Life Insurance: What Happens When You Die?

Life insurance is a contract between an insurance company and a policyholder, where the insurer agrees to pay a sum of money to the policy's beneficiaries when the insured person dies. There are two main types of life insurance: term life insurance and permanent life insurance. Term life insurance covers the insured for a set number of years and does not accumulate cash value, whereas permanent life insurance remains in force for the entirety of the insured's life, provided that premiums are paid, and can accumulate cash value.

It is possible to have more than one life insurance policy, and some people choose to do so to provide additional financial security for their loved ones. For example, someone might take out multiple policies to cover specific life events, such as paying off a mortgage or supporting children until they become adults. However, the decision to have multiple life insurance policies should be made strategically and in consultation with a financial advisor, as it may not be the best option for everyone.

Life insurance for married couples

Joint Life Insurance Policies

Also known as dual or survivorship life insurance, a joint policy covers both spouses. There are two types of joint policies: first-to-die and second-to-die. With a first-to-die policy, the surviving spouse will receive the death benefit after the first spouse dies. A second-to-die or survivorship policy pays out the death benefit once both spouses have passed away.

One of the main advantages of a joint policy is cost. Since it covers two people, it generally costs less than two separate policies. This type of policy can also be useful for estate planning and tax purposes, as the death benefit is typically paid out tax-free. Additionally, a joint policy can cover both spouses even if one of them is unable to secure their own policy due to poor health or a pre-existing medical condition.

However, a potential drawback of a joint policy is that the surviving spouse is left uncovered if they need to make a claim during their lifetime. For example, if one spouse has high medical expenses or needs to pay off debts, a separate policy would allow them to access the death benefit, whereas a joint policy would not.

Separate Life Insurance Policies

A separate or single life insurance policy will only cover one spouse. If that spouse passes away, the policy will pay out a death benefit to the surviving partner. Separate policies offer more flexibility, as each spouse can choose a policy that meets their unique needs. For example, one spouse might prefer a term life insurance policy that provides coverage for a set period, while the other spouse might opt for a whole life policy that offers lifelong protection.

The main disadvantage of separate policies is cost. Since each spouse has their own policy, the total premium may be higher than that of a joint policy. Additionally, separate policies can be more complex to manage and customise, as each policy may have different terms and conditions.

Factors to Consider

When deciding between a joint or separate life insurance policy, married couples should consider their specific needs and financial situation. Important factors to consider include:

• Income replacement: Life insurance can replace the income of a working spouse, helping to maintain the family's standard of living.
• Retirement gap planning: Life insurance can be used to secure each spouse's retirement, providing money for regular contributions to an individual retirement account.
• Debt and expenses: Life insurance benefits can be used to pay off mortgages, car loans, credit card debt, and other financial obligations.
• Childcare and education: Life insurance proceeds can cover childcare and educational costs, including college tuition.
• Peace of mind: Life insurance ensures that loved ones are financially cared for in the event of an unexpected death, reducing emotional and financial stress.

It's also important to consider the timeline of financial risk, retirement savings contributions, and the potential need for long-term care insurance. Consulting with a financial advisor can help married couples navigate these complex decisions and choose the most suitable option for their needs.

Life insurance for parents

Life insurance is a contract between an insurance company and a policy owner. The insurer guarantees to pay a sum of money to the beneficiaries when the insured person dies. The policyholder must pay a single premium upfront or regular premiums for the policy to remain in force.

You can buy life insurance for your parents if you meet certain requirements and have their consent. Here are some steps to follow if you're considering life insurance for your parents:

• Get your parents' consent: Verbal and physical consent from your parents is necessary, and they will need to sign the application. You may also need to explain how their death would impact you financially.
• Figure out their coverage needs: Assess your parents' debts and the income goals for the family to determine the required coverage amount.
• Choose a life insurance policy and company: Research different types of life insurance, such as term, whole, and final expense life insurance, to find the one that best suits your needs.
• Fill out an application: Provide the required information, such as your parents' Social Security number, name, and address. Depending on the company, a medical exam may be required.
• Get approved and start paying premiums: Once approved, start paying the scheduled premiums to activate the plan.

• Term life insurance: This is a plan where you choose the coverage period, usually 10, 20, or 30 years. The beneficiary will receive the death benefit if the insured passes away during the term. Term life insurance is typically less expensive.
• Whole life insurance: Whole life insurance is a type of permanent life insurance, meaning the beneficiary will receive the death benefit regardless of when the insured person passes away. While more expensive, whole life insurance guarantees benefits.
• Final expense life insurance: This type of insurance is designed to support end-of-life costs, including funeral expenses, legal and accounting charges, and out-of-pocket medical bills.

Life insurance for retirees

Life insurance is a contract between an insurance company and a policy owner, where the insurer agrees to pay a sum of money to the beneficiaries when the insured person dies. The policyholder must pay a premium regularly or a single premium upfront for the policy to remain in force.

There are several reasons why retirees may want to consider keeping their life insurance policy or purchasing a new one. Here are some factors to consider:

• Outside Income: If you are still earning an income during retirement, life insurance can provide financial protection for your loved ones in the event of your death. It can help replace your income, cover final expenses, and ensure your family's financial security.
• Debt and Expenses: If you retire with outstanding debts, such as a mortgage or student loans, life insurance can help pay off these obligations. It can also cover funeral costs, which typically range from $7,000 to $12,000, and other final expenses, such as medical bills and legal costs associated with processing your will and estate.
• Family Situation: If you have a spouse or children who depend on your financial support, life insurance can provide them with financial assistance upon your death. This is especially important if your spouse relies on your pension income or if you have children with special needs.
• Estate Planning: Life insurance can be a valuable tool for estate planning. It can help pay estate taxes, fund buy-sell agreements, and even make charitable contributions. Consult with an attorney specializing in estate planning to determine if life insurance aligns with your estate goals.
• Tax Considerations: If you have accumulated cash value in a permanent life insurance policy, consider the tax implications before cancelling the policy. Surrendering the policy may result in taxable gains, and there may be penalties during the surrender period. Consult a tax professional to understand the potential tax consequences.

The Texas Employees Group Benefits Program (GBP) offers three types of life insurance for retirees: Basic Term Life Insurance, Optional Term Life Insurance, and Retiree Fixed Optional Life Insurance. Each option provides different coverage amounts and premium structures.

When deciding whether to maintain or purchase life insurance during retirement, it is essential to assess your financial situation, family dynamics, and long-term goals. Consult with a financial planner or a fee-only insurance consultant to determine if life insurance aligns with your specific needs and objectives.

Life insurance for mortgage payments

Life insurance is a contract between an insurance company and a policyholder in which the insurer guarantees to pay a sum of money to one or more named beneficiaries when the insured person dies. There are two main types of life insurance: permanent and term. Permanent life insurance policies do not have an expiration date, whereas term life insurance is designed to last a certain number of years and then end.

Mortgage protection insurance is a type of life insurance policy that can help your loved ones pay off your mortgage after you're gone. This type of policy ensures that your family can remain in their home, even if you're no longer around to provide financial support. With mortgage protection insurance, you purchase a term life insurance policy for at least the amount of your mortgage. If you pass away during the "term" when the policy is in force, your loved ones receive the face value of the policy, which they can use to pay off the mortgage.

There are two main options for using life insurance to cover your mortgage:

Option 1: Using One Policy

Purchase a term life insurance policy with a benefit amount that matches the outstanding balance of your mortgage. This policy lasts for the full term of your mortgage (typically 30 years). In the event of your passing, your family can use the death benefit to pay off the mortgage or make continued mortgage payments.

Option 2: Using Two Policies

Purchase a whole life insurance policy to provide long-term coverage that fits your financial situation. Additionally, buy a term life insurance policy to cover the balance of your mortgage for the early period (10 to 15 years) when the amount owed is the highest. This will allow your family to pay off the mortgage or continue making payments if something happens to you.

It's important to note that mortgage protection insurance is different from mortgage life insurance. With mortgage life insurance, your mortgage lender is the beneficiary of the policy, not your loved ones. This means that if you pass away, the lender will receive the death benefit and use it to pay off the remaining balance of your mortgage. Your family won't see any of the proceeds. Additionally, mortgage life insurance is usually more expensive than term life insurance and doesn't offer the same flexibility in terms of coverage and payout options.

Life insurance for business owners

Life insurance is a contract between an insurance company and a policy owner. The insurer guarantees to pay a sum of money to the policy's beneficiaries when the insured person dies. The policyholder must pay a single premium upfront or regular premiums for the policy to remain in force.

Business owners have unique challenges when it comes to ensuring their families and companies are protected in the event of their death. Life insurance can provide a solid financial foundation and serve as a versatile tool for businesses of all sizes. Here are some reasons why business owners might consider getting life insurance:

• To protect your family: Business owners often carry more expenses and support more people, and their death could result in a sudden loss of income. Life insurance can help cover outstanding business debts and protect important business assets.
• To keep your business running: A business may have supplier contracts, employees, and daily operating expenses that need to be covered even after the owner's death. Life insurance can provide the necessary funds to keep the business afloat during this transition.
• To equalize an estate: Life insurance can help assure that each of your heirs will receive an equal amount of money or asset value. This is especially relevant for business owners with children or a spouse, some of whom will inherit ownership of the business while others won't.
• To fund an agreement: Business owners often have a buy-sell agreement or buyout clause in place to ensure financial stability for the company after their death. Life insurance policies can be used to fund these agreements and keep ownership of the business within the family.

There are several types of life insurance policies that business owners can consider, including term life, whole life, permanent life, and key life insurance. The cost of life insurance for business owners will depend on factors such as the type of coverage selected, the nature of the business, and the age of the owner. It is recommended that business owners consult with a financial advisor or licensed insurance agent to determine the most suitable coverage for their personal and business needs.

Frequently asked questions