What Is Life Insurance?
Legacy Life Insured policy provides a lump sum payment to your Nominee (or beneficiaries) upon death. It also covers your debts and other expenses that might arise during your death.
Many policies have riders that allow you to cover certain illnesses or injuries during your life. These are usually paid in addition to your premium.
A life insurance policy generally provides a lump-sum death benefit paid to the insured person’s beneficiaries upon their death. This benefit may cover funeral costs, pay off debts, or provide income to loved ones. Life insurance is important because it can help prevent financial hardship for your loved ones after your death.
There are two types of life insurance policies: term and permanent. Term policies protect for a specific period, such as 10 or 20 years. On the other hand, permanent life insurance lasts your entire lifetime and includes a cash value component.
Depending on your preferences, you can buy life insurance directly from the insurer or through an agent or broker. Captive agents sell policies from only one company, while independent brokers offer coverage from multiple providers. Comparing quotes to find the best price and terms is important when choosing a policy. The same type of life insurance can cost much less or more from one company to another.
Before a life insurance provider will issue a policy, it must assess how much risk you pose to the company. This process is called underwriting, and it usually involves a medical exam and questions about your health, lifestyle, and other factors. If the provider determines you are a high-risk applicant, it may charge higher rates or decline to offer you coverage.
After the underwriting process is complete, you can choose a policy. You may also add riders to your policy for an additional fee. Some riders allow you to purchase more coverage without a medical exam, pay your premiums if you become disabled, or use the policy’s cash value for living expenses.
If you have concerns about an insurer’s customer service, look at its complaint history. NerdWallet analyzes complaints submitted to state insurance regulators and reports to the National Association of Insurance Commissioners.
There’s nothing quite like buying life insurance to protect your loved ones, but understanding all the policy terminology can be confusing. Words like beneficiary, rider, and underwriting can seem like a foreign language after a while (or right away), especially if you’re shopping around for the best coverage available. One of the most important terms to get a handle on is premium, which has everything to do with how much you’ll pay to keep your coverage in place.
Ultimately, premiums reflect the risk the insurer assumes by offering you a policy. The underwriting process seeks answers to that question through various questions about your health, family history, and other factors. The higher the risk, the higher the premium.
The premiums you pay become your insurance company’s income to operate its business, meet expenses, and pay claims. Depending on the type of policy, the income may also serve as profit. The company invests the premiums and earns interest or other income from them. This investment income and a portion of the premiums paid are the sources of dividends that can be withdrawn in cash, used to reduce the premium, left to accumulate at interest, or used to purchase paid-up additional insurance.
You can choose to pay your premium annually, semi-annually, or monthly. Haven Life offers several policies with monthly premiums, which is ideal for people who want the security of a lifetime policy but have a tighter budget.
Your premium will depend on several factors, including the life insurance coverage you purchase and the policy’s underwriting class. The younger you are when you buy a policy, the lower the premium. Your occupation will also have an impact on your rate. Inherently dangerous professions like professional athletes, firefighters, or law enforcement officers will result in higher rates because of the increased chance of accidents or death regularly. The health of the life insurance company is another consideration when deciding on a policy. A good start is checking the company rating from independent rating agencies.
A life insurance rider is an add-on to a policy that provides coverage for specific events. Riders transform a basic life insurance policy into one that meets an individual’s and their family’s needs. While they may cost more than a basic life insurance policy, they are often worth the added expense.
The type of riders available will depend on the kind of life insurance policy purchased, and each company will offer different ones. However, many riders are fairly standard and available from most companies. Others are more specialized and might only be provided by select insurance providers.
For example, an accelerated death benefit rider provides money to the beneficiary if you are diagnosed with a terminal illness that would cause you to die within a short period, such as a heart attack or cancer. This rider can be especially helpful for people with terminal illnesses or other serious health conditions and is often more affordable than an entirely new policy.
Other riders are designed to give you more flexibility with your policy. For example, a children’s term rider allows you to purchase additional insurance for your children, and some of these riders can be converted to permanent life policies without going through the full underwriting process again. This rider is a good option for parents who want to provide their kids with a financial safety net and need more cash to pay for an entirely new policy if required.
Another useful rider is a waiver of premium rider. This rider allows you to waive your life insurance premium if you become disabled, and it can be particularly beneficial for those with a fixed-term life policy that is expiring soon or those with whole or universal life policies that may need to increase their coverage in the future.
Adding a rider to your policy will usually require you to go through the underwriting process again and will likely include a medical exam. This is because the insurer increases the chance that they will have to pay out a claim, and they must be certain that the policyholder has the same health status. As a result, it is generally best to add a rider when you originally buy the policy or shortly after.
Life insurance brings peace of mind to your survivors after your death and can also help protect your estate from taxes. However, the IRS has its rules that can complicate matters, and it’s important to know how life insurance policies are taxed before purchasing one.
Generally speaking, life insurance premiums are not subject to sales or income tax. This is because the IRS considers them personal expenses rather than investments. However, there are a few exceptions to this rule. One example involves an employer-provided life insurance plan. If an employer pays for a policy that covers the lives of its employees, it must include the value of that coverage in the employee’s taxable income.
Whole life insurance policies that accumulate cash value can generate investment income that is taxable as ordinary income. Similarly, some mutual life insurance companies offer dividends to contract owners. These are distributed based on the company’s financial performance, claim experience compared to expectations, and the cost of doing business. Unless the dividends exceed the money you’ve paid into your life insurance policy, they are not taxable.
When you need to access the cash value of your life insurance policy, you can do so through a policy loan. Generally, the loan amount will only be considered taxable if you repay it within a certain period. Take out a policy loan to ensure your ability to surrender the policy and fully choose beneficiary payment options.
A final note: you’ll want to be careful if you sell your life insurance policy for cash. The broker facilitating the sale often takes a portion of the selling price. This can push the amount of your policy’s payout over a taxable threshold, and it could result in heirs having to pay an estate tax.
If you need clarification on whether or not your life insurance payouts are taxed, talk with an expert. A financial advisor can help you understand the rules of the IRS and how they apply to your situation.