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How does life insurance work?
Understand life insurance policies and how to choose the right coverage.
Life insurance is designed to protect your loved ones after you die or are no longer able to work. With the right coverage, your family will have enough to cover outstanding debts and maintain their current way of living.
Life Insurance Through PolicyAdvisor
What's in this guide?
- What is life insurance?
- How does life insurance work?
- What types of life insurance can I get?
- Compare life insurance companies
- How much does life insurance cost?
- How much life insurance can I get?
- How do I buy life insurance?
- How to pay life insurance premiums
- Can I cancel my life insurance policy?
- Choosing life insurance beneficiaries
- How do life insurance payouts work?
- How to file a life insurance claim
- Bottom line
- Frequently asked questions about life insurance policies
What is life insurance?
Life insurance is a protective policy that helps your family recover financially after loss. You pay monthly premiums to an insurer, with rates based on your risk of dying according to actuarial tables. In exchange, if you die during the period your policy is active, your family receives a payout designed to replace your income.
How does life insurance work?
If you’re interested in purchasing life insurance, here are the basics:
- Sign up for a policy. After narrowing down your needs, comparing insurers and applying for a policy, you sign a contract with an insurer specifying the terms and conditions of your coverage and the premiums you’ll pay.
- Pay your premiums. You pay your policy’s premiums on time monthly, quarterly, semiannually or annually as specified in your contract.
- File a claim for payout. After your death, your designated beneficiaries receive your policy’s payout as a lump sum or in payments as agreed on in your contract.
What types of life insurance can I get?
When it comes to protecting your family with a policy, you have two main types of life insurance to choose from, term life and permanent life. The main difference between the two is how long you want to be covered for.
What is term life insurance?
Term life insurance is a popular choice for most people. With term life insurance, you choose the term or period when you would need to cover your family’s expenses. For example, if you’re the sole breadwinner of your family and have a 30-year mortgage, a 30-year term life insurance policy would ensure your family could afford to stay in the home until it’s paid off.
What is permanent life insurance?
Permanent life insurance offers lifelong coverage. While you’ll pay much higher premiums, you’re covered for life instead of choosing a coverage term. Your premiums are usually also invested, which means your policy has a cash value you can dip into once you’ve accumulated enough.
Compare life insurance companies
How much does life insurance cost?
Costs vary greatly based on the level of risk a provider or insurer considers you to be. Ultimately, this risk is reflected in the premium you pay, which considers such factors as:
- Your age.
- How much you smoke or drink.
- Your pre-existing and current health.
- Your occupation.
- Your gender.
- How much your policy is worth.
How much life insurance can I get?
Coverage limits vary across insurers and providers, but averages usually range from $50,000 to up to $1 million or more. The majority of providers offer coverage in multiples of $50,000 up to $2 million. When you’re young, the difference between adding an extra $50,000 or $100,000 in coverage to your policy can be low.
How much life insurance should I buy?
As a general rule of thumb, many experts say you should take out insurance coverage that’s equal to 5 – 10 times your annual income.
To start determining how much coverage you need:
- Put together a list of your financial obligations — your mortgage, credit card and loan debts and everyday household expenses.
- Consider how long your family would need to pay for those items. For example, if you have five years left on your mortgage, total up five more years of mortgage payments. Or if your spouse is ten years away from retirement, add up the cost to replace your income until then.
- Add in the costs necessary to fulfill your funeral or burial plans, plus any extra considerations for things like lost income due to funeral arrangements or bereavement.
- Subtract any savings, investments and other assets available to your family.
Can I take out life insurance for my wife or child?
Yes. Most insurers allow you to take out a joint policy to cover your spouse, and many offer coverage options that allow you to extend your policy’s coverage to cover your entire family.
A handful of providers offer standalone life insurance for your children that may even allow for conversion to a permanent life policy when they’re grown. Talk to your insurer about your options.
How do I buy life insurance?
You have three main ways to buy life insurance: directly from an insurer online, through an insurance agent or through an insurance broker. The basic steps to purchasing a life insurance policy include:
- Get a free quote. Submit sufficient details to return an accurate quote on the policy type and coverage you’re interested in.
- Speak with a representative. If you like the quote, you’ll speak with the provider, an agent or a broker to discuss your options. You’re not obligated to pay any fees or even sign up for a policy at this point.
- Compare your policy options. You’re typically provided a variety of policy, coverage and premium options that meet your specified needs and circumstances. By comparing prices, benefits, exclusions and riders, you can narrow down an affordable policy with adequate coverage.
- Submit your application. You’ll work with your chosen provider, agent or broker to submit your application and necessary paperwork to your chosen insurer.
- Wait for a decision on your application. After considering the full scope of your application — including your health records — the insurer will decide whether to provide you with coverage and an appropriate premium. You may be asked to submit further information, including medical records and tests.
- Sign your policy contracts. After your application is accepted, you’ll sign a contract of agreement with the insurer, who then puts your coverage in place.
- Begin paying your premiums. You’ll pay your premiums as specified in your contract. As long as you continue making payments on your policy, it remains active.
How to pay life insurance premiums
Many insurers will allow you to pay your premiums through a variety of payment options. These can include paying through a personal or cashier’s check, bank transfer, pre-authorized debit, or even using a credit card. It is unlikely an insurance company will accept cash payments.
Can I cancel my life insurance policy?
Yes. If you decide you no longer need the protection it offers, you can let your insurer know that you’d like to cancel your life insurance.
You do have the right to cancel your policy and receive a full refund of the premiums payed until a specified amount of time has passed – usually within 10 days. This period is called the “free-look” or “cooling-off” period. Check with the insurer and review your policy to see how long your free-look period is.
If you try to cancel your policy after the free-look period has passed, note that your insurer is not obligated to refund any of the premiums you paid. And if you change your mind after canceling your policy, you’ll likely face higher premiums and other restrictions if you’re older or have had health issues since you initially signed up.
Can my life insurance company cancel my policy?
Yes, but generally only in two specific circumstances:
- You stop paying your premiums. You’re typically extended a grace period that keeps your benefits active even if you’ve occasionally paid a premium late. After the grace period, your insurer reserves the right to cancel your policy.
- Your application is found to be fraudulent. If your insurer finds that you purposefully lied on your application or provided fraudulent supporting documents, your insurer has just cause to cancel your policy. If the fraud isn’t caught until after your death, your insurer can cancel any claim due to your beneficiaries.
Choosing life insurance beneficiaries
Part of the process of signing up for a life insurance policy is designating the people who will receive your policy’s benefits after you die. Most policyholders designate their spouse or children, but you can assign your benefits to anybody who depends on you financially — even friends or business partners.
If you don’t assign at least one beneficiary or you outlive your beneficiaries and fail to update your policy, your funds are distributed to your estate as outlined in your will.
What if I want to change my life insurance beneficiaries?
Updating your policy is simple: Just call your insurance company and ask how you can remove or add a beneficiary. If you have an estate planner, you’ll want to let them know of the change as well.
How do life insurance payouts work?
Most life insurance policies pay out your benefits to designated beneficiaries after you die. They’ll receive a one-time lump sum equal to the amount of the death benefit.
To start the death claims process, a beneficiary or representative of your estate contacts your insurer, which then guides them through the paperwork and documents required to settle your claim.
How to file a life insurance claim
It’s the responsibility of the beneficiary to file a claim when the policyholder dies. These are the steps:
- Prepare to file. To file a claim, your insurer will typically require a copy of the death certificate, related medical reports and any original policy documents available.
- Notify your insurer. The beneficiary or rep contacts the insurance company by phone or online to start a claim. At this point, only policy information and the date and cause of death are usually required.
- Follow your insurer’s procedure. From here, the process depends on your insurer. Generally, your beneficiaries will receive hard-copy forms to complete with specific instructions. Your insurer may also assign an officer to your claim.
- Submit forms and supporting documentation. Your beneficiaries submit completed claims form, your death certificate and other documents as requested.
- Wait for assessment. Your insurer assesses your policy’s claim and supporting documentation. This process can vary depending on the insurance company and if there is any additional information required to process the claim. Ideally, the benefit could be payed out within a week to 10 days.
- Learn claim decision. Your insurer announces whether your policy’s claim is accepted, declined or requires additional information. If it’s accepted, your insurer pays out the claim to the beneficiaries.
- Policy is closed out. After your insurer pays out the benefit to your beneficiaries, your policy is considered closed. The payouts might be subject to taxes depending on the details of your policy, however, the guaranteed death benefit is non-taxable.
What if my claim is rejected?
If your insurer declines the claim, your beneficiaries usually have the option to file an immediate objection, unless the rejection is due to fraudulent or falsified information in the policy or claim.
What about critical illness or disability insurance?
Successful critical illness or disability claims are typically paid out in a lump sum or in installments equal to a portion of your paycheque. You may be able to add on critical illness or disability to your life insurance policy as a rider. That will allow you to receive a payout if you are injured or diagnosed with a serious medical condition.
The right life insurance policy can help keep you and your family financially secure even if there’s a sudden loss of income. To find the right policy for you, compare life insurers and learn more about life insurance.
Frequently asked questions about life insurance policies
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