For the most part, life insurance policies are purchased with the intent to provide financial security for an insured’s beneficiaries when they pass away, and the goal of most policies is to allow loved ones to maintain the same lifestyle as if the insured had not died. These policies also contain a number of rights and options, some of which can help you get through your own financial hiccups.
Term life insurance policies offer the most amount of coverage for the least outlay of premium dollars. And, they are no longer just for people starting out in life. Today, due to competitive improvements in the insurance industry, term life offers initial rate guarantees of 10, 15, 20, 25, 30 years and even lifetime for those who want permanent insurance with no expensive cash value fund.
For those who require lifetime coverage, universal life and whole life are popular choices. Whole life offers a fixed premium and coverage amount for life. Universal life allows you to skip premiums or even pay more should you desire to build a cash value nest egg.
If you buy a term life policy and then find yourself wanting lifetime coverage, most term life plans can be converted to a permanent plan of insurance during, say, the first ten years of the policy or upon reaching age 65 – without having to endure any new medical exams. This conversion feature can be extremely important should your health take a turn for the worst and you find yourself uninsurable.
Did You Know?
No additional medical exam is needed when converting a term policy into a permanent form of insurance, according to Al Lurty, senior vice president and head of Retail life business development at ING U.S. Insurance.
The conversion privilege on a term life policy typically extends from a year after the policy is bought to the end of the premium, or to the maximum age set by the insurer, which is usually 65 or 70 years old, said Phil Young, Life Insurance Product analyst for Life Quotes, Inc.
The coverage of the new policy is limited to the coverage amount on the previous one.
If money is tight, you can take a loan out on your permanent policy, sell it, cash it in or use it as collateral on a loan.
“Life insurance policies are made for the economic problems like we have today,” said Michael Weintraub, chairman of Life and Health Insurance Foundation for Education (LIFE). “People today are saving their homes by being able to borrow against their life insurance to pay their mortgage.”
Insurance experts say people also take out loans on the cash value of their policies to pay for a child’s education, down payment for a mortgage or car, and/or medical expenses. If you pass away with an outstanding loan, the death benefit will be reduced by the amount of the loan.
“If you have a policy for $250,000 or more and you’re in poor health you can potentially sell your policy for more than you would get if you cashed it in. It’s not something we encourage, but some people no longer need life insurance coverage,” says LIFE secretary Stephen Rothschild.
According to Lurty, banks may request a life insurance policy as collateral for a small business loan. This way, the bank can be assured of getting its money should the business’ sole owner die before the loan is paid off. Weintraub adds that once the loan is paid off, you can change the beneficiary from the bank to a loved one.
Other Options to Consider
-Those with a participating whole life insurance policy have the right to share in the insurer’s profits through dividends, which are paid at the discretion of the whole life insurer.
-Some permanent life insurance plans allow the owner to change from one permanent plan to another issued by the same company without a medical exam.
-You may have a right to re-instate a policy if you’ve forgotten to make payments and the policy lapses, provided you’re in good health and make back payments within six months to one year or within the period of time specified by your insurer.
-With extended term life insurance, you won’t need to keep making premium payments.
-In some flexible-premium policies, premiums may be reduced or skipped as long as sufficient cash values remain in the policy. However, this will result in lower cash values and a shortened coverage period.
Life insurance provides income protection while you are still working. When you retire, it can then be used to cover the assets you’ve accumulated throughout your lifetime. During your work life, life insurance protects your family’s livelihood in the event you die by providing regular payments to them that would replace your lost income.
While retired, there is a possibility you have assets (i.e., house). If something were to happen to you, life insurance can be used to cover estate taxes so the bill doesn’t get passed down to your loved ones.
If the IRS comes knocking at your door or the door of your loved ones because of unpaid taxes, they may be able to seize other assets, but they cannot seize your life insurance policy. The same goes with any creditors – regardless of how far in debt you are when you die.
No one can legally take the benefits in your life insurance policy from your beneficiaries. However, if you failed to name a beneficiary on the policy or the beneficiary on the policy died prior to your death, then the proceeds would be transferred to your estate. If this happens, creditors can file a claim in probate court against your estate to try to use the life insurance proceeds to pay off your debt.