Choosing a life insurance policy is no easy task. Not only do you need to learn every detail about the different options for life insurance, but you should also understand how you can use life insurance throughout your life.
With this guide to the most frequently asked questions about using life insurance, you can begin your search for life insurance as a knowledgeable consumer.
How Long Do You Have to Have a Life Insurance Policy Before You Can Use it?
The waiting period for a life insurance policy typically depends on the provider. While most policies require that you wait up to 5 years before the death benefit is available, others would have no waiting period to access the death benefit if you passed away unexpectedly. However, the average waiting period for a life insurance policy is just two years.
Life insurance companies have these waiting periods to reduce the risk of insurance fraud and provide an extra layer of protection for themselves. For example, if you were to take out a life insurance policy and then pass away two weeks later, the life insurance would have to pay your death benefit despite the fact that you had not paid any premiums.
The waiting period is also put in place so that policy holders will take out a life insurance policy at a younger age. Besides the policy being less expense, this is yet another reason why it’s beneficial to take out a life insurance policy at a younger age.
Can You Use Life Insurance Money for Anything?
While many people will use the death payout for life insurance to cover bills, mortgage, debt owed, living expenses, and college funds, the beneficiaries are not limited to what they can purchase with the money received from a life insurance policy.
In fact, some policyholders will take out a life insurance policy for a charitable cause or have the money go to their heirs as an inheritance. Just make sure that you name your heirs as your beneficiaries because heirs and beneficiaries are not the same under a life insurance policy.
What Questions Do They Ask for Life Insurance?
When you apply for life insurance, there are some general questions that you can expect to be asked before you are approved for a policy. Not only should you answer these questions truthfully to avoid insurance fraud, but you will also have to corroborate your physical health with an official medical exam.
Some of the questions that you can expect to be asked during a phone interview for a life insurance policy include, but are not limited to:
- Your complete medical history, or at least your health over the past 10 years.
- Your family’s medical history.
- Your weight, blood pressures, and heart condition.
- Prescription, diagnoses, treatments, physical therapy, etc.
- Smoking, drinking, and recreational drug use.
- Occupation.
- The hobbies you take part in.
- Financial information such as net worth, income, and assets.
- Citizenship information or identification.
What is the Average Life Insurance Cost Per Month?
For a term life insurance, the average cost per month is about $26 per month. However, the price per month will depend on age, gender, hobbies, occupation, the size of your policy, and overall health. Additionally, whole life insurance tends to be more expensive.
Can You Cash in a Paid-Up Life Insurance Policy?
While this does not apply for term life insurance, you can cash in a paid-up permanent life insurance policy. With term life insurance, you are only paying monthly premiums for a specific period of time. But for whole life insurance, your higher monthly premiums will go towards a cash value account that will grow over time.
When you have paid up—meaning you have enough cash value to cover your monthly premiums—you are allowed to end your policy and take the remaining cash.
What Reasons Will Life Insurance Not Pay?
While most life insurance policies will pay out for accidental deaths, not all scenarios are covered by life insurance. Generally, there are four reasons why a life insurance policy will not pay the death benefit.
- Insurance Fraud
If you lie on your life insurance application, then the odds of your life insurance paying out are slim. Some of the common areas that lies could result in a termination of your policy include not reporting risky hobbies, not reporting medical conditions, travel plans, or failing to recognize significant family health history. The best way to ensure that a life insurance policy will pay out is to be as truthful as possible on an application.
- Deaths Related to Risky Hobbies
If you were to die while partaking in a risky hobby, your life insurance policy may not cover your death. Risky hobbies may include rock climbing, flying private planes, scuba diving, spearfishing, or other hobbies that put your life at risk more than others.
However, some life insurance policies will still cover you if you are truthful about any risky hobbies that you may have, you may just have to pay higher monthly premiums.
- Beneficiary-Related Murders
While many life insurance companies will still payout if you are murdered, they will not cover your murder if your beneficiary took any part in the planning or actual event of your murder. This is known as the “slayer rule” and rules out the possibility of your beneficiary getting a payout for murdering you. If this event occurs, your contingent beneficiaries or your estate will receive the funds from your death benefit.
- Suicide Clause
Many life insurance companies do cover suicide, but there is a two-year waiting period known as the “suicide clause.” In this clause, the insurance company will not pay out in the case of suicide if the death occurred within the obligatory two-year waiting period.
Life insurance companies have these clauses so that those who take out life insurance cannot commit suicide immediately after they take out a policy. However, there are certain times when a life insurance company will pay out for an accidental drug overdose. For this to happen, the overdose must be confirmed to have been an accident and the individual must be examined by a medical professional.
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Can I Have 2 Life Insurance Policies?
While there are no laws that prevent you from taking out two life insurance policies, there is no need to take out two policies. Generally, taking out one life insurance policy would be more than enough to cover your death should something happen unexpectedly.
If you have two policies, you will have to pay two separate monthly premiums, which can get costly. Instead of taking out a separate plan, most people would just change their policy to cover more financial costs should they pass away, or they would simply make the switch from a term life insurance to a whole life insurance.
Does Life Insurance Pay Out the Full Amount?
Whether you get the full amount of a life insurance policy depends on the number of beneficiaries that are named on the policy. If an individual is the only beneficiary on the account, they will get the entire amount. But if there are multiple beneficiaries, then the funds will be divided as directed by the policy.
Most of the time, life insurance payouts are distributed in a lump sum, or full amount. Depending on the policy, there are some cases that will distribute the money as an annual payment instead of a lump sum. When a life insurance policyholder takes out a policy, they will decide how they would want the money to be distributed.
What is a Beneficiary?
A beneficiary is the person or institute that will receive the money from your life insurance policy should you die. The beneficiary does not need to be a single person (although it could be), but it could be multiple people, your children, a trustee, a charity, or an estate. If an individual does not explicitly name a beneficiary, the money from the policy will be given to your estate upon your death.
Does a Beneficiary Need to Do Anything to Receive the Death Benefit?
If a policyholder dies, there is no guarantee that a policyholder will be notified to receive the death benefit. For that reason, beneficiaries should always make a claim with the insurance company to report the death of their loved one.
Typically, the beneficiary makes a claim by presenting the policyholder’s death certificate to the company. After the claim has been submitted, it generally takes about one to two months for the death benefit to be disbursed.
What is a Death Benefit?
A death benefit is the money that gets paid to beneficiaries upon the death of a life insurance policyholder. The death benefit is typically delivered as a lump sum, but there are other options, such as an annual payment or money paid to an estate.
The death benefit will be divided as the policyholder intended, so if only one person was named the beneficiary, then all the money will go to that person. But if there were more than one beneficiary, the funds will be divided according to the policyholder’s wishes.
Is the Death Benefit Taxed?
Generally, when a beneficiary on a life insurance policy receives a death benefit, that money does not count as taxable income. This means that the beneficiary does not have to pay taxes on death benefit funds that are issued immediately upon the death of the person insured under a life insurance policy.
Yet, there are some circumstances where the beneficiary will be taxed on a portion or all of the death benefit. If, for example, the money from a death benefit is put into an estate, the beneficiary may have to pay taxes on the estate.
Additionally, if the life insurance policyholder opts to let the funds grow within a life insurance policy and not release the funds upon their death, then the beneficiary may need to pay income tax on the investment growth.
How Often Should I Review My Life Insurance Needs?
Because life is constantly changing, it’s important to review your life insurance plan often. For example, you may get married, have a second child, buy a larger home, or purchase a third car. Financial situations are completely fluid, so your life insurance needs should be fluid as well.
Luckily, most life insurance companies make it easy to change a policy. If you experience any significant changes in your life, it’s best to review the coverage you have on your life insurance policy. Even if you do not experience any life-changing events, it’s best to review your policy every year at the minimum.
Final Thoughts
While these are among the most commonly asked questions regarding life insurance, the answers only scratch the surface when it comes to understanding life insurance. To get the most in-depth answers and information about life insurance, make sure to review our numerous articles and guides on life insurance policies.
Once you have learned everything you need to know about life insurance and choosing a policy, make sure you check out our expert reviews of the best options for life insurance.
* This content is not provided by the financial institution or the offer’s provider. Any opinions, analyses, reviews or recommendations expressed here are those of the author’s alone, and does not constitute a financial or expert advice.