Understanding Life Insurance - Frequently Asked Questions about Life Insurance

 

Q. What is life insurance?

A. Life insurance is a contract where an insurer agrees to pay a designated beneficiary a sum of money upon the insured's death, in exchange for premium payments. There are various forms of life insurance contracts covering only certain circumstances of death, loss of limbs or impending death from illness.

 

 

Q. What are the main types of life insurance?

A. The two main types of ordinary life insurance are term life insurance, which provides coverage for a specific period, and whole life insurance, which provides lifetime coverage with a savings component. There can be variations, combinations and add on provisions such as paying for long term care or anticipated death from an illness. There is also accidental death and dismemberment insurance which may only pay for loss of life or limb under certain circumstances.

 

 

Q. How does life insurance work?

A. Policyholders pay premiums, and in return, the insurer provides financial protection for the beneficiaries upon the insured's death if certain circumstances in the contract are met.  Disputes focus on whether contract terms have been met under the facts available.

 

 

Q. What is the difference between term life and whole life insurance?

A. Term life covers a set number of years and has no cash value. In essence you are betting you will die, and the benefit will pay your beneficiaries. If you do not die during the term, your policy will not have any value and expires. It only provides you peace of mind.  Whole life covers the insured's entire life and includes a cash value feature. There is some value that may exist if proper payments are made.  Many have loan components which if not paid per the policy terms may destroy the cash value.

 

 

Q. What is a beneficiary in a life insurance policy?

A. A beneficiary is the person or entity designated to receive the policy's death benefit when the insured passes away. The contract may have default beneficiaries if no beneficiary designation is found or made.

 

 

Q. Can I name multiple beneficiaries?

A. In most instances you can name multiple beneficiaries and allocate the benefit percentage among them as desired. You can change beneficiaries as well, unless you make an irrevocable designation.

 

 

Q. What is accidental death and dismemberment (AD&D) insurance?

A. AD&D insurance provides additional benefits if the insured dies or loses a limb due to an accident. Disputes usually focus on whether a physical infirmity contributed to the loss in some way thus giving the insurer a reason not to pay the claim.

 

 

Q. How are life insurance premiums determined?

A. Premiums are based on factors like age, health, lifestyle, use of cigarettes, drugs or alcohol, coverage amount, and the type of policy. A health issue, even if not a problem, can cause an increased premium. Insurers may share information about you with other insurers. Your credit can impact your premium as well as some insurers may run a credit check on you in assessing its risk.

 

 

Q. Can life insurance be part of an employee benefits package?

A. Yes, many employers offer group life insurance as a benefit, often at little or no cost to employees.  There are tax considerations with this matter of who pays the premium and whether the payment is made with before tax payroll deductions or after tax deductions.

 

 

Q. Is life insurance taxable?

A. Generally, life insurance death benefits are not taxable if you pay for the premiums with after tax dollars. However, if the policy generates interest or if the benefit is part of a large estate, taxes may still apply.