Frequently Asked Questions
Could someone secretly take out a life insurance policy on me?
Can I do anything to lower the cost of life insurance?
Can I donate my life insurance policy to my favorite charity?
Can I name someone other than a relative as the beneficiary of my life insurance policy?
Do I need to buy a separate life insurance policy for my child?
How are life insurance cash values and death proceeds generally taxed?
Should I replace my current life insurance policy with a new one?
What happens to my term life insurance policy at the end of the term?
Why is my health history important if I am healthy now?
What is a contingent beneficiary (secondary beneficiary)?
Could someone secretly take out a life insurance policy on me?
Safeguards built into the life insurance application process would make it extremely difficult for someone to secretly take out a policy on your life.
When someone applies for a life insurance policy, there are several requirements that help prevent secret policies. They include:
- Insurable interest. The person taking out the life insurance policy must have an "insurable interest" in you. Basically, that means he or she must be at risk of a financial loss if you die. Examples of people with an insurable interest in your life include your spouse, blood-related family member or a business partner.
- Medical exam or release of medical information. Most life insurance policies require medical information about the person whose life is being insured. Unless you sign a release or undergo a medical exam, your medical information cannot be accessed without your knowledge.
- Your signature. Life insurance policies usually require consent via your signature. Most insurance companies also follow up with paperwork, an e-mail or a phone call.
Technically, it might be possible for someone to successfully commit fraud and take out a secret policy on your life. But this is extremely unlikely and would involve actions such as someone getting a hold of all insurance company correspondence and forging your signature.
Some businesses also offer group life insurance where it's possible to take out a policy on your spouse. But such policies typically do not have substantial payouts and are unlikely to inspire a nefarious scheme.
Can I do anything to lower the cost of life insurance?
The price you pay for life insurance depends on your age, your health, and your lifestyle. So if you are older, you have health problems, and you are a smoker, you will always pay more for life insurance than someone who is younger, healthier, and a nonsmoker. That being said, there are ways to lower your life insurance premiums, even if you fall into a higher-risk category. Following are some simple suggestions for life insurance and term life insurance.
1. Round upOften, you'll actually pay less for a little more life insurance as you approach multiples of $250,000 in coverage. For example, $240,000 of life insurance coverage might cost $275 per year, while $250,000 in coverage might cost only $260 per year. Find out the rate per $1,000 of coverage, which often drops once you pass a certain level of coverage.This figure will help you determine how to get the most life insurance for the least money.
2. Find a "friendly" life insurance company Some life insurance companies do offer competitive rates for conditions such as diabetes, heart disease, and cancer. These companies employ underwriters who are trained in analyzing people on a case-by-case basis, rather than lumping everyone with a particular condition into one group.
3. Consider quitting Everyone knows that you'll save money on your insurance premiums if you quit smoking, start exercising, and lose weight. But you might be surprised to find out just how much you can save. Many insurance companies charge smokers doublethe nonsmoker rate for insurance. (Don't even think about lying, though. If you end up dying of a smoking-related illness, your insurance company can opt not to pay your death benefit.) Similar discounts can apply if you lose enough weight to fall into a preferred category.
4. Forget the ridersWhile riders may add value to your life insurance policy in certain situations, many are simply an unnecessary expense. Paying extra money to cover an event that's almost guaranteed not to happen just doesn't make sense when you're trying to cut costs. Additionally, many riders simply provide duplicate coverage once your overall insurance needs are met.
5. Find out about hidden fees You may not realize it, but your life insurance could end up costing you more if you choose to make "convenient monthly payments" rather than paying the entire premium up front. Before you choose a payment plan, compare the single payment price to the total cost of the monthly payments. Do the math, and decide whether the convenience is worthwhile.
6. Shop around When it comes to insurance, it pays to shop around because premiums can vary widely. And thanks to the Internet, it's now easier than ever. Save time by going to a website where you can compare multiple insurance companies at once.
Can I donate my life insurance policy to my favorite charity?
Yes, you can donate your life insurance policy to charity. In fact, insurance can be a good way to leverage affordable premium payments into a substantial future donation. There are several different ways you can give your life insurance policy (or the death benefits from it), to charity. Each method has different advantages and disadvantages to both you and the charity.One way to help your favorite charity is to simply name the charity as a beneficiary on your policy. When you die, the charity will receive the death benefits.
A disadvantage of this approach is that you will not get to take the charitable income tax deduction for the premium payments that you make. With this method, there are no gift tax implications. The proceeds of the policy will be includable in your taxable estate, but you will receive an offsetting estate tax charitable deduction.Another way to help your favorite charity is to donate an existing life insurance policy to the charity.
You will be able to claim an income tax deduction for either the tax basis or the fair market value of the policy (whichever is less) for the year of the donation. You can then make deductible cash gifts to the charity, which the charity can use to make the premium payments. The proceeds of the policy may be includable in your taxable estate, but you will receive an offsetting estate tax charitable deduction.A third way to donate a life insurance policy to charity is to donate money to the charity and have the charity buy the life insurance policy. You make income and gift-tax-deductible donations to the charity, and the charity makes the premium payments.
The proceeds of the policy will not be included in your estate for estate tax purposes.Note: Some states' laws do not consider a charity to have an insurable interest in a donor and will not allow a charity to purchase a life insurance policy on a donor.There are a number of different strategies from which to choose, as well as a number of tax rules and differing state laws that may influence your decision. If you are considering a substantial gift of life insurance to a charity, ask your attorney or tax advisor to help you decide on the best approach.
Can I name someone other than a relative as the beneficiary of my life insurance policy?
You can name any legally competent person as a beneficiary of your life insurance policy, including your spouse, children, other relative or friend. You can also name an entity as a beneficiary, such as a charity, church or trust.
It's a good idea to designate a contingent beneficiary as well as a primary beneficiary. If your primary beneficiary cannot be located or dies before you do, the life insurance proceeds go to your contingent beneficiary. Be very specific when naming a beneficiary; include full name and Social Security number to avoid any confusion.
Other important factors
Here are a few additional notes about designating a beneficiary:
- Trusts. A trust is a legal document that transfers money from you to another person or institution who will manage the proceeds for the benefit of a third person. Make sure to have the appropriate legal paperwork in place when you designate the trust as beneficiary.
- Power of attorney. If you give someone power of attorney, indicate whether or not that person can make changes to your designated beneficiary.
- Community property states. Remember that in community property states, your spouse is entitled to half of everything. Such states include Arizona, California, Idaho, Nevada, New Mexico, Texas, Washington and Wisconsin.
It's a good idea to review your beneficiary designation regularly to make sure it still reflects your wishes. Major life events such as births, deaths or marriages are good times to confirm you have the appropriate person or entity designated as the beneficiary of your life insurance policy .
Do I need to buy a separate life insurance policy for my child?
If you want life insurance coverage for your child, you may be able to add a child death benefit rider (usually limited to $5,000 or $10,000) to an existing policy on your own life. Otherwise, you'll probably need to buy a separate policy on your child's life.But is it a good idea to insure your child's life?
In some cases, yes. Term policies for children typically carry small premiums. In addition, your employer's group policy may include inexpensive term coverage for your dependents. Either one of these options can provide you with some peace of mind at a relatively low cost.
In most cases, however, it's better to wait until your child reaches adulthood to start thinking about life insurance.
Why? Because the main purpose of life insurance is to replace lost income when a person dies. Unless your child is a movie star or a model, he or she is likely earning little or no income. His or her death would certainly be a tragedy, but it would probably not cause your family any financial hardship. You would have to pay for your child's funeral expenses, but buying a life insurance policy just to cover those costs may not make sense. Instead, consider saving or investing the money you would spend on insurance premiums. That way, the money will be available in case a tragedy strikes, but it can be used for other purposes as well. Perhaps you have other reasons for wanting to buy a separate insurance policy on your child's life. You might be worried that you won't be able to insure your child down the road if he or she develops a medical condition (especially if certain diseases run in your family).
However, few medical conditions make a person uninsurable. Only about four percent of all life insurance applications are rejected. And don't think that life insurance will be too expensive once your child grows up. Insurance policies for healthy young adults don't cost much more than policies for children.
How are life insurance cash values and death proceeds generally taxed?
Under Current Tax Law:
- The cash value growth in a life insurance policy generally enjoys deferral of taxation while the policy remains in force.
- Policy loans, except those made from Modified Endowment Contracts, are generally NOT treated as taxable distributions.
- If the entire life insurance policy is surrendered for its cash value, the difference between the gross cash value and the taxpayer's basis in the policy, is generally subject to income tax.
- Partial surrenders from life insurance policies are taxable to the extent funds received exceed the taxpayer's basis in the policy.
- Funds coming out of a life insurance policy (other than as death proceeds) classified as a Modified Endowment Contract (MEC), are taxed differently than those not classified as a MEC. Under a MEC, distributions, including policy loans, are subject to income tax to the extent the gross cash value of the policy exceeds the taxpayer's basis in the contract. In addition, a 10% penalty tax may apply if the distribution was made prior to owner's age 59½.
- In general, life insurance death proceeds are not subject to income taxation. This income tax exclusion makes life insurance a very attractive financial planning tool.
Should I replace my current life insurance policy with a new one?
Think twice before discontinuing or changing your current life insurance policy in order to buy a new one. It is rarely in your best interest; following are a few reasons why...
- It Could Cost You During the early years of policy ownership, much of what you paid covered the insurance company's expense of selling and issuing the policy. This expense will be incurred all over again when you buy a new policy.
If a cash value policy is surrendered and the proceeds placed into a new policy, the cash value may be relatively small for several years due to the imposition of surrender charges. In fact, the new policy's cash value may never be as large as that of the existing policy.
If you are older and your health has changed, premiums and/or insurance charges for the new policy will often be higher. Beware of anyone offering free insurance or more insurance at a lower cost. It is likely the premium due on the new policy is being paid by drawing cash from an existing policy.
- You Could Lose Guarantees Life insurance is purchased to assure the accumulation of a desired amount of liquid capital at death. If you are considering the purchase of a variable life (VL) or variable universal life (VUL) policy, be aware that you bear all of the investment risk and more of the risk of adverse trends in mortality and expenses than with a traditional whole life policy. The cash value, and perhaps the death benefit, under VL and VUL policies would not be guaranteed.
- You Could Lose Benefits Certain provisions such as the suicide and contestable clauses are required by state law to safeguard the policy owner and beneficiary. Usually after one or two years from the date of the policy, the insurance company cannot challenge the validity of the policy or deny benefits if death is a result of suicide. These clauses, which may have already been satisfied in your existing policy, will often start over on a new policy. The result - the insurance company may have the right to cancel the contract or refuse to pay a claim for certain events during the initial period of the policy.
- You Could Owe Income Taxes According to Section 72(e) of the Internal Revenue Code, upon the complete surrender of a policy, if the gross cash value of the present policy exceeds the new premiums paid, the difference is taxable to the policyowner. You should understand that a 1035 exchange does not eliminate taxable income if there is a taxable gain and there is an outstanding policy loan at the time of surrender.
- Get All The Facts Before making the decision to replace or exchange an existing policy, make sure you get all the facts. Read over your existing policy, and ask your representative or a member of your insurer's policyowner service department for a detailed cost breakdown of premiums, cash surrender values and death benefits. Request the same information for the new policy you are considering. Then, compare the two thoroughly.
Make sure you hear from both your existing company and your proposed company before you make your decision.
If your requirements have changed since you bought your policy, you may be able to change your present policy, or even add to it, to get the coverage and benefits you now need.
If you decide to replace the policy you now own with other insurance, be sure:- To insist that the agent making the proposal put it in writing.
- That you qualify for the insurance applied for.
- That you do not take action to terminate your existing policy until your new policy has been issued and you have examined it and found it acceptable.
What happens to my term life insurance policy at the end of the term?
When your life insurance policy's term of coverage is ended, you have several options. The first and simplest option is simply to let the matter drop: you pay no more premiums, and you have no more coverage.
Alternatively, the option to continue maintain your old term life insurance policy (yes, even after its term of coverage) is commonly available these days. If this option is available, your policy will probably stipulate an 11th year premium (or premium for whatever year follows your term). The new premium will be higher than you were paying before. You may be able to maintain a term life insurance policy of this sort even up to age 90, but your rate will continue to increase, and the rate of increase may not be guaranteed.
Another option, if offered by your insurer, is to renew your coverage. What this means is that you can buy a new term life insurance policy without having to prove your insurability anew. Your new policy's term and face amount will be the same as before, and your rate class will be the same as before as well, so if you were a "preferred plus" for the original policy, you will be a "preferred plus" for the new policy. This does not signify that your rates will be the same as before, however. When you renew a life insurance policy, even though your rate class is the same, your rates will be higher than before because you are older now.
Another option is to convert your expired term insurance policy into a permanent life insurance policy . If you choose to convert, you won't get to pick just any type of permanent policy; you can only choose from the options which your insurer is offering at the time your term policy expires. The conversion options offered at the time you buy your original term life policy may not be the same ones offered later, when your term of coverage is expired. It is industry standard for life insurance companies to offer one or more conversion options.
A final option is to start shopping anew. Look for a new life insurance policy, of any shape or size, and buy the one that best meets your needs.
Why is my health history important if I am healthy now?
Your personal health history serve as indicators of health risks, which can manifest as serious health problems in the future. That is not to say that all former ailments can affect your insurability, but some diseases, particularly varieties of cancer with a high incidence of recurrence, can significantly impair your insurability.
Simliarly, your family health history can provide indications of certain health risks. Some diseases, such as cancer, heart disease, and diabetes, trend through families, so a significant incidence of any one of them among your biological relations implies a risk for yourself.
Both these histories are significant factors in determining your rate class, but each life insurance company is at liberty to weigh them after their own manner. Comparing life insurance quotes from a variety of insurers may lead you to a company that does not penalize you or only penalizes you slightly for your particular risk factors.
If your personal or family history impairs your insurability to the point that you think you do not qualify for standard rates , you would do well to work closely with one of our expert life insurance advisors. Our team has succeeded in getting standard rates even for applicants who had previously been declined coverage!
What is a contingent beneficiary (secondary beneficiary)?
When you take out a life insurance policy , you designate one or more primary beneficiaries—typically just called "beneficiaries"—to receive the policy's death benefit. But in the event that a primary beneficiary dies before he or she can receive the death benefit, the death benefit can instead be given to a contingent—or secondary—beneficiary.
Designating a contingent beneficiary is of especial concern if there is a chance of both the insured and a primary beneficiary perishing at the same time. For instance, if a spouse is one's primary beneficiary, naming a contingent beneficiary would be good planning against the hazard of an accident claiming both their lives.
It is common to designate a spouse as primary beneficiary, then designate one's offspring as secondary beneficiaries.
Just as you can designate multiple primary beneficiaries, you can designate one or more contingent beneficiaries for each primary beneficiary. In fact, you can designate contingent beneficiaries for your secondary beneficiaries. These beneficiaries are called tertiary beneficiaries.
An example
To put all of these concepts into an example, suppose a man, John, makes his wife, Jane, the primary beneficiary of his life insurance policy. His two children, Betty and Veronica, are secondary beneficiaries, behind his wife. His grandchildren are each tertiary beneficiaries, contingent upon their parents' deaths. Let's throw in another variable and say that Betty is disabled, so John has arranged that she should receive 80% of the death benefit in the event that the primary beneficiary dies.
Now let's suppose that John, Jane, and Betty suffer heart attacks simultaneously and die. Who gets the money? Because the primary beneficiary is dead, the benefit passes to the secondary beneficiaries. Veronica gets 20% of it. But because Betty is dead, her 80% passes on to her children, who are the tertiary beneficiaries.
An alternative
If one's contingent beneficiaries are simply following a line of heirs, one can save him/herself the trouble of actually naming contingent beneficiaries by stipulating that his/her death benefit should pass to primary beneficiaries per stirpes. This phrase means that if a beneficiary cannot receive his/her benefit, it should be passed on to his/her heirs (in perpetuity until it arrives at someone capable of receiving it).
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