Most life insurance policies are purchased with the intention of providing financial security for an insured’s beneficiaries when they die, and the goal of most policies is to allow loved ones to continue living as if the insured had not died. These policies also include a number of rights and options, some of which can assist you in overcoming your own financial difficulties.
Term life insurance policies provide the most coverage for the least amount of money. And they are no longer limited to those just starting out in life. Due to improvements in the insurance industry’s competitiveness, term life now offers initial rate guarantees of 10, 15, 20, 25, 30 years, and even lifetime for those who want permanent insurance without an expensive cash value fund.
Universal life and whole life are popular choices for those who need lifetime coverage. Whole life insurance has a fixed premium and lifetime coverage amount. If you want to build a cash value nest egg, you can skip premiums or even pay more with universal life insurance.
If you purchase a term life policy and later decide you want lifetime coverage, most term life policies can be converted to a permanent plan of insurance without having to undergo any new medical exams during the first ten years of the policy or upon reaching age 65. This conversion feature can be extremely useful if your health suddenly deteriorates and you become uninsurable.
Did You Know?
According to Al Lurty, senior vice president and head of Retail life business development at ING U.S. Insurance, there is no need for an additional medical exam when converting a term policy to a permanent form of insurance.
According to Phil Young, Life Insurance Product analyst for Life Quotes, Inc., the conversion privilege on a term life policy typically lasts from a year after the policy is purchased until the end of the premium, or until the maximum age set by the insurer, which is usually 65 or 70 years old.
The new policy’s coverage is limited to the previous policy’s coverage amount.
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Need Cash?
If you’re short on cash, you can borrow against your permanent policy, sell it, cash it in, or use it as collateral on a loan.
“Life insurance policies are made for the economic problems like we have today,” said Michael Weintraub, chairman of Life and Health Insurance Foundation for Education (LIFE). “People today are saving their homes by being able to borrow against their life insurance to pay their mortgage.”
According to insurance experts, people borrow against the cash value of their policies to pay for a child’s education, a down payment on a house or car, and/or medical expenses. If you die with an outstanding loan, the death benefit will be reduced by the loan amount.
“If you have a policy for $250,000 or more and you’re in poor health you can potentially sell your policy for more than you would get if you cashed it in. It’s not something we encourage, but some people no longer need life insurance coverage,” says LIFE secretary Stephen Rothschild.
Banks may require a life insurance policy as collateral for a small business loan, according to Lurty. The bank will be assured of receiving its money if the sole owner of the business dies before the loan is paid off. Weintraub adds that once the loan is paid off, the beneficiary can be changed from the bank to a loved one.
Other Options to Consider
- Those who own a participating whole life insurance policy have the right to a portion of the insurer’s profits in the form of dividends, which are paid at the insurer’s discretion.
- Some permanent life insurance policies allow the policyholder to switch from one permanent plan to another issued by the same company without having to take a medical exam.
- If you forget to make payments and your policy lapses, you may be able to reinstate it if you’re in good health and make back payments within six months to one year, or within the time period specified by your insurer.
- With extended-term life insurance, you won’t have to make premium payments indefinitely.
- In some flexible-premium policies, premiums can be reduced or skipped as long as the policy has sufficient cash values. This will, however, result in lower cash values and a shorter coverage period.
Also, keep in mind…
Life insurance protects your income while you are still working. When you retire, you can use it to cover the assets you’ve accumulated over your lifetime. During your working life, life insurance protects your family’s livelihood by making regular payments to them to replace your lost income in the event you die.
It is possible that you have assets while retired (i.e., house). If you die, life insurance can be used to cover estate taxes, preventing the bill from being passed down to your loved ones.
If the IRS comes knocking on your or your loved ones’ door due to unpaid taxes, they may be able to seize other assets, but they cannot seize your life insurance policy. The same is true for any creditors, regardless of how much debt you have when you die.
No one can legally take your life insurance policy benefits from your beneficiaries. However, if you did not name a beneficiary on the policy or the beneficiary died before you died, the proceeds would be transferred to your estate. If this occurs, creditors may file a claim against your estate in probate court in order to use the life insurance proceeds to pay off your debt.
If you have any questions about your life insurance policy, please contact us and speak with an insurance adviser.