Life Insurance: Curing The Confusion And Complexity

Life insurance is a confusing topic for many people, with 88% of people reporting that they are confused by their insurance options. It is a contract between an insurance company and a policy owner, where the insurer guarantees 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 is designed to last a certain number of years and then end, while permanent life insurance stays in force until the insured person dies, stops paying premiums, or surrenders the policy. The type of life insurance policy someone chooses depends on their individual needs and goals. Some factors to consider when deciding on a life insurance policy include age, financial situation, health, lifestyle, and whether or not there are people who depend on your income. Life insurance can be a valuable financial asset and provide peace of mind for loved ones in the event of an unexpected death.

How to choose the right type of life insurance policy

Life insurance is a policy that provides a death benefit payout to beneficiaries if you pass away while it’s active. There are two main types of life insurance: term and permanent. Term life insurance provides temporary coverage for a fixed period of time, while permanent life insurance is designed to last a lifetime and provide a death benefit for your beneficiaries no matter when you die, as long as your premiums are paid.

When choosing a life insurance policy, it's important to consider your specific needs and budget. Here are some factors to help you choose the right type of life insurance policy:

Assess Your Financial Situation

Before purchasing life insurance, evaluate your financial situation and ask yourself the following questions:

• How much of the family income do I provide?
• Will these financial obligations change over time?
• Knowing that the risk of death increases each year, in how many years do you anticipate the need for death benefits?

Understand the Different Types of Life Insurance

There are several types of life insurance policies available, including:

• Term life insurance: Provides coverage for a specific term or period, such as 10, 20, or 30 years. It is typically more affordable but may not offer a payout if you outlive the policy term.
• Whole life insurance: A type of permanent life insurance with fixed premiums and a guaranteed death benefit. It is more expensive but offers lifelong coverage and can be useful for individuals with lifelong dependents or estate planning needs.
• Universal life insurance: Offers flexible premiums, an adjustable death benefit, and an interest-earning cash value component. It provides the advantage of adjusting premium payments and benefit value over time.
• Variable life insurance: A type of permanent life insurance where the cash value is tied to investment accounts, allowing policyholders more control over their investments. However, it also carries the risk of potential loss in cash value.
• Final expense insurance: A type of permanent life insurance that offers a smaller death benefit payout to cover funeral, burial, and other end-of-life expenses.

Consider Your Budget and Coverage Needs

Determine how much you can afford to spend on premium payments and how much coverage you require. If you have a limited budget, term life insurance may be a more suitable option. On the other hand, if you have many dependents or lifelong financial obligations, permanent life insurance may be preferable.

Evaluate Additional Benefits and Riders

Some life insurance policies offer extra benefits, such as long-term care riders, which allow early access to a portion of the death benefit for long-term care costs. Consider which additional benefits are important to you and compare them across different policies.

Compare Life Insurance Companies

When choosing a life insurance company, consider the following:

• Financial strength: Ensure the company has a strong financial rating from agencies like AM Best to guarantee future payment of the death benefit.
• Customer satisfaction: Check customer reviews, complaint indexes, and rankings from organizations like J.D. Power to assess the company's customer satisfaction.
• Available policy types: Narrow down your options to companies that offer the specific type of coverage you require.
• Riders: Evaluate the cost and availability of desired riders, such as living benefit riders, across different companies.
• Application process: Decide whether you prefer a same-day issue policy without an exam or a policy with a medical exam, which may offer more favorable rates if you're in good health.

Get Quotes and Review the Fine Print

Obtain quotes from multiple life insurance providers and carefully read the details of each policy, including any exclusions or limitations. Ensure you understand how the policy works, the payouts, and the fine print before making a decision.

Consult a Financial Advisor

If you have complex financial needs, lifelong dependents, or health concerns, consider consulting a financial advisor to help you navigate the selection of a permanent life insurance policy. They can provide personalized advice based on your unique circumstances.

How to find a missing life insurance policy

When a loved one passes away, it can be challenging to locate their life insurance policy. Here are some steps you can take to find a missing life insurance policy:

Search the Deceased's Documents and Correspondence:

Go through the deceased's paper files, computer records, bank safe deposit boxes, and other storage spaces for insurance-related documents. Check their mail and email for premium notices, annual reports, or other communications from insurance companies.

Review Financial Records and Bank Statements:

Look for bank statements, checks, or automatic drafts indicating payments to life insurance companies. Review their income tax returns for interest income or expenses associated with insurance companies.

Contact Financial Advisors and Insurance Professionals:

Speak to the deceased's financial planner, accountant, attorney, or insurance agent. They may have information about existing life insurance policies or can guide you in the right direction.

Check with Employers:

Contact the deceased's current and former employers. Many companies offer group term life insurance as an employee benefit, and this may be bundled with other types of insurance such as homeowners or auto insurance.

Use Online Tools and Services:

Utilize online tools such as the National Association of Insurance Commissioners' (NAIC) Life Insurance Policy Locator Service, a free tool to assist in locating life insurance policies. Submit requests and relevant information, such as the deceased's social security number, legal name, date of birth, and date of death. You can also contact your state insurance department or use their online policy finder, which directs inquiries to participating life insurance companies within the state.

Contact Relevant Organizations and Associations:

Reach out to professional associations, labor unions, fraternal organizations, credit unions, or other groups that the deceased was a part of. These organizations often provide group term life insurance for their members.

Check with the State's Unclaimed Property Office:

After a certain period, usually around three years, unclaimed insurance benefits are turned over to the state as "unclaimed property." You can search the state's unclaimed property database or use the National Association of Unclaimed Property Administrators' search tool to locate any unclaimed benefits.

It is important to note that there may be special challenges or circumstances that complicate the search, such as insurance companies changing their names or the policy being purchased in a different state or country. However, by following these steps and utilizing the available tools and services, you can increase your chances of finding a missing life insurance policy.

How to calculate the appropriate amount of coverage

There are several methods to calculate the appropriate amount of life insurance coverage. The most common approach is to use a multiple of your current and expected future income. This can range from 10 to 25 times your annual income, depending on various factors. Another popular method is the DIME (Debt, Income, Mortgage, Education) approach, which takes into account your specific debts, future obligations, and expenses.

Human Life Value (HLV) Method:

The HLV method calculates the current value of your potential earnings, expenses, debts, and savings. It aims to determine the sum of money needed to protect your beneficiaries' future if you were to pass away. When calculating your HLV, consider your employment benefits, target retirement age, and the financial records of your spouse and children.

Income Replacement Value:

This method focuses on the breadwinner's missed income in the event of an untimely death. It is calculated by multiplying your current annual salary by the number of years left until retirement. For example, if your annual income is $40,000 and you plan to retire in 30 years, you would need life insurance coverage of $1.2 million.

Underwriters Thumb Rule:

According to this rule, the minimum amount of insurance coverage should be a multiple of your annual income, based on your age. For example, individuals between 20-30 years old should have coverage worth 25 times their yearly salary, while those aged 40-50 can opt for coverage worth 10-15 times their annual income.

Premium as a Percentage of Income:

This method suggests that the life insurance premium should equal a certain percentage of the breadwinner's yearly salary, plus an additional percentage for each dependent. For instance, if the gross annual income is $50,000 for a client with a spouse and a child, the recommended premium would be $50,000 (6% of the income) plus $10,000 (1% for each dependent).

It's important to note that these methods provide estimates, and the final insurance coverage amount should be determined based on your specific circumstances and financial goals. Additionally, it's recommended to work with a licensed agent or financial planner to ensure your coverage level fits your needs.

How to use life insurance as a financial asset

Life insurance is typically purchased for its death benefit, but some policies can also be used as a financial asset during your life. Permanent life insurance policies, such as whole life insurance and universal life insurance, can be used as an asset because they allow the owner to build cash value over time. This cash value can be accessed in a variety of ways, including loans, withdrawals, or surrendering the policy.

• Take a loan from the policy: You can borrow against the cash value of your permanent life insurance policy. However, read the fine print as the interest rate can be fixed or variable, and it is set by the insurer. Additionally, if the loan isn't paid off by the time of your death, the outstanding balance will be subtracted from what your beneficiaries receive.
• Use the policy as collateral for a loan: You can use your life insurance policy as collateral for a loan, which may make it easier to get approved or get a better interest rate. However, if you die before paying it back, the amount you still owe will be deducted from your beneficiaries' benefit.
• Withdraw funds: You can make withdrawals from your policy's cash value, which is yours to keep. However, if you withdraw a large enough amount to dip into your investment gains, you may have to pay taxes. Additionally, the amount you withdraw will reduce the value of the policy and the amount your beneficiaries will receive.
• Option for "accelerated" benefits: Some policies allow you to receive benefits during your lifetime if you experience an unexpected or extreme medical emergency, such as cancer, a heart attack, or kidney failure. You can usually withdraw a significant portion of your policy's value in these cases.
• Surrender the policy (cash out): If you no longer need your life insurance policy, you can cancel your coverage and receive the accumulated cash value, minus any fees and outstanding loan balances. However, surrendering your policy will result in the loss of life insurance coverage, and your beneficiaries will be left without financial protection.

It is important to note that not all life insurance policies are created equal. Term insurance policies, for example, are generally less expensive and valid for a set number of years, but they do not offer the ability to build cash value. Therefore, when shopping for a policy, consider choosing one with a cash value if you want to use it as a financial asset.

How to file a claim with your insurance company

Filing a claim with your insurance company is a relatively straightforward process, though it can vary slightly between providers. Here is a step-by-step guide on how to file a claim with your insurance company:

Identify the Insurance Company:

Firstly, you need to determine which insurance company holds the policy. This information should be detailed in the policy documents. If you cannot access these, the policyholder's financial advisor or estate planning attorney may be able to help.

Obtain a Certified Copy of the Death Certificate:

The next step is to obtain a certified copy of the policyholder's death certificate. This is required by life insurance companies to verify the policyholder's passing. You can obtain multiple certified copies from your local vital records office or funeral home. Having multiple copies is useful as you may need to provide them to other institutions, such as banks or government bodies.

Contact the Insurance Company:

Reach out to the insurance company to initiate the claims process. They will direct you to their claim form, which can often be filled out online or in person. Be prepared to provide the policy number (found on the policy documents) and any other relevant information.

Submit the Completed Claim Form and Supporting Documents:

Fill out the claim form as accurately and honestly as possible, and submit it to the insurer along with the death certificate and any other required documents. Triple-check your answers before submitting to avoid any delays in the process.

Choose Your Payout Method:

Insurance companies typically offer several payout methods for the death benefit, including a lump sum payment, life income annuity, specific income annuity, or a retained asset account. Each method has its own tax implications, so it is advisable to consult a tax professional before making a decision.

Receive the Payout:

Once the insurer approves your claim, they will disburse the death benefit according to your chosen payout method. Stay in communication with the insurer throughout this process to ensure a smooth transaction and to follow up if there are any delays.

It is important to note that the claims process can vary depending on the insurance company and your specific circumstances. Additionally, there may be instances where your claim is denied or delayed due to various factors, such as missing information or the cause of death. In such cases, you can follow up with the insurer to understand the reason for the denial or delay and take appropriate steps to resolve the issue.

Frequently asked questions