Life insurance explained

Understand your policy and how to choose the right coverage for your needs.

Life insurance is a planning tool designed to protect the financial future of your selected beneficiaries after you die or are otherwise unable to provide for them due to unexpected illness or disability. You agree to pay your policy as outlined in your contract, and your insurer agrees to pay it out to your designated beneficiaries when you die.

With adequate coverage, your loved ones who depend on you will have enough to cover outstanding debts you leave behind, maintain their current way of living or pay for your burial or funeral expenses. That way, they can focus on grieving and planning to steadily move forward without you.

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What types of life insurance can I get?

When it comes to protecting your family with a policy, you have three main types of life insurance to choose from, whether bundled or purchased separately:

• Life Insurance. Provides a lump sum benefit following the death of the policyholder.
• Critical illness insurance. Provides a lump sum payment if the insured person suffers a serious illness or injury that’s covered under their policy.
• Disability. Provides a lump sum benefit payment if the insured becomes permanently disabled and is unable to work.

Other types of insurance offer reduced levels of coverage, including accident insurance, accidental death and dismemberment insurance and funeral insurance.

How much can I be insured for?

Coverage limits vary across insurers and providers, but averages range from $50,000 to up to $1 million or more.

The majority of providers offer coverage in multiples of $50,000 up to $1 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 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:

How much life insurance should I buy?

To determine how much coverage you need, think about everything you currently do to protect your family’s finances. Put together a list or spreadsheet of your financial obligations — your mortgage, credit card and loan debts and even everyday household expenses. Also consider the costs necessary to fulfill your funeral or burial plans.

As a general rule of thumb, many experts say you should take out insurance coverage that’s equal to 10 times your annual income. Of course, this amount doesn’t consider your 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 partner and children.

A handful of providers offer standalone life insurance for your children that allows for conversion to a term life policy when they’re grown. Talk to your insurer about your options.

How do I pay for my insurance?

Options depend on your insurer and policy, but many insurers accept payment for your premiums by card, check or automatic withdrawals with payment structures that range from monthly to twice a year or annually.

How do life insurance payouts work?

Most life insurance policies pay out your benefits to designated beneficiaries after you die. They might have the option of receiving a one-time lump sum or installments over time — also called annuities.

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

1. 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.
2. Notify your insurer. Your 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 required.
3. Follow your insurer’s procedure. From here, the process depends on your insurer. Generally, your beneficiaries will receive hard-copy forms to complete against specific instructions. Your insurer may also assign an officer to your claim.
4. Submit forms and supporting documentation. Your beneficiaries submit completed claims form, your death certificate and other documents as requested. They’ll also indicate their payout preferences, either a lump sum or structured annuities.
5. Wait for assessment. Your insurer assesses your policy’s claim and supporting documentation. The process can take anywhere from a week to a month or more.
6. Learn claim decision. Your insurer announces whether your policy’s claim is accepted, declined or requires additional information.

1. Payment of claim. Your insurer pays out the claim by check as requested by the beneficiaries. Ongoing payments can be sent by check or direct deposit to a bank account.
2. Rejection of claim. If your insurer declines the claim, your beneficiaries have the option to file an immediate objection unless the rejection is due to fraudulent or falsified information in the policy or claim.

How does life insurance work after a payout?

After your insurer pays out the benefit to your beneficiaries, your policy is considered closed.

What about critical illness or disability insurance?

Successful critical illness or disability claims are typically paid out in a lump sum that you spend however you’d like. If your critical illness or disability benefit is a rider or otherwise bundled with your life insurance policy, your coverage amount is reduced by the benefit you’re paid.

How do life insurance beneficiaries work?

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 does buying life insurance work?

You have a three main ways to buy life insurance: directly from an insurer, through an insurance agent or through an insurance broker.

With so many companies embracing the convenience of the Internet, you can often get a quote online. But either way involves a series of basic steps to purchasing a life insurance policy:

1. Get a free quote. Submit sufficient details to return an accurate quote on the policy type and coverage you’re interested in
2. 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.
3. 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.
4. Submit your application. You’ll work with your chosen provider, agent or broker to submit your application and necessary paperwork to the insurer assigned to your policy.
5. 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.
6. 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.
7. 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.

Can I cancel my life insurance policy?

Yes. If you decide you no longer need the protection it offers, you can let your insurer that you’d like cancel your life insurance.

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 than when you initially signed up or have since had health issues.

If you’re recently signed up for the policy you’d like to cancel, you might be within a “cooling off” period. Many providers allow you up to 30 days to change your mind without fees or penalty, even refunding any premiums you’ve paid in the meantime.

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 cancel your policy. If the fraud isn’t caught until after your death, your insurer can cancel any claim due to your beneficiaries.