of numerous companies side by side.
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- What's the difference between term life insurance and whole life insurance?
They are similar, in that they both offer you and your loved ones the requisite cover. However, like everything else in life, term life insurance has positive and negative aspects that need consideration before making a decision.
Term life insurance can also be known as short term cover because it provides a death benefit for a certain length of time. Eventually, your term life insurance will end, and you will basically be left without protection.
On the other hand, whole life insurance does exactly as the name suggests, is protects you perpetually, until the day you die. With whole life insurance, there is the option of using them as a kind of investment because they have cash value. Term life insurance does not possess this feature, simply lying dormant until the allotted time is up.
Though the above shows some negative aspects of term life policies, they are inexpensive, usually being the cheapest form of coverage, hence the lack of options available from it. This makes it the ideal purchase for those who cannot afford anything else.
The relative lack of cover provided by term life policies are a cause of concern for people, but it has its own specific purpose. Financial institutions and other lenders will advise you to take out a life insurance policy for the duration of their mortgage. In this instance, 15 years would be sufficient, with the individual only having to hand over money when coverage was required. By only keeping the coverage for a certain length of time, a person could hold on until a situation arose where they would have money due to them, for example, retirement funds.
- How do I change my life insurance beneficiary?
This is easily achieved, just phone or email your life insurance company and follow their set guidelines on changing the beneficiary. Such requests must be submitted in the form of writing, normally on a form specifically prepared by the company for the purpose. On rare occasions, your company may include something called an "endorsement", which means that a change is made to your policy to highlight the fact you have changed the beneficiary. Of course, it is not always easy to change your policy in this manner. If for some reason, you decided to include an irrevocable beneficiary, changes are impossible without the permission of the original beneficiary. Permission must be granted by your spouse if you live in a community property state. If the change is a result of a divorce, then you have to obey the divorce terms. If the terms state that you must keep a life insurance policy, and your ex-spouse is the beneficiary of this, then there is nothing you can do to alter it.
If you had decided upon your ex-spouse as beneficiary during your marriage, then divorce does not change it. Do not think that you can change your beneficiary in your will, as the life insurance policy beneficiary retains the rights to it, regardless of who you name in your will. Ensure that you contact your insurance company, and follow their instructions for change to the letter. Alternatively, your lawyer or accountant could help you name a trust as the beneficiary, which means that you can avoid any unnecessary problems, as you can change the disposition of the trust in no time.
- Can I challenge a beneficiary?
When the owner of the policy dies, challenging a beneficiary is a taxing process, which could cost an enormous sum of money in legal fees, and will most likely take a long time. While it is not an impossible task, the chances of success are not high.
- Can I borrow money against my life insurance policy?
Yes, you can borrow money against any cash value accrued by your policy, but, like any bank loans, you will have to pay it back with the regular borrowing rate interest. Your beneficiary will suffer if you die before you pay back this money, because it will be subtracted from the death benefit.
Unfortunately, those with a term life policy are unable to borrow as these policies generally do not have any cash value.
- What does secondary beneficiary mean?
Simply put, this is the individual who is on standby to benefit from your policy in the unfortunate event that your primary beneficiary dies before you do.
- If I die, can the Insurance Company refuse to pay?
The company have to pay everything that they owe because your policy is a legally binding agreement. Failure to do so leaves them open to legal action from your beneficiary. If they have reasonable grounds to believe that you committed fraud by lying to them about a pre-existing condition for example, they have the option of using the two year contestability clause that is usually part of any life insurance policy. Also, if the owner of the policy commits suicide within a couple of years, the policy becomes null and void in many instances. If any of these scenarios occur, the beneficiary will not receive the policy payment, though they will benefit from return of premiums paid.
- What happens if I lose weight or quit smoking after my policy is issued?
Each company is different, having various time limits in which quitting smoking or losing weight would be considered worthy of reappraisal. Let us know if you have done any of the above, or if your health has improved so we can help reduce your premium.
- Do we get a discount if my spouse and I apply at the same time?
Generally no, riders are occasionally offered on policies enabling coverage for a spouse and children, but applying separately will usually not affect the price. In this case, you should inform us, so we can explore every avenue to ensure you get the best price.
- Can I pay for my policy with a credit card?
Most insurance Companies do not accept credit cards for payment, but occasionally you may find a Company willing to do so. The first payment is probably best negotiated by drawing a check on a bank account. For subsequent payments, an automatic withdrawal option would be advisable.
- Do I get a discount if I pay annually?
Not directly, but paying annually is cheaper than monthly payments, or any other method that is more frequent than yearly. Paying every six months, or every month is a good way of paying if you do not wish to part with a large lump sum. Paying every three months works out as the most expensive option, so avoid at all costs.
- Is income tax collected on a debt benefit?
Death benefits are an income free tax zone, but they are susceptible to estate and inheritance tax. The employee of the Company who sold you the policy should be contacted for more information.
- What is does the term churning mean?
Churning is a practice that should be avoided by all prudent buyers. It is a nefarious scheme whereby the insurance agent advises you to cash in your current policy in favor of a new and usually more expensive policy. They normally neglect to mention that this policy is generally no better than the old one. Unfortunately, this is encouraged behavior because the agent benefits from the commission.
- What does vanishing premium mean?
Alas, this is another ethically questionable practice which involves the agent telling you that your premium payments can vanish' because the cash value return on your policy will cover them, rendering them obsolete. Of course it does not happen. Also, watch out for agents who claim that the premium will be covered by dividends, this is another trap.
- How long does it take to settle a life insurance claim?
According to the American Council of Life Insurers, the beneficiary usually receives what is due to them within seven days of the company reading and approving the death certificate of the policy holder.
The Council does state however, that if the policy holder dies within two years of taking out the insurance, it is common practice for the company to conduct an investigation into the circumstances, particularly if they have reason for suspicion. In this instance, the beneficiary could be waiting from a month to six weeks.
An incontestable' clause is usually inserted in the policy which states that the insurance company does not have to pay out if they discover that the policy holder withheld information on their application. If they had claimed that they were a non-smoker, yet died of a smoke related illness, like lung cancer, within two years of signing the agreement, then the company is within its rights not to pay.
- Can parents use a variable annuity (VA), or variable life insurance as a means of saving for their children's college tuition?
It is agreed by experts in the field of insurance that a variable life insurance policy is not an advisable method of paying for your children's education. If your investments do well, the variable life insurance policy can increase in cash value over a long period, but then there are the expensive life insurance premiums which will negate any increase in your cash value.
Remember, the cash value of your policy is not an investment, as you are still responsible for paying back any loans taken out against it, and, if you die before these are repaid, your beneficiary is the one who will be billed.
Be careful when you do take out loans against cash value, if the amount owed is greater than the premiums paid in by you, then you will be forced to pay tax on the difference.
If you decide to give up your variable life insurance policy, you may have to pay a fee for doing so. Check the terms and conditions of the policy for clarification.
A VA is best used as something to put aside for retirement, rather than a method of saving money for education. As the company is presuming that you are guaranteed a constant income for life, they will charge you high fees for the risk factor. A mutual fund fee is about one percent, for a VA, the average is treble that. Mutual funds do not have large surrender period fees, also known as back-end sales loads' and contingent deferred sales charges'. Whereas with a VA, you are left with a period of six to eight years with the fee decreasing every year. Perhaps in year one you will be subject to an eight percent fee for surrendering, which may drop by two percent for the second year, and should drop for every year thereafter.
Withdrawing anything from a VA fund before you reach 60 subjects you to another penalty tax. A VA is taxed at the normal income tax rate, but mutual funds are taxed at the lower capital gains tax, and do not have penalty tax stipulations.
- What are the tax implications of transferring cash-value life insurance, annuities, or 401(k) money?
As long as you are transferring the money from like account to like account, it is allowable by the tax code, and is not taxed. So if you have life insurance money, you must transfer to it another life insurance policy. Transferring to differing accounts is forbidden because of the perceived unfair benefits generated.
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