Jeffrey Wade
Life insurance is a financial safety net for your loved ones after you pass away. It is a contract between a policyholder and an insurance company that pays out a death benefit to the beneficiaries listed on the policy. The beneficiaries can choose to receive the proceeds in a lump sum, through a series of payments, or by letting the insurance company invest it for them and pay out the interest. The policyholder must pay premiums to keep the coverage active, and the payment methods vary by insurer, with most companies accepting electronic bank transfers and checks. If the policyholder misses payments, the policy may lapse, and the insurance company is no longer obligated to pay the death benefit.
| Characteristics | Values |
|---|---|
| Payment methods | Electronic funds transfer (EFT), personal check, cashier’s check, credit card (usually only for the first payment) |
| Grace period for non-payment | 30-31 days; after this period, the policy will lapse |
| Payout options | Lump sum, installment payments, annuities, retained asset accounts |
| Payout recipients | Beneficiaries named on the policy |
| Payout timing | Usually within 60 days |
| Payout tax | Tax-free |
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What You'll Learn
Payment methods
Recurring payments using electronic bank transfer are the most common way to pay for life insurance. Checks are also allowed, but often only for annual, bi-annual, or quarterly payments.
If you are unable to pay your life insurance premiums due to financial hardship, most policies include a payment grace period of 30 to 31 days after your payment due date. If you have a cash value life insurance policy, the insurer may use the cash value in the policy to cover the premiums. In some cases, you may be able to pay premiums with your policy's cash value.
It is important to note that missed payments can lead to lapsed coverage, so it is essential to maintain a reliable payment method for your life insurance policy.
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Grace periods
A grace period is a window of time after a missed premium payment during which your policy remains active and provides coverage. This period usually lasts around 30 days but can vary between 30 and 90 days depending on the insurance company and the policy terms. Some policies may offer shorter or longer windows. During this time, you can make the missed payment without any penalties, and your beneficiaries will still receive the coverage amount minus the unpaid premium.
The grace period provides a safety net for policyholders who miss payments, helping to protect them from a policy lapse. It offers flexibility in managing life insurance payments and ensures that you remain covered, providing peace of mind amidst uncertainty. If you are still within your grace period, you can pay your premium plus any interest or late fees, and your policy coverage will resume.
If you do not pay your premium during the grace period, your policy will lapse, and you may need to reapply for life insurance. You may also be required to go through underwriting again and your premiums may increase if your health or age has changed since you first applied for coverage. Therefore, it is important to maintain timely payments to keep your coverage intact.
To avoid missing payments, most life insurance companies let you set up automatic payments from your bank account. You can also use a calendar to set reminders for your life insurance payments and make a premium payment as soon as you receive the reminder.
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Policy types
Life insurance is a type of insurance contract. When you purchase a life insurance policy, you agree to pay premiums to keep your coverage active. In return, if you pass away, the life insurance company can pay out a death benefit to the person or persons you named as beneficiaries of the policy. There are several kinds of life insurance, including term and permanent plans.
Term Life Insurance
Term life insurance offers protection for a set period of time, which can be as short as one year or as long as 30 years or more. The policyholder chooses the length of the term. If the policyholder dies during the policy's term, a lump-sum death benefit is paid to the beneficiaries, and the policy ends unless it is extended. Term life policies are usually purchased by people who want coverage for a specific period, such as while they have children who are still financially dependent on them or while they have children in college.
Permanent Life Insurance
Permanent life insurance offers lifelong protection. Some permanent life insurance policies allow policyholders to pay premiums using the policy's cash value.
Universal Life Insurance
Universal life insurance provides specific coverages, such as credit life insurance, which pays off any remaining loan balance upon the policyholder's death. Some universal life policies have a no-lapse guarantee, which keeps the policy in effect even if the premium payments are insufficient to cover the cost of insurance.
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Payout options
When you purchase a life insurance policy, you agree to pay premiums to keep your coverage in force. If you pass away, the life insurance company can pay out a death benefit to the person or persons you named as beneficiaries of the policy. There are several payout options for beneficiaries, including lump-sum payments, installment payments, annuities, and retained asset accounts.
Lump-sum payments
The most common selection, beneficiaries who select this option receive the entire death benefit in one payment. However, this can be risky if the funds are not managed properly. Because bank account balances are only covered up to $250,000 by the Federal Deposit Insurance Corporation, it may be necessary to place funds in various accounts if the insurance payout exceeds this amount.
Installment payments
Beneficiaries can choose to receive monthly installments over a set period to ensure the money doesn't run out too fast. For example, they could request $30,000 in payments each year for 20 years if the death benefit was $600,000. The life insurance company will hold the money in an interest-earning account, and you'll owe taxes on the interest earned on the balance.
Annuities
Also known as a life income payout, this grants beneficiaries guaranteed payments as long as they're alive. Insurance companies use your beneficiaries' ages when they file the claim and the amount of the death benefit to determine the payment amount. The amount of the death benefit remaining (if any) when your beneficiary passes away goes back to the insurance company unless they opt to receive an annuity for a set period. In this case, what's left will then go to designated beneficiaries.
Retained asset accounts
If your insurance company offers this option, policy proceeds can be placed in an interest-bearing account.
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Beneficiaries
When you purchase a life insurance policy, you agree to pay premiums to keep your coverage in force. If you pass away, the life insurance company can pay out a death benefit to the person or persons you named as beneficiaries of the policy. An important part of owning life insurance is designating your beneficiaries — the people or entities who will receive the benefits from your policy or accounts when you die. Choosing who will receive your assets or the payout (called a “death benefit”) from your life insurance policies is a decision that should be carefully considered.
A primary beneficiary is the person (or persons) first in line to receive the death benefit from your life insurance policy. Typically, this is your spouse, children, or other family members. In the event your primary beneficiary dies before or at the same time as you, most policies also allow you to name at least one backup beneficiary, called a “secondary” or “contingent” beneficiary. If the primary beneficiaries are all deceased, the secondary beneficiaries receive the death benefit. Most financial services companies provide a form or website for you to designate your beneficiary so they have it on file with your other account or policy information. When you name your beneficiary, be specific. Most beneficiary designations will require you to provide a person’s full legal name and their relationship to you.
There are different ways a beneficiary may receive a life insurance payout, including lump-sum payments, installment payments, annuities, and retained asset accounts. When a loved one dies, a beneficiary may have options for how to receive the death benefit. One option is a single settlement check. Another option may be a Retained Asset Account, which is like a checking account maintained with the life insurance company. When evaluating your options, it is important to consult with a tax professional about any potential tax consequences.
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Frequently asked questions
Most life insurance companies give policyholders a grace period of 30 to 31 days after the payment due date. If you don't pay within this period, your policy will lapse due to non-payment. To reinstate your coverage, you may be required to go through underwriting again and your premiums may increase.
Life insurance payments are used to keep your coverage in force. If you pass away, the life insurance company can pay out a death benefit to the person or persons you named as beneficiaries of the policy.
Depending on the insurer, a life insurance payout can typically be distributed in three ways: in the form of a lump sum, via a life insurance annuity, or through a retained asset account.
