Q: What is term life insurance?
A: Term life insurance provides coverage for a specific period of time—typically from one to 30 years--and it only pays out if you pass away during that “term.”
Q: What is whole life insurance?
A: This type of life insurance, on the other hand, provides coverage for the rest of your life. These policies build up a cash value up to their maturity date, and you can withdraw or borrow against that amount in various ways after a certain period of time has passed or after a certain amount of value has been accumulated.
You may also see whole life insurance referred to as “permanent” or “cash value” life insurance.
Q: There’s no mention of anything called “term” or “whole life” policies in the life insurance brochures I’ve picked up so far. Why is that?
A: Although most of the major providers of life insurance seem to use the terminology mentioned above (term, permanent, whole life, etc.) these days, some companies have created their own brand names for these products.
It’s easier to decipher the meaning of some of these brand names than it is for others, so if you’re at all confused about what you may be buying (or what you’re considering buying), ask your contact at the insurance company to explain it to you.
Q: Why should I consider buying one of these types of life insurance over the other?
A: If you’re seeking protection for a specific time or a specific need—perhaps your goal is to replace your income should you pass away before you retire, or maybe you want to make sure your child’s educational expenses will be covered should something happen to you before she graduates—term life insurance may be the product for you.
Also, some people choose to go with a term policy because they can’t afford the premiums associated with a whole life policy.
On the other hand, if you’re concerned about your loved ones being saddled with hefty estate taxes after your death, or if you’re starting a family a bit later in life (such as in your 40s or 50s), you may want to consider whole life insurance instead.
Q: How do premium payments tend to differ between term and whole life insurance policies?
A: Early on, the premiums tied to term life policies usually are lower than those attached to comparable whole life policies. That said, term life premiums are likely to increase as you get older.
For whole life premiums, initially they tend to be higher than what you could expect to pay for the same amount of term life insurance, but most remain level throughout the life of the policy.
Q: I’ve heard about something called “renewable” term life insurance. What is that?
A: You probably heard this in relation to a term life insurance plan, which often are described as being renewable.
What that means is that, up to a certain age (in most cases), you can renew your policy for another term period without having to prove you’re still in good health (or whatever level of heath you were at when you first bought the policy).
Just be aware that the premium you pay after you renew your policy probably will be higher than what you previously paid for it.
Q: Also, what is “convertible” term life insurance?
A: This type of plan lets you convert your term life policy into a whole life policy within a certain window of time and without needing to show you’re still in good health.
Some people choose this option when they can’t currently afford the premium payments that would come with a whole life insurance policy but think they’ll be able to swing them down the road.
Q: Who can take out a policy on my life? Or, can I take a policy out on someone else’s life?
A: Someone can only take out a life insurance policy on you if you they can prove they are dependent on you and your income and would suffer financially if something happened to you.
The reverse is true if you’d like to take out a life insurance policy on someone else—as in, you would have to prove you have what some refer to as an “insurable interest” in the person in question.
This does mean, by the way, that, in some instances, an employer, a business partner, a creditor, or some other institution may be able to claim they have an insurable interest in your life.
Q: Can I designate whomever I want to be a beneficiary on my life insurance policy?
A: Although life insurance policyholders generally are provided a good amount of flexibility when it comes to naming beneficiaries, as is the case with the above, people who are named as beneficiaries of a particular policy have to have an “insurable interest” in its owner.
Thankfully, insurable interest is presumed for family members like spouses, children, grandchildren, parents, and siblings. It’s not presumed for more distant relatives, though, or people who aren’t related to you at all.
Speaking of the latter, an insurer may deny your application for a life insurance policy if they decide the beneficiaries you name don’t have an insurable interest in you.
All that said, you can name a charitable organization as your beneficiary, too. (You also can “gift” or donate your policy to a charity, or do something along similar lines by adding a charitable giving rider to your policy.)
Q: Can a company cancel my term life insurance policy?
A: In certain instances, yes, they can. If you forget to pay your term policy’s premium, for example, and then you don’t correct that error during the insurance company’s grace period, it can and probably will terminate your policy. Rest assured, though, that a company can’t cancel your term life policy due to a change in your health status.
Another instance in which your term life policy could be canceled: if you buy this kind of insurance through, say, an employer-employee group, your policy may be terminated if you leave your job or if you’re fired.
Q: What is a “participating” policy?
A: This is a type of life insurance policy that pays dividends. The insurer’s profits generally are responsible for generating these dividends, which usually are given to policyholders on an annual basis.
Q: What is a “rider”?
A: For an additional fee, you can add these amendments to your policy to protect yourself—and your beneficiaries—from specific situations that typically aren’t covered by your basic policy.
A couple of examples: an accidental death benefit rider pays an extra amount if you pass away as a result of an accident, while a long-term care rider covers long-term care expenses if you’re unable to complete a certain number of “activities of daily living,” like dressing or feeding yourself.
Q: Why is term life insurance sometimes called “temporary” insurance?
A: The gist: the primary goal of life insurance is to protect people for a specific, limited period of time. As an example, parents often invest in it when their children are still young and they’re not sure how they’ll be supported if something happens to one of the parents. Over time, though, as their children get older and are less dependent on their parents’ income, the coverage can be reduced and even dropped entirely.
Will I have wasted my money if I buy term life insurance but I’m still alive after its term ends?
Well, consider this: do you feel like you’re wasting your money by paying for car insurance, even if you’ve never been involved in an accident? That’s pretty much how you can look at an investment you may make in life insurance. What you’re paying for when it comes to life insurance is peace of mind that your beneficiaries will be taken care of if you pass away.
Q: Why are some insurance agents reluctant to sell term insurance?
A: One possible reason for this is that agents tend to make more money via commissions for other forms of life insurance than they do for term life insurance.
Q: How do I find out how much cash value my policy has accumulated so far?
A: First, check to see if you have an annual statement related to your policy, as many companies send them to policyholders, and they usually include information about the cash value of a policy. If not, though, contact the company that sold you your plan and ask them to tell you--or send you--the exact cash value of your policy.
Q: When an agent tells me that my life insurance will be “fully paid up” by a certain age or year, what does that mean?
A: This one is pretty straightforward, too. Basically, this means you’ve made enough of your premium payments to cover the cost of your insurance for the rest of your life.
Or, that’s what it should mean. Sometimes it does, and it means that you no longer have to pay premiums, and sometimes it means that, should you stop paying your premiums at this point (as you’re able to do), your insurance company will dip into your policy’s cash value and use it to pay your premiums--which, over time, would lead to a slow depletion of your policy.
Your best bet here? Pull out your contract and see what it says about this kind of situation, and if that doesn’t help you out, contact your agent (or whoever sold you your policy) and ask that person to explain exactly what “paid up” means in your specific case.
Q: I’ve seen some insurance companies advertise that they don’t require a physical exam. That sounds too good to be true. Is it?
A: In a way, no, and in a way, yes. For some people, the lack of a physical exam could be a godsend, for instance. The flip side of that, though, is that the people who take advantage of such “deals” likely will pay more for their life insurance coverage than people who are required to take part in a physical.
Other life insurance ads I’ve seen claim “you can’t be turned down.” Is there a catch here?
The answer to this question is much the same as the one above. These “guaranteed issue” policies don’t require you to share health information with the company offering them. In order to compensate for the added risk that comes with such a stance, the company in question charges higher premiums for its life insurance products than counterparts that do require physicals and the like.
Q: I borrowed money from my life insurance policy. How does that affect the cash value?
A: When you take funds from your life insurance policy, its cash value is reduced by the same amount you withdrew.
There’s more to it than that, though, as your insurance provider will charge you interest on the money you borrowed from your policy’s accumulated cash value, and any unpaid interest will be added to the amount of your loan and also will be subject to compounding.
As a result, you’re likely going to want to pay back that borrowed money as soon as possible--and probably do what you can to not borrow from your cash value again in the future, if you can help it.
Q: Will my life insurance policy be protected if my company goes broke?
A: Yes, in a way. Although neither the Federal Insurance Deposit Corporation (FDIC) nor any other such federal entity insures or otherwise watches over life insurance funds (as they do traditional bank accounts), each state has what is known as an insurance guaranty association that supports insurers with guaranty funds, if needed.
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