Life Insurance Frequently Asked Questions

Why is understanding life insurance important?

Understanding life insurance and how it can fit into one’s overall financial planning strategies is an essential issue for those who wish to ensure that loved ones will be taken care of financially in the event of an untimely death. Knowing how the benefits of life insurance can help an insured’s family and other survivors to avoid financial hardship can also help in pinpointing where this important financial vehicle fits into one’s complete financial picture. For more information, read How Does Life Insurance Work?

What is the purpose of life insurance?

Life insurance provides numerous benefits. In the event of a policy holder’s death, life insurance can help to pay off a mortgage or other debts, cover funeral costs and related final expenses, replace lost income from the decedent, and pay for a child’s future education costs. This important product can also help to cover estate taxes that are due. For those who own a business, having a life insurance policy in place can aid in continuing the business while a replacement owner is found, or keep the business afloat until it is eventually sold.

How much life insurance does a person need?

The amount of life insurance that a person needs can vary a great deal with regard to his or her financial obligations and responsibilities. When determining an appropriate amount of death benefits, it is important to add up all personal – and business, if applicable – costs that a person’s survivors would be responsible for should the insured pass away. These needs include not only short-term expenses such as housing, food, and utilities, but also long-term financial obligations such as funding for a child’s future college education. For details, visit this page.

What are the primary types of life insurance policies?

There are two main types of life insurance – term and permanent. Term life insurance provides only a death benefit, without any type of cash value build-up in the policy. This type of life insurance is typically the least expensive – especially if purchased when an insured is young and healthy.

Permanent life insurance offers a death benefit, as well as a cash value component. While the premiums on permanent life insurance may be higher than those of a comparable term life policy, this is primarily due to the fact that some of the premium is going towards the cash value portion of the policy.

What are the three entities that are necessary in a life insurance policy contract?

All life insurance policies – regardless of whether they are term or permanent – have three key entities. These are the owner, the insured, and the beneficiary. The owner of a life insurance policy is the one who has the rights that are stipulated in the insurance contract. The insured is the person whose death causes the insurance company to pay the death benefit proceeds. And, the beneficiary is the one who receives the death benefit upon the death of the insured. For more details on legal concept of life insurance contract, visit this link.

What are the different types of owners in a life insurance policy?

Life insurance policies can have many different types of owners. Oftentimes, the owner of a life insurance policy is an individual. However, owners can also include trusts, estates, businesses, and other types of corporate entities.

What are the different classes of life insurance policy beneficiaries?

A life insurance policy beneficiary is either a person or entity that is named in the policy to receive the death benefit proceeds. There can be more than just one beneficiary named in a life insurance policy. The primary beneficiary is the person or entity that is named first in the policy to receive benefits. If, however, the primary beneficiary pre-deceases, then a contingent beneficiary will be next in line to receive the proceeds from the policy. Likewise, a tertiary beneficiary is one step removed from the contingent beneficiary, and is only entitled to the life insurance proceeds if both the primary and the contingent beneficiary are both no longer alive. Related Article: How to Choose Your Life Insurance Policy Beneficiary

Which components make up a life insurance policy?

There are many components of life insurance policy. The primary component of a life insurance policy is the death benefit proceeds. These funds are what is paid out to the beneficiary who is named in the policy. Permanent life insurance policies also contain a cash value or investment component whereby funds are deposited and are allowed to grow on a tax-deferred basis.

How does life insurance underwriting work?

Life insurance underwriting plays a large part in whether or not an applicant for life insurance will be accepted for coverage. Insurance underwriters look at a variety of factors when determining the acceptance of an applicant for coverage. These can include the applicant’s current age and health, as well as his or her income, medical history, occupation, hobbies, and health history of their family. Majority of applicants will be required to undergo a medical exam to qualify for coverage, though there is the option to look into a no physical exam life insurance policy if you feel your health will not allow you to qualify for a traditional medically underwritten life insurance policy.

What can make a life insurance policy applicant less insurable?

Nearly any type of major illness suffered by an applicant for life insurance will raise his or her risk factor, and therefore lessen their insurability in the eyes of life insurance companies. Other criteria that are considered include the applicant’s age (older age is more of a risk factor), participation in dangerous or hazardous activities, and smoking and drinking.

What is the meaning of the term insurable interest?

Prior to purchasing any type of insurance, there must be an insurable interest. A person has an insurable interest in somebody or something if the loss of that person or item would cause the individual to suffer some form of financial loss. With regard to life insurance, an insurable interest between the insured and the beneficiary must exist at the time of policy application. Also read this article in which Insurable interest is explained in detail.

What are life insurance policy dividends?

One of the features associated with whole life insurance is that certain policies offer a dividend option to the policy holder. Policies that offer dividends are referred to as “participating” policies. (Likewise, policies that do not offer dividends are referred to as non-participating policies).

Although they are not guaranteed, dividends are paid out to policy holders by the insurance company when the actual cost to provide insurance turns out to be less than the insurance company originally estimated in their initial cost projections. Dividends can typically be taken in the form of cash, or the insurance company may retain the dividends for the purpose of earning interest for the policy holder.

What are the tax benefits that life insurance can provide?

There are several tax-related benefits that are associated with life insurance. One such benefit is the fact that life insurance proceeds are received income tax free by beneficiaries (although such proceeds may be subject to estate taxation).

In addition, the funds in the cash value component of permanent life insurance policies are allowed to grow on a tax-deferred basis. This means that the growth of these funds will not be subject to taxation until they are withdrawn. More resources: Tax Related Benefits of Life Insurance

What are living benefits of a life insurance policy?

In addition to providing liquidity upon an insured’s death, life insurance can also offer “living benefits.” This means that a policy holder can use the cash value – or even a portion of the death benefit – while still alive for the purpose of paying medical expenses, long-term care costs, or other financial obligations. More resources: What are the Benefits of Life Insurance?

How can life insurance proceeds protect a business?

Small businesses typically rely on one or a few key individuals for the entire operation of the company. Therefore, the loss of even one of these key people due to a sudden death can disable the entire business. This is why many businesses carry life insurance on the lives of their owners and other key individuals.

What is a buy / sell agreement?

A buy / sell agreement is a contract between two or more owners of a business. When there are two or more owners of a company, the sudden passing away of one of the owners could devastate the entire business. Therefore, business owners can set up a buy / sell agreement whereby each owner purchases a life insurance policy on the lives of the other owners. If one of the owners dies, the life insurance proceeds will be paid out to the other owners / beneficiaries and can provide the funding that is necessary to continue the operation of the business during its time of transition.

What is a viatical settlement?

A life insurance policy owner who engages in a viatical settlement will sell his or her policy to an investor. In turn, the investor will typically pay the policy holder a lump sum of cash in order to purchase the policy. This lump sum is generally a percentage of the policy’s death benefit proceeds. In these cases, the investor takes over paying the policy premiums, and when the insured dies, the investor will receive the death benefit proceeds.

About Jack D. Davis at InsuranceScored.com
About Jack D. Davis at InsuranceScored.com

Jack D DavisBorn and raised in a quiet suburb of Philadelphia, PA, the youngest of nine children, son of two wonderful parents, Jack developed his work ethic early on. While attending West Chester University, he volunteered to join the US Army Reserves for a six-year enlistment. Attending college during the day, working evenings, and fulfilling his military obligation on various weekends, Jack learned the value of hard work and time management. After graduating from college (BS in Business Management), he began working as a sales representative for a Fortune 100 company and honed his marketing skills. In 1985 Jack started his financial planning career as an agent with Mutual Benefit Life.  After Mutual Benefit Life ran into financial difficulties, Jack decided to “go it alone”. His company, “Eagles Soar Enterprises, LLC.” successfully grew for almost 30 years. Jack’s skill-set is understanding and recognizing the personal needs of families and business owners. His patience in explaining the numerous options available is greatly appreciated by his clients. Jack agrees that life insurance is a difficult topic and people are rarely “excited” about discussing the subject. When Jack was 23 he witnessed firsthand how important life insurance is when he lost his Dad to cancer. Jack’s Mom used the life insurance proceeds to help minimize the financial loss.  Jack recognizes how critically important proper insurance planning is to the surviving spouse, business partner and, most importantly, the children of his clients. In his free time Jack enjoys playing tennis, horseshoes, ping pong, exercising, reading and attending Philadelphia Eagles football games. Jack has two wonderful children and currently resides in beautiful St. Petersburg, FL. Questions? Call Jack at 1.800.277.3098 or email: info@jackddavis.com