Recent studies show that most Americans are uninformed when it comes to life insurance.
According to a 2018 survey from Bestow, about 70% of Americans don’t have life insurance.
Another survey from Anthem found that only 53% of millennial respondents understand life insurance coverage and the benefits that it provides.
The same survey found that 51% don’t realize that cash value from permanent life insurance can be used to help fund certain needs like college educations and retirement income.
More findings from the survey revealed that:
- 88% of respondents understand the death benefit component of permanent life insurance.
- 75% of people who work with a financial professional are discussing sources of tax-free retirement income with the professional.
- 70% of respondents are discussing ways to fund their child’s college education.
- 52% talk about financial products that offer low or no interest loans against the policy’s cash value.
- Fewer than half of respondents with a financial professional have permanent life insurance and 25% don’t currently have it but would like to learn more about it.
- Nearly 95% of respondents said the ability to save enough to retire comfortably was a top priority when planning for the financial future.
It’s clear that most Americans don’t know where to begin when it comes to life insurance, so here are the top 8 most frequently asked life insurance questions, answered.
What’s the difference between universal and term life insurance?
Term life insurance is the most basic of insurance policies. It is nothing more than an insurance policy that provides protection against accidental death and possibly debilitating injuries for a specified period of time.
Generally, term life insurance is cheaper to buy during the earlier years of life, when the risk of death is relatively low. Prices rise in accordance with increasing risks and advancing age.
Universal life insurance falls under a broader category of policies sometimes referred to as cash-value or permanent insurance. These types of insurance policies combine death benefits with a savings component or cash value that is reinvested and tax-deferred.
During the earlier stages of your life, a large portion of the premium paid to this policy is routed to the savings component. During the later stages of life, when the cost of insurance is higher, less of the premium is devoted to the cash portion and more to the purchase of insurance.
Because these policies are permanent, any early termination of the contract by the policyholder can result in penalties.
Can my insurance company cancel my policy without notice?
In most states, an insurance company must give a policyholder written notice of at least 30 days before canceling a policy.
The policy between the insurance company and the insured is a formal contract that specifies the reasons the insurer can cancel the policy and the time frame and method in which it can do it.
Once an insurance policy is issued, an insurance company cannot cancel the policy except for reasons specifically stated in the policy. State laws usually limit what an insurance company can include as reasons for cancellation of the policy.
Typical reasons include failure by the insured to make required premium payments and suspension or revocation of the insured’s driver’s license in the case of auto insurance.
Can my life insurance fund nonqualified deferred compensation plans?
Yes, it is possible to fund nonqualified deferred compensation plans with life insurance. A nonqualified deferred compensation plan is a binding contract between an employer and an employee in which the employer makes an unsecured promise to pay an employee’s future benefits, subject to the specific terms of the contract.
These plans are broken into two parts: the first part is the plan itself and the second part is the employer’s general asset reserve that finances the future liabilities created by the plan. The general asset reserve is what the employer uses to pay the employee for the future benefits.
The two main types of nonqualified deferred compensation plans that allow life insurance funding are supplemental executive retirement plans (SERPs) and corporate-owned life insurance (COLI). SERPs are similar to defined-benefit pension plans and give an employee a stated benefit from the employer at the time of retirement.
With COLI, companies purchase life insurance policies on employees they wish to compensate. The company pays the premium on the life insurance policies and then pays out benefits to the employees when they retire.
How do life insurance policy loans work?
If an insured needs money in an emergency, it’s possible to get a life insurance loan if you have permanent life insurance – either whole life or universal life.
As cash value builds in a whole or universal life insurance policy, policyholders can borrow against the accumulated funds.
These loans have two distinct advantages: you don’t have to repay them and the money goes to your bank account tax-free.
However, insurers generally make no promises as to how fast or to what extent the cash value will increase, so it’s hard to know exactly when your policy will be eligible for a loan.
Different insurers also have different rules about how much cash value a policy must have before you can borrow against it and what percentage of cash value you can borrow.
Before borrowing against your life insurance, it’s a good idea to consult a financial advisor and talk to your insurance broker about all possible options and outcomes.
What’s a beneficiary?
The Insurance Information Institute defines a beneficiary as the person or entity you name in a life insurance policy to receive the death benefit.
Beneficiaries can be one person, multiple people, the trustee of a trust you’re established, a charity or your estate.
There are two levels of beneficiaries: primary and contingent.
The primary beneficiary gets the death benefits if he or she can be found after your death. Contingent beneficiaries get the death benefits if the primary beneficiary can’t be found.
If no primary or contingent beneficiaries can be found, the death benefit will be paid to your estate.
Why do I need life insurance?
If you’re wondering whether or not you need life insurance, ask yourself these questions:
How many people depend on me for financial support?
If the answer is “none,” you probably don’t need life insurance.
If you do have people that depend on you financially, you need life insurance. In the event of your death, your dependents will be left to fend for themselves unless you leave them money through a life insurance policy.
Do I have any debt that will be left to my relatives to pay in the event of my death?
In the event of your death, your debt will be left to your relatives to pay. This can include credit card debt, student loan debt, auto loan debt and more.
If you have a substantial amount of debt that will be difficult for your relatives to pay off, it may be a good idea to get a life insurance policy because the payout can be used by your family to pay off your debts.
What should I look for in a life insurance policy?
This depends on your individual needs, but here are a few things to consider when buying a life insurance policy:
- Affordability – Choose a policy you know you’ll be able to afford in the long run.
- Immediate Payout – Some policies have a two-year waiting period before they’ll pay out life insurance proceeds after a death. Make sure your policy pays 100% of the “face value” from day one, if possible.
- Automatic Payments – Life insurance is a recurring expense that can be easily managed through automatic payments each month. This is especially helpful because missing even one payment could result in your policy being canceled.
- Living Benefits – Many life insurance companies provide benefits to use while you’re living, like the option to cash out your policy if you need expensive, life-saving medical care.
While nobody wants to think about their own death, planning now and looking at life insurance policies can help protect you and your loved ones in the already-stressful event of an untimely death.
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