Understanding Life Insurance: Who Gets The Money?

Life insurance is a contract between an insurance company and a policy owner in which the insurer guarantees to pay a sum of money to one or more named beneficiaries when the insured person dies. The policyholder must pay a single premium upfront or regular premiums over time for the life insurance policy to remain in force. There are two main types of life insurance: term life insurance and permanent life insurance. Term life insurance is designed to last a certain number of years, then end. Permanent life insurance, on the other hand, stays in force throughout the insured's entire life unless the policyholder stops paying the premiums or surrenders the policy.

There are several reasons why life insurance benefits might go unclaimed. For example, the life insurance company and the policy owner may have lost track of each other, or the company may not know that the insured person has died. In some cases, the company may be unable to locate the policy's beneficiaries, or the beneficiaries themselves may not know that a policy exists. Additionally, the original life insurance company may no longer exist or cannot be located.

If you believe you may be owed life insurance money, it is important to gather as much information as possible about the policy and the insurance company. You can start by checking with the insurance company directly, especially if you know their name. Keep in mind that insurance companies are often bought and sold, so the company may be operating under a new name. If you are unable to locate the company, you can seek assistance from the insurance commissioner of the state in which the policy was issued. They can help you determine if the company has changed its name or provide guidance on how to proceed.

Reasons for unclaimed life insurance benefits

Unclaimed life insurance benefits are a rare but preventable problem. Here are some common reasons why life insurance benefits go unclaimed:

• Lost contact between the life insurance company and the policy owner: When a policy owner moves, they must update their new address, phone number, and email address with their life insurer and other financial institutions. If they don't, the insurance company may lose track of them.
• Life insurance company unaware of the insured's death: Life insurance companies usually only know about a policyholder's death when informed by the policy's beneficiary. If the beneficiary is unaware of the policy or fails to notify the insurer, the benefits may go unclaimed.
• Inability to locate beneficiaries: The life insurance company may have difficulty locating the beneficiaries if the policy owner hasn't provided detailed and up-to-date personal identification information for each beneficiary.
• Beneficiaries unaware of the policy: Sometimes, beneficiaries are unaware of the insured's life insurance policy, either because the insured didn't inform them or intentionally kept it a secret. As a result, the beneficiaries don't know they can make a claim.
• Original life insurance company no longer exists: If the original life insurance company has changed its name, been acquired, or gone out of business, beneficiaries may struggle to locate the insurer to make a claim, especially if they don't have the updated company information.

To prevent these issues, it's essential to maintain open communication between the insured, beneficiaries, and the life insurance company. Keeping detailed records, updating contact information, and regularly reviewing and updating beneficiaries can help ensure that benefits are claimed when needed.

How to determine if you are owed life insurance money

There are several reasons why you may be owed life insurance money without realising it. For example, the life insurance company might not know that the policyholder has died, or they may be unable to locate the beneficiaries. Sometimes, beneficiaries are unaware that they are listed on a policy. In other cases, the original life insurance company may no longer exist or cannot be located.

If you think you might be owed life insurance money, there are several steps you can take to find out. Firstly, if you know the company that issued the policy, start by contacting them directly. Keep in mind that insurance companies are often bought and sold, so if you're unable to locate the company, it may be operating under a new name. The insurance commissioner of the state in which your policy was issued should be able to help you determine the new company name.

You can also try searching for unclaimed property by clicking on your state on this website and following the prompts on the screen. Alternatively, you can conduct a multi-state search by visiting this site and typing your name in the box.

If you believe that you are a beneficiary of a life insurance policy, there are several ways that you can receive the payout. These include lump-sum payments, installment payments, annuities, and retained asset accounts. It's important to remember that any interest income received from annuities is subject to taxation, so you may end up better off with a lump-sum payment.

To determine the exact value of your policy, you can refer to the policy's statement of benefits. If you have a permanent life insurance policy, the face value and future payout may increase or decrease over time, depending on how you manage the policy. For example, if you buy additional insurance or allow dividends to accumulate, the face value can increase. On the other hand, if you withdraw cash from the policy or take out a policy loan, the face value and payout will be reduced.

Borrowing from a life insurance policy

Firstly, it's important to note that you can only borrow against a permanent life insurance policy, which includes whole life insurance and universal life insurance. Term life insurance, which is generally cheaper and more suitable for many people, does not have a cash value and is designed to last for a limited period, typically anywhere from one to 30 years. In some cases, a term life policy can be converted into a permanent policy, which allows cash value to build up.

Permanent life insurance policies are more expensive than term life policies but have no predetermined expiration date. If sufficient premiums are paid, the policy is in force for the lifetime of the insured. While the monthly premiums are higher, money paid into the policy that exceeds the cost of insurance builds up a cash value account that is part of the policy. This cash value is meant to offset the rising cost of insurance as the insured person ages, allowing premiums to remain level throughout their life.

The cash value of permanent life insurance serves two purposes. It is a savings account that the policyholder can use during their lifetime, and the cash accumulates on a tax-deferred basis. Some policies have restrictions on withdrawals, depending on how the money is used. For example, the policyholder might take out a loan against the policy's cash value and pay interest on the loan principal. The policyholder can also use the cash value to pay premiums or purchase additional insurance.

When borrowing from a life insurance policy, the insurer lends you the money and uses the cash in your policy as collateral. This means that the policy's cash value can continue to accumulate, but it's important to check with your insurance company how interest and any dividends will be determined and paid when you have an active loan. It's also worth noting that policy loans reduce the available cash value and death benefit. If you pass away while owing money on a life insurance loan, it will reduce the amount your beneficiaries receive.

The amount you can borrow against your life insurance policy depends on factors such as how much cash value has accumulated and the policy's terms and conditions. You can typically borrow up to 90% of the policy's cash value, but this may be lower depending on the insurer and whether you have any existing policy loans with interest accumulated.

While borrowing from a life insurance policy can be convenient, it's important to consider the potential downsides. Policy loans can create financial turmoil if not managed carefully. If you don't make interest payments, your policy could lapse, and the entire loan amount could become taxable. Additionally, if you pass away, the loan amount and any interest owed will be deducted from the death benefit, which could significantly impact your beneficiaries. Therefore, it's crucial to thoroughly consider the pros and cons of life insurance policy loans before taking one out.

How to choose a life insurance beneficiary

Choosing a life insurance beneficiary is an important step in owning a life insurance policy. Here are some tips on how to choose a life insurance beneficiary:

Understand the role of a life insurance beneficiary

The life insurance beneficiary is the person or entity who receives the death benefit from your life insurance policy when you pass away. They are the reason you have life insurance in the first place, so it's important to choose someone who relies on you financially and would need help paying ongoing bills or covering costs incurred by your death, such as funeral expenses.

Know the different types of beneficiaries

There are two main types of beneficiaries: primary and contingent. Primary beneficiaries are the first in line to receive the death benefit if you die, while contingent beneficiaries, also known as secondary beneficiaries, receive the benefit if the primary beneficiary dies before you do. You can also have irrevocable beneficiaries, who cannot be removed or changed without their consent, and revocable beneficiaries, who can be changed or updated at any time.

Consider your options

When choosing a life insurance beneficiary, you can select a person, charity, business, or trust. If you choose a person, they can be a relative, child, spouse, or friend. If you live in a community property state, your spouse may automatically be entitled to a percentage of the death benefit, so they must give written consent if you want to designate someone else. You can also name multiple beneficiaries and decide how much of the payout each will receive.

Be specific and provide necessary information

When designating a beneficiary, be as specific as possible to avoid disputes. Instead of just saying "spouse" or "child", include their full name, Social Security number, relationship to you, date of birth, and address. This will help the insurer locate your beneficiaries quickly and ensure there is no confusion, especially if you remarry or have multiple children.

Keep your beneficiary designations up to date

It's important to review and update your life insurance beneficiaries regularly, especially after major life changes such as marriage, divorce, or the birth of children. This ensures that the right people are protected and that your wishes are carried out.

The differences between term and permanent life insurance

Term life insurance and permanent life insurance are the two types of life insurance policies. Both types of policies were created to protect the financial well-being of your loved ones in case you pass away. However, there are some differences between the two.

Term Life Insurance

Term life insurance is a simple and relatively inexpensive way to get life insurance coverage. It is temporary and typically has level premiums. It lasts for a specific amount of time, called a term, which could be between one and 30 years, or until a particular age. In many cases, you do not need to take a medical exam to be approved for purchase.

Term life insurance policies do not carry any cash value, meaning they don’t accrue savings over time that can be accessed by the policyholder. Once the policy term ends, so does your coverage.

Permanent Life Insurance

Permanent life insurance, on the other hand, provides protection for your entire life and does not expire. It is generally more expensive than term life insurance. However, permanent life insurance can be a financial tool that can help you build wealth and accumulate cash value that can be used during your lifetime.

Permanent life insurance policies have a cash value component that grows tax-deferred. This cash value can be withdrawn or borrowed against while the policyholder is still alive. However, doing so can decrease the amount of the policy’s death benefit if those funds are not repaid.

When choosing between term and permanent life insurance, consider the length of coverage you need, the benefits offered, and your budget. Term life insurance is a good option if you need short-term coverage or have a limited budget. Permanent life insurance is suitable for those who need long-term financial protection, want to create an inheritance for their heirs, or prefer stable premiums.

Frequently asked questions