Understanding life insurance

The two most common types of life insurance are term life and whole life insurance.

  • Term Life Insurance:
    • Provides coverage for a specific period of time (e.g., 25 years);
    • Has a monetary value that is paid to the named beneficiary in the event that the policyholder dies;
    • Annual premium payments are common;
    • Does not accumulate more cash value and is usually not a great investment vehicle.
    • Offers large face values for relatively small premium payments.
  • Whole Life Insurance:
    • Is also knows as permanent insurance;
    • Stays in effect for the life of the policyholder, as long as the premiums are paid on time;
    • Can grow in value over time;
    • Accumulates cash value on a tax-deferred basis;
    • Pays a specific amount upon the death of the policyholder;
    • Can be converted to an annuity;
    • Offers life-long protection on a tax-deferred basis.

How Much Coverage Do I Need?

In order to accurately estimate the amount of life insurance needed, it is important to consider the following factors:

  • The future expected income of the insured;
  • Existing debts;
  • Expected future spending, including non-routine costs such as college tuition medical expenses, etc.;
  • Future Social Security or pension benefits (if any);
  • Expected costs associated with a family member’s death, such as estate taxes, legal fees, funeral expense, etc.;
  • Lifestyle changes that may be made by the surviving family members in the event of the death of the insured, such as relocation, career change, education, etc..

When you think about buying a life insurance policy, consider how much in premium payments you will spend over the years and how much value the policy will pay upon the insured’s death. In addition, read the following “Dos” and “Don’ts” regarding purchasing a life insurance policy.

What To Do and Not To Do When Buying a Life Insurance Policy

  1. Do not leave the beneficiary designation line blank. Many applicants for life insurance omit beneficiary designation and do not name anyone. This can present a host of problems for the insured’s surviving family members. Children, surviving spouses, the estate, siblings, parents and ex spouses may all file competing claims arguing that they are entitled to the proceeds. The insurer will most likely freeze the account until the dispute is resolved. If it cannot be resolved, the insurance company will file lawsuit called interpleader and let a court decide who is entitled to the benefits. Sometimes, if no beneficiary is named in the policy, the insurance company will follow its own policy terms and issue a payment in the order of precedence outlined in the policy.
  1. Make sure the sum of the percentages allocated to multiple beneficiaries equals 100%. This may seem as a no-brainer, yet many policies are issued with the total sum of the beneficiary percentages adding up to more than 100%. For example, a policy may state 50% – John Smith, 40% – Brian Smith and 20% – Barbara Smith. After the insured’s death, this type of an error may cause long and protracted litigation and dispute among the beneficiaries.
  1. Read your life insurance application carefully before signing it. At Kadetskaya Law Firm, we have seen many cases where a client provided correct answers to a life insurance agent, but the agent failed to record the answers correctly on the application and asked the insured to sign the form which contained incorrect information. Life insurance agents are in the business of selling policies. They are interested in closing the sale. Remember that wrong information on a life insurance application may lead to policy rescission.
  1. Do not misrepresent facts on the life insurance application (no matter how insignificant!). Some applicants conceal important information about their health, tobacco use, drug use, income, history of mental disorders including depression, prescription medications, weight, age, criminal history, risky sports they engage in, alcohol abuse, etc.. Insurance companies call this material misrepresentation, and they can cancel your policy based on it.
  1. Inform your beneficiaries about the life insurance policy. Your loved ones will not be able to file a life insurance claim if they are unaware you have a policy, or what insurance company it is with. Life insurance companies have a duty to track down beneficiaries, but many of them fail to do it. The best way is to inform the beneficiaries as soon as you purchase the policy. If you have a family attorney and prefer to keep your life insurance secret, give a copy of the policy to your attorney with instructions to inform the beneficiaries of the policy upon your death.
  1. Apply for an automatic loan option to avoid a policy lapse. If you do not pay your premiums on time, your policy will lapse and you will need to file for reinstatement which is not always available. The best thing to do is to check off the automatic loan option on the application. If chosen, this option will allow the insurance company to charge missed premium payments from the policy amount. You will have to pay it back, but the policy is guaranteed not to lapse.
  1. Name contingent beneficiaries. If your beneficiary predeceases you or dies simultaneously with you, your death benefits will go to your estate or the beneficiary’s estate. If the proceeds go to the estate, they may be depleted by probate costs, creditors’ claims against the estate, inheritance taxes, and other fees. You can avoid this by naming substitute beneficiaries—sometimes called secondary or contingent beneficiaries—who will receive the benefits instead.
  1. Do not take a large loan against the cash value of your policy. In many cases the insured can borrow money, tax-free, against the cash value of his/her life insurance policy. Borrowing too much, however, is not a good idea as it can make the policy lapse and the beneficiary will not be able to collect the life insurance proceeds after the insured’s death.

If you have any questions or need additional information, please call our insurance lawyers at 856-524-1157.