We all vaguely know that we should have life insurance. However, to many of us it can seem complicated. We may even feel afraid that insurance companies will use legalese and small print to create a gotcha moment so that our loved ones can’t reap the benefits when they need it most. However, a good life insurance policy will be a gift of love and financial security to the people you leave behind. So, we’re here to break life insurance down as simply as we can.
There are two main types of life insurance. There is whole life insurance—which is exactly what it sounds like, life insurance up to age 100. And there’s term life insurance—this can apply for a specific period, between 5 to 20 years, or it can stop at a particular age, such as 65 or 75.
As the name suggests, this is how you apply for life insurance. It’s important that you ensure that all the information you give is up-to-date and accurate. You may also be asked to take a medical test for your application to be accepted. It may be tempting to omit that surgery you had last year because you think it will negatively affect your application. But remember, withholding critical information can backfire if you make an early claim related to the condition you withheld.
Life insurance is, essentially, a contract between you and your insurance company. You pay a first premium with your application and you’ll continue to pay monthly premiums to guarantee your coverage.
This may be the sort of language that makes you want to stop reading. Hang in there! A contestability period is just an amount of time where the contract can be disputed if there appears to be fraudulent statements made in relation to age or sex. This period is usually two years from the contract’s date of issue. Any party can use this time to contest the contract.
The main purpose of life insurance is to provide coverage in the event of your death. If you pass away within the first five years of coverage, it will be considered an early claim and an investigation will be carried out into the cause of death, including whether you had any underlying medical issues which were not disclosed in the application. Life insurance also includes a suicide clause. If a person commits suicide within two years of the policy issue date, the insurance company will pay no benefits except for premiums paid.
Many people get a life insurance policy to be used as security or collateral at the bank. For example, if you’re getting a mortgage, your life insurance coverage can be used as security in the event that you pass away before you’re able to complete payments. Once your policy is assigned to the bank, proceeds will be used first to repay any debts before going to your beneficiaries.
Most people choose to leave their policy proceeds to loved ones; however, you can choose to name any beneficiaries you want. However, you should be aware that our country has a Married Persons Act, which protects the spouse and children in the event of an individual’s passing.
If you ever find yourself desperately needing money, most policies allow you to access cash. However, please only use this option when you need money urgently. It can be tempting to turn to your life insurance if there is something you really want to do–like going on your dream vacation or buying your dream car –but that could negatively impact your policy’s future cash value.
What happens if you stop paying your premium? Does that mean your life insurance is completely gone? Well, your insurance will be considered lapsed instead of active and this means your coverage will be put on hold until you reinstate or redate the policy.
Reinstatement means that you pay all outstanding premiums and any additional fees. This way, you’ll maintain the original issue date, contestable period and any relevant clauses.
For some of us though, reinstatement may not be financially viable. In this case, we can redate the policy by paying only two premiums and any fees. This means that the issue date will be brought forward and the contestable period may also be affected. In some instances, you may also have to complete relevant medicals at your own expense.
Over time, all monthly charges and fees will be removed from premiums and your policy will create a cash value. This means that the policy can sustain itself and it will even more of an asset to you. At this point, you can either surrender the policy and receive the cash benefits or you can apply for a paid-up policy.
Many people apply for a paid-up policy on their whole life insurance at age 65. Basically, you’re telling your insurance company that you want to stop paying premiums and maintain your existing coverage. Your insurance company will then use the cash value to calculate how many years your policy can continue. We hope that you’ve come away with a better understanding of life insurance. If you want to do more research, check out our blog to read about finding the life insurance plan that’s best for you