Life Insurance Tips

Choosing An Amount

It turns out that for life insurance, the solution to the puzzle of “how much” can be found with some basic calculations. The reason for purchasing life insurance, of course, is to provide your family with long-term financial security. To come up with a dollar figure that will provide that security, you should begin with a careful review of your financial situation.

Essentially, there are two categories that you should consider-what your family’s immediate needs will be if something happens to you, and what their ongoing needs will be.

• Immediate needs can include the final expenses associated with a terminal illness, burial costs, estate taxes, the balance of an unpaid mortgage and even relocation expenses.
• Ongoing needs might include monthly bills and expenses, mortgage payments, daycare costs, education, income replacement and retirement.

Most people aren’t so anxious to figure out how their family will replace the income lost if they die, or even to tackle such details as how much their own funeral will cost, or if the family will have to sell their home should such an event occur, and what the marketplace will be like if selling the home is neccesary. One way to start the process is to consider this basic rule of thumb for life insurance:

• In general, most people should have life insurance that is equal to five to seven times their annual gross income.

Life insurance comes in two basic forms. There is:

• Term life insurance and
• Permanent life insurance (also known as Cash-Value). Knowing which one is appropriate for you means understanding what your needs are and what you are protecting.

You should elect an amount necessary to meet the needs you are trying to satisfy.

Choosing The Type

There are two basic types of life insurance, term insurance and cash value insurance. There are many variations on these two basic types. Term Policies provide life insurance for a specified period of time. These policies provide benefits in the event of death, but they generate no “cash value”. If you have a limited amount to spend, and only need the additional coverage insurance for a finite period of time (for instance.. until the children graduate from college), you may be able to get more coverage by acquiring term insurance than by with cash value insurance. Today’s term policies usually have two sets of premiums – guaranteed maximum premiums, and “current premiums”, which are usually much lower. The company cannot increase current premium above the guaranteed maximum premiums shown in the policy.

When you buy term insurance you need to make a choice as to how long you want the protection. You may renew the policy without a physical examination for the period of years specified in the policy. Some term insurance can be converted to cash value insurance up to a specified age with no physical examination. Premiums for the converted insurance will initially be higher than the premiums you would be paying for the term insurance. Cash-Value Insurance combines death benefits with a cash accumulation feature. The buyer of a cash value policy pays more in the early years than for term insurance, but the money not needed to pay for the cost of the death benefit accumulates as interest. If the policy is surrendered before the insured dies, there may be a cash value paid to the owner. In addition you can make loans from your policies cash value. This interest rate for most policies decreases after a specified number of years, and if the loan is never paid back then the amount is deducted from the policy’s benefit. As a general rule, it is not a good idea to buy cash value life if you plan to surrender early.

If all premiums are paid, cash value insurance usually lasts for the whole life of a person, and pays death benefits to the beneficiaries named in the policy upon the death of the insured. The cash value can be used as loan collateral for borrowing funds at the interest rate specified in the policy. Any outstanding loans are deducted from policy proceeds at death or surrender. Some of these products may enjoy tax advantages.

Choosing Beneficiaries

Designating a Beneficiary

A beneficiary is the person or entity you name (designate) to receive the death benefits of a life insurance policy.

Revocable and irrevocable beneficiaries
The beneficiary can be either irrevocable or revocable. Once named, you cannot change an irrevocable beneficiary without his or her consent. A revocable beneficiary can be changed at any time.

Primary, secondary, and final beneficiaries

You can name as many beneficiaries as you want, subject to procedures set in the policy. The beneficiary to whom the proceeds go first is called the primary beneficiary. Secondary beneficiaries are entitled to the proceeds only if they survive both you and the primary beneficiary. A third level of beneficiary (“final” beneficiaries) can be named as well. Final beneficiaries receive proceeds only if they outlive all other beneficiaries. Usually aunts, uncles, nieces, nephews, and charities are named at this level.

You should name both secondary beneficiaries and final beneficiaries. You may outlive the primary beneficiary, you may die simultaneously, or the primary beneficiary may be unable to collect the proceeds. In these cases, if you have not named secondary beneficiaries, the proceeds pass to your estate. Proceeds paid to your estate are subject to all the expenses and delays associated with settling an estate, whereas named beneficiaries can receive proceeds almost immediately after your death.

Multiple beneficiaries
You may name multiple beneficiaries if you choose. There are no legal restrictions–and few company restrictions–on the number of beneficiaries you can designate. The only requirement is that they must all have an insurable interest in you (e.g., spouse, child, business partner, etc.) at the time you apply for the insurance.

If you name multiple beneficiaries, you must also specify how much each beneficiary will receive. You may not want to give each beneficiary an equal share, so you must state how the proceeds should be divided. Because of the numerous interest and dividend adjustments the insurance company must make, the death benefit check often does not exactly equal the policy’s face value. Thus, it’s wise to distribute percentage shares to your beneficiaries, or to designate one beneficiary to receive any leftover balance.

How do you name or change a beneficiary?

When you buy life insurance, the insurer will provide you with a beneficiary designation form. Generally, you only need to list the names of the beneficiaries, sign the form, and date it. When changing a beneficiary, a similar form is used. It is advisable to specifically revoke any previous designations by writing this in on the change of beneficiary form. You may want to review your beneficiary designation every two or three years. Additionally, be sure to check and update your designation upon certain life events (e.g., divorce, remarriage, the birth of children, etc.).

Don’t make the mistake of thinking that you can change your beneficiary in your will. A change of beneficiary made in your will does NOT override the beneficiary designation form. If you want to change the beneficiary, execute a change of beneficiary form. Do not rely on your will to do so.

Why designating the proper beneficiary is important

Life insurance is purchased for two primary reasons: to create an instant estate to provide for your family members, and to solve cash flow problems caused by your death. To attain these goals, you want to ensure that all the life insurance proceeds are received by the beneficiary. To do this, you need to avoid estate taxes that will deplete these funds. One way to avoid taxes is to properly designate the beneficiary.

Should you name your spouse as beneficiary?

Most married people name their spouse as primary beneficiary. If your spouse is the beneficiary, then the proceeds pass free of estate taxes under the unlimited marital deduction, regardless of who owns the policy. However, if the spouse also has a sizeable estate, the proceeds will be included when he or she dies (unless, of course, they have been spent). In the later case, you may end up only postponing estate taxes, not completely avoiding them.

Additionally, if you and your spouse die simultaneously, the Uniform Simultaneous Death Act (USDA) provides that the beneficiary will be presumed to have died first. This means that the unlimited marital deduction will be lost, and the proceeds will be included in your gross estate.

Be aware, however, that if you live or move to a community property state, your spouse must give written consent before you can designate anyone else as your beneficiary.

Other things to think about

Be careful if you name your estate or your executor

If your estate or your executor is named as beneficiary on your life insurance, the proceeds will be included in your gross estate for federal estate tax purposes. If your gross estate is large enough, estate taxes must be paid. These taxes reduce the life insurance proceeds available for your family, and the process of settling the estate will delay the availability of the life insurance proceeds.

Of course, your child or spouse may also serve as your executor. In this case, he or she may be a perfectly appropriate beneficiary. Just make sure you indicate that the beneficiary is your child or spouse, and not just the executor of your estate.

Be careful if you name a creditor, or someone who will use the proceeds to do you a favor

Occasionally, a beneficiary is considered by the IRS to be for the benefit of your estate. When this happens, the proceeds from the life insurance policy are included in your gross estate for estate tax purposes. Examples of this include:

• naming a creditor as beneficiary (in payment of a debt)
• naming a beneficiary to receive proceeds under an agreement that requires him or her to pay your estate’s debts or expenses
• naming a beneficiary to receive proceeds to pay alimony or support

Don’t name a minor unless a guardian has been appointed or a trust is used

Insurers generally will not make settlements directly to minors. Do not name a minor as a beneficiary unless you also appoint a guardian or use a trust.

Name a beneficiary in accordance with a divorce decree, settlement agreement, or state law

Your right to change a beneficiary may be limited by a divorce decree or settlement agreement. In some states, divorce automatically terminates a spouse’s interest. In other states, divorce allows a policyowner to change the beneficiary, even if the beneficiary is irrevocable.

Claiming Benefits

How do you claim life insurance benefits?

Life insurance benefits are not paid automatically. If you are the beneficiary of a life insurance policy, you must file a claim in order to receive any money. Often, this is as simple as contacting your insurance agent, and filling out some paperwork.

However, if this is the only step you take, you may be missing out on other life insurance benefits to which you are entitled. For example, your spouse or family member may have owned one or more group policies that pay benefits depending on how the insured person died, or in restricted amounts. If you spend time uncovering these unseen policies, you may uncover additional support funds from life insurance than you had expected.

Finding individually-owned life insurance policies

Your spouse or family member may have owned one or more permanent or term life insurance policies. Individually-owned term or permanent policies are what most people think of as life insurance. These policies are purchased by one person, and pay benefits when the insured person dies. If your spouse or family member owned one of these policies, he or she probably kept it with his or her important papers; in a file, or in a safety deposit box. However, if you know that your spouse or family member owned an individual policy and you can’t find it, call his or her insurance agent or company to check. If you’re not sure if your spouse or family member owned a policy, you can contact the American Council of Life Insurance. Its members can do a free search for you.

Finding group life insurance policies

Group life insurance policies provide coverage to many people under one policy. Group insurance policies may be issued through an employer, bank, credit agency, or other professional or social organizations, and they often pay benefits in specialized circumstances. Because the group holds the actual policy, the insured person receives a certificate of insurance as proof that he or she is insured. Look for these certificates in your spouse’s or family member’s personal papers, files, and safety deposit box. However, even if you can’t find any certificates, this doesn’t necessarily mean your spouse or loved one wasn’t insured. You should still check with your spouse’s or family member’s employer, bank, or credit agency, or study loan paperwork or purchase contracts. Read the following sections for information about types of group policies your spouse or family member may have owned.

Employer-based group life insurance

If your spouse or family member was employed at the time of his or her death, you may be the beneficiary of a life insurance policy issued through his or her employer. Because some employers offer their employees a certain amount of life insurance at no cost, you may not even be aware that your spouse or family member was insured by a group policy because he/she did not pay his/her own premiums. In addition, your spouse or family member may have had the option of purchasing additional group life insurance through his/her employer, paying the extra premiums himself/herself. Thus, before assuming that your spouse or family member did not have group life insurance, you should check his/her pay stubs, and call his/her employer.

Accidental death and dismemberment policy

Your spouse or family member may have been offered an accidental death and dismemberment policy through an employer, credit card, or bank. These policies pay benefits if an insured individual dies accidentally. This is another type of life insurance you may be unaware that your spouse or family member had because, occasionally, these policies are offered as part of a loan package, or even issued as a free benefit by banks, or as a rider to an employer-issued insurance policy. If your spouse or family member died accidentally, look for such a policy in his or her files, or contact his or her employer, bank, credit card issuer, or insurance company.

Travel accident insurance

If your spouse or family member was killed while traveling by air, boat, or train, you may be eligible to receive the proceeds from a travel accident insurance policy he or she may have purchased when buying tickets. In addition, if your spouse or family member used a credit card to purchase travel tickets, you could be automatically entitled to a life insurance benefit payable if he or she dies as a result of an accident when using those tickets. Some travel agencies and road and travel clubs also routinely issue travel accident insurance policies, and employers sometimes pay death benefits to employees who are killed while traveling on company business.

Mortgage life insurance

If your spouse or family member owned a house, he or she may have purchased mortgage life insurance. A mortgage life insurance policy pays off the balance of the policyholder’s mortgage upon his or her death. If you’re not sure whether your spouse or family member purchased such a policy, check with the mortgage lender.

Credit life insurance

Banks and finance companies routinely offer credit life insurance when someone takes out a loan, or is issued a line of credit. This insurance will pay off the outstanding balance of a loan or account if the insured individual dies. A few extra dollars is added to the monthly loan payments to pay the premiums. Many institutions try to sell this type of policy when someone finances a purchase, or signs up for a line of credit, and occasionally they add it to a contract before the individual signs it. Thus, it is likely that you won’t find out that your spouse or family member owned such a policy unless you check with credit card companies, banks, or any lenders to whom your spouse or family member owed money at the time of his or her death.

How do you file a life insurance benefit claim?

1. Notify the insurance company that the policyholder has died

   You should contact the insurance company as soon as possible. Call the policyholder services department directly, or if the life insurance policy was issued through our agency or an employer, ask us/them to notify the company for you to begin the claims process.

2. File a claim form

   You’ll begin the claims process by filling out and signing a proof of death form, and then attaching to it an original or certified copy of the policyholder’s death certificate. If you are too distraught to fill out the form yourself, we may fill it out for you, although you’ll still have to sign it. If there is another beneficiary named on the policy, that person must also fill out a claim form. You may also have to fill out Form W-9 (Request for Taxpayer Identification Number and Certification), which will enable the insurance company to notify the Internal Revenue Service of any interest it has paid to you on the value of the policy. To expedite your claim, follow the insurance company’s and/or policy instructions carefully.

3. Wait for the company to process the claim

   Life insurance claims are usually paid quickly, often within a few days. First, however, the insurance company will ensure that you are the beneficiary of the policy, that the policy is current and in force, and that all conditions of the policy have been met. This is usually a simple matter, and does not delay the claims process. Claims are more often delayed because the insurance company has not received a valid death certificate. The insurance company also has a right to challenge or deny a claim if it believes that a specific policy provision has been violated.

How should you receive the life insurance proceeds?

In a lump-sum cash payment

Life insurance proceeds are often paid as lump-sum cash payments. Most people elect this form of payment because it enables them to control how the insurance money is invested or spent. In addition, if you elect to receive a lump-sum payment, you will not owe income tax on the life insurance proceeds.

Through a settlement option

A settlement option is a way of paying the proceeds of a life insurance policy other than in a lump-sum cash payment. Many types of settlement options are available, but all are designed to ensure good money management in situations where the beneficiary is unable or unwilling to manage a lump sum of cash. Either the policy owner chooses the settlement option at the time he or she purchases the policy, or the beneficiary chooses the option at the time the benefit becomes payable (unless the policy owner had chosen an irrevocable option).

If you receive the proceeds of an insurance policy through a settlement option, the insurance company will keep the policy proceeds, invest them, and pay you interest. Or, you may be allowed to withdraw part of the proceeds or receive periodic payments of both principal and interest.

Reading Policies

Most life insurance policies are filled with fine print, legalese, and technical insurance jargon. However, if you can find the time and muster the patience, it’s probably a good idea to sit down and read through your policy. If you do, you’ll understand your policy better and gain an understanding of your rights and obligations under the contract.

Here are some common provisions to look for when you read your policy:

Entire contract clause

When your life insurance policy takes effect, the application for insurance that you filled out is incorporated into the contract. The statements you made on the application become contractual provisions and can be used as evidence in a dispute over the contract’s validity. Typically, states require that a clause be inserted in your policy stating that the policy and the application attached to it together form the entire contract between you and the insurer. This clause is beneficial to you because if your insurer accuses you of misrepresentation and seeks to void the contract, they’re prevented from using other evidence outside of the contract. They can only void the contract if you made false statements on your application.

Ownership clause

A life insurance policy is a piece of property. The owner of the policy may be the individual whose life is insured under the contract, it may be the beneficiary, or it may be someone else. In all likelihood, if you are the insured, you are also the owner of the policy. As the owner, you have certain privileges of ownership, including the right to transfer or assign the policy, the right to change the beneficiary, the right to receive the cash value and dividends (if applicable), and the right to borrow against the cash value (again, if applicable).

Beneficiary clause
The beneficiary clause allows you to name the person who will receive the policy’s death benefit proceeds upon your death. The designation of your beneficiary is an important decision, enabling you to control the disposition of the insurance money. While you may designate yourself as beneficiary under certain types of retirement income policies, the beneficiary under a traditional policy will generally be either your estate or an individual. It’s usually not advisable to name your estate, however, because then the proceeds will have to pass through probate and payment of them will be held up. If you name a specific individual, the proceeds will be paid directly to him or her upon your death without delay. A beneficiary designation may be revocable (can be changed by you at any time) or irrevocable (can’t be changed). In addition, a beneficiary may be primary or contingent. Basically, the primary beneficiary is the person first entitled to the policy proceeds at your death. If the primary beneficiary dies before you (and thus before any proceeds are paid), the contingent beneficiary takes his or her place.

Incontestable clause
This is an clause that is required in most life insurance policies. Typically, it states that the validity of the contract cannot be questioned or challenged for any reason whatsoever after the policy has been in force for a period of two years during your (the insured’s) lifetime. The reason for this clause lies in the long-term nature of the life insurance contract. Its purpose is to give the insurer ample time to review the contract while providing you and your beneficiary with some assurance that you will not be harassed by lawsuits long after the policy was originally bought.

Misstatement of age clause

This is somewhat of an exception to the incontestable clause. The incontestable clause does not apply when you, the insured, misrepresent your age. The reason is simple. Because age is a key factor in determining whether a company offers you life insurance and in setting premiums, some applicants are tempted to understate their age in order to pay a lower premium. Understandably, insurers wish to avoid this. The misstatement of age clause provides that if you have misrepresented your age, the insurer will lower the face amount of the policy to the amount of insurance that the premium paid would have purchased at the correct age.

Grace period
Your policy specifies the due date for premiums (e.g., monthly, quarterly, semiannually). Whatever the due date, you generally must pay your premiums on or before that date. If you fail to do so, you will be in default and technically the policy will lapse. This rule is subject to a disclaimer, however, in the form of a grace period during which the policy still remains in force if a premium hasn’t been paid on time. For example, if you have a premium due on January 1 and don’t pay it by that date, you might have until February 1 to make the payment before the policy would lapse. If you died on January 15, the death benefit proceeds would still be paid, but minus the amount of the premium in default.

Reinstatement clause
Many life insurance contracts contain a clause allowing you to reinstate or reactivate a lapsed policy (i.e., one for which you stopped paying the premiums). However, reinstatement is not your unconditional right. If available, it will be subject to a number of very specific requirements on your part. First, if it’s a cash value policy, reinstatement will be possible only if at the time of the policy’s lapse you did not withdraw its cash surrender value. Second, reinstatement must be accomplished within a specified time period, normally five years after the lapse. Third, you must resubmit proper evidence of your insurability. Not only must your health still be satisfactory to the insurer, but other factors such as your income and personal habits must not have changed greatly either. Finally, an insurer will generally only permit reinstatement if you pay all the overdue premiums (plus interest) and if you pay (again, with interest) or reinstate any indebtedness from loans that may have existed at the time of lapse.

Suicide clause

Almost all life insurance policies exclude suicide during a specified period after the policy is issued. Under this clause, the typical period during which coverage for suicide will be denied is two years (although some policies limit it to one year). Assuming you are the insured, this means that if you commit suicide (whether by insanity or not) within two years after purchasing your policy, the insurer will not pay any death benefits to your beneficiary. The insurer would be responsible for refunding the premiums paid by you, but that would be the extent of their financial obligation under these circumstances.

Aviation exclusion

At one time, almost all life insurance policies excluded death resulting from aviation. Today, most policies will provide coverage if you die in an airplane accident, although you may have to pay an extra premium to cover the heightened risk if you’re a private or commercial pilot (or a crewmember).

War clause

During war time or when a war seems likely to occur, insurance companies may insert a war clause into their policies. This clause usually states that if you (the insured) die in a war, the insurer does not have to pay the death benefit proceeds that would ordinarily be payable under the policy. Instead, all they have to do is return the premiums you paid plus interest.

Special provisions, riders and options
Note that the provisions described here are only the ones that are more or less common to all life insurance contracts. In most cases, you have the choice of purchasing riders and optional coverages that allow you to expand your coverage and tailor the policy to your needs. In addition, certain types of policies may have special provisions of their own. Cash value policies, for example, generally include provisions relating to policy loans and the surrender of all or part of the cash value.

Estate Planning & Life Insurance

Life insurance has come a long way since the days when it was known as burial insurance and used mainly to pay for funeral expenses. Today, life insurance is a crucial part of many estate plans. It can:

1. provide much-needed income that is immediately accessible to your survivors
2. allow you to replace wealth lost due to estate shrinkage (i.e., the estate taxes and expenses associated with your death) and
3. allow you to give money to your favorite charity.

What are the estate planning benefits of life insurance?

Life insurance can protect your survivors financially:

You can buy life insurance to help ensure that your survivors don’t suffer financially when you die. You can protect their long-term financial needs by planning so that they will have enough money to pay their bills and live comfortably for years to come. You can also use life insurance to protect your survivors’ short-term financial needs. Because life insurance proceeds normally don’t pass through probate, your loved ones will have enough money to pay their bills right away–they won’t have to wait until your estate is settled.

Life insurance can replace wealth that is lost due to estate shrinkage:

Life insurance may be the number one method of replacing wealth that is lost due to estate shrinkage. To ensure that the estate (money and assets) you leave to your survivors isn’t less than you intended, you can buy enough life insurance to cover the expenses associated with your death, such as taxes, fees, and other debts that your survivors will have to pay.

Life insurance can be given to charity:

If you want to leave money to charity when you die, consider using life insurance. Not only does life insurance allow you to make a substantial gift to charity at relatively little cost to you, but there are certain tax benefits as well. For instance, depending on how you structure your gift, you may be able to take an income tax deduction equal to your basis in the policy or its fair market value. Or, you may be able to deduct the premiums that you pay for the policy. In addition, gifts to charity may reduce estate taxes owed when you die.

Plan carefully if you expect to leave behind a substantial estate
Your survivors generally won’t owe income tax on any life insurance proceeds that you leave to them. However, they may owe estate taxes if you leave behind a large enough estate but don’t plan ahead. In general, if you’re leaving behind a taxable estate worth less than a certain amount, your survivors won’t owe estate taxes on a life insurance policy that you leave them. But, if you intend to leave an estate larger than that amount, you may want to consider the estate tax consequences of owning life insurance.

In general, to avoid life insurance-related estate taxes, make sure that you don’t:

• Own the policy or have any incidents of ownership in the policy
• Make the proceeds payable to your estate
• Make the proceeds payable to your personal representative (executor)
• Make the proceeds payable to a beneficiary to satisfy a debt or to pay alimony or support
• Pay the premiums

Taxes & Life Insurance

How is life insurance taxed?

Historically, life insurance has been accorded liberal tax treatment. As insurance products have become more sophisticated, however, the line separating insurance products from investment products has become a bit more complicated, depending on the type of policy(s) you own. As a result, a mix of complex rules and exceptions now govern the taxation of insurance products. Familiarity with these rules will help you avoid an unwary consequences and help you plan accordingly.

Tax considerations

Taxes are typically levied whenever cash changes hands. During the term of any life insurance policy, there are a number of oc