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Here’s What’s Actually in the Fine Print of Your Life Insurance Policy
It’s fun to contemplate your life — who you will become, where it will take you, what you will do.
The flip side of that conversation, though? Not so much.
Still, it’s important to prepare yourself and your family for the (un)expected. Part of that preparation may include working with life insurance.
Many Americans are covered by some form of life insurance, with the proportion highest among parents of minor children (59% of those involved in the 2023 Insurance Barometer Study). And the payments can range anywhere from a couple hundred to a couple thousand dollars a year, depending on several factors.
But what does life insurance cover? We’re going to review the basics so you can determine if it’s right for you.
Life insurance is a contract between an insurer and a policyholder. In exchange for a premium, life insurance companies provide a sum of money to the designated beneficiary after the insured person’s death.
In layman’s terms? Life insurance helps support your family after you die. It’s a financial cushion your family can turn to after the loss of your salary or income.
Whether you need to buy life insurance depends on your personal situation — if you don’t have dependents, the expense might not be worth it. However, if you have several dependents and are the family breadwinner, you’ll want to seriously consider it.
Before we dive into the nitty-gritty of life insurance, here are a couple of terms to familiarize yourself with:
You’ll see these terms pop up a lot when you discuss life insurance.
People often put a life insurance payout, or death benefit, toward mortgage payments, funeral costs, everyday expenses and debts.
Here are five common ways of using life insurance payouts:
How much life insurance you need depends on your unique situation. You’ll want to shop around. You can get quotes online pretty easily, ensuring you find the best policy for you and your family.
The two primary types of life insurance are term and permanent.
Whole life insurance is the most popular form of permanent insurance, and you’ll often see “whole life” and “permanent” used interchangeably. Whole life falls under the umbrella of permanent life insurance policies, which we’ll expand later in the article.
For now, we’ll look at the differences between term and whole life insurance, as well as some pros and cons of each.
The simplest form of life insurance is term life insurance. This type of insurance only pays if your death occurs during the policy’s term — typically between five and 30 years — and most term policies offer no other benefits.
Here are some additional things to know about term life insurance:
Pros:
Cons:
There are two basic forms of term life insurance: level term and decreasing term. There’s one major difference between them.
Level term: The death benefit remains the same throughout the policy term
Decreasing term: The death benefit drops, typically in yearly increments, throughout the policy term
Level term is the more popular option because the premiums and death benefits don’t fluctuate. It’s also the most common life insurance policy offered.
Unlike term life, permanent life insurance pays a death benefit at any age.
Pros:
Cons:
Here are the major types of permanent life insurance policies.
Also known as “ordinary life,” traditional whole life insurance is the most common form of permanent life insurance.
It provides a death benefit and a savings account. Your premiums stay the same throughout the policy, and you receive a specified death benefit. The savings portion grows based on the company-paid dividends.
Also known as “adjustable life,” universal life insurance offers more flexibility than whole life. If you pass a medical exam, you may be able to increase the death benefit.
Once you’ve accumulated funds in that account, you’ll have the option to change your premium payments if needed. However, you’ll want to coordinate with an agent to make sure you don’t use up the savings and cause a lapse in your policy.
Universal life premiums are usually less expensive than whole life premiums but more expensive than term life premiums.
This policy merges your death benefit with a cash value component that you can invest in stocks, bonds and money market mutual funds. However, if your investments don’t do well, you could lose money. Having said that, some policies won’t let the death benefit fall below a certain amount.
You’ll get the features of both variable and universal life policies with this one. If you purchase this policy, you’ll experience investment risks and wins, and you’ll be able to adjust your premiums and death benefits.
Here are five other types of life insurance policies you can purchase, depending on your situation.
Married couples have the option to purchase an individual or a joint life insurance policy. The latter covers both spouses.
Survivorship life insurance, also known as a “second-to-die life,” is a joint life policy. It doesn’t pay out the death benefit until after the second insured partner dies.
This type of life insurance is usually cheaper than single-insured plans since there is no payout until both parties die. Because of this, it’s sometimes easier to qualify for a policy, too.
A survivorship life insurance policy might make sense for a couple whose heirs could owe large estate taxes or for parents with special needs children who would need financial support after they pass away.
This insurance covers “key” employees, such as a business owner.
Key man insurance is life and disability insurance rolled into one. The business owns the policy and pays the premiums; if an insured key person dies or becomes disabled, the business receives the payout.
Groups and employers offer group life insurance to their members and workers. You should approach it as supplemental to individual life insurance, versus a replacement, since your employer owns the policy.
Unlike other life insurance policies, coverage is guaranteed and there are no health questions. (The premium is based on the group as a whole.) Group insurance is typically offered as part of an employee’s benefits package.
Accidental death and dismemberment insurance is a limited form of life insurance that covers you or your beneficiaries if you’re killed or dismembered in an accident. AD&D shouldn’t be considered a replacement for life or disability insurance. Because of its specificity, it might not be worth purchasing for most people.
Policies typically don’t cover deaths resulting from the following:
This type of policy is also known as burial or funeral insurance.
Final expense life insurance is generally a lower-value policy that beneficiaries can put toward your final wishes. A reminder: You can use any life insurance policy to pay for funeral costs.
Life insurance is a complex topic. So, we’ve rounded up some popular questions people have regarding these policies.
Not necessarily.
It’s possible to get a life insurance policy without undergoing a physical. However, you may have to pay a higher premium and/or supply supplemental health reports — it will be harder for insurance companies to evaluate your health and lifestyle, after all.
Regardless, answer survey responses honestly, or a company could void your policy.
A health care professional, such as a nurse, typically does them. The exam usually consists of a verbal questionnaire and a blood and urine sample. You can do it in your home, too.
Life insurance policies typically cover any cause of death other than suicide within the first two years of the policy. After the two-year window, the policy will usually pay out for suicide unless there’s another provision in place.
That said, each policy is different. Some may have recreational-drug or alcohol-related death clauses, for example. People in certain occupations might not be covered, either. Your best bet is to thoroughly review a potential policy and consult with a professional if needed.
If your term life insurance policy is about to expire and your age or health might make it difficult to renew, you have options. You can purchase a new policy (though, most likely at a higher rate), convert it to permanent life insurance or drop it altogether.
When a policyholder dies, here’s what you’ll do to start the claims process:
Once someone makes the claim, the company gives the money to the beneficiaries. Typically, that’s within 30 days.
Kathleen Garvin (@itskgarvin) is a writer and editor whose work has appeared in U.S. News, Clark.com and Well Kept Wallet.
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