What is life insurance?
Life insurance provides financial benefits to dependents or beneficiaries after the insured person’s death. Life insurance can be used in many ways such as helping to replace the lost income of the deceased, assist in paying final expenses including burial costs and address estate planning issues.
How does life insurance work?
An insurance company that issued the life insurance policy pays a lump sum death benefit to your beneficiaries in exchange for premium payments made pursuant to the policy.
Who needs life insurance?
Life insurance is an important element of financial planning. The need varies by age, circumstance, number of dependents, and level and degree of financial responsibility you may have. For example, if you are married, are the primary wage earner and cover monthly household expenses (like the mortgage, car note, insurance, health care, and utilities) or contribute to daycare costs or a continuing education fund, life insurance should be considered.
What are the types of life insurance plans?
There are two main types of life insurance: term life and Permanent life insurance.
Term life insurance is a policy for a fixed period. The premiums are generally the same amount for the entire time the policy is in force.
Permanent life insurance policies provide coverage for the entire lifetime of the policyholder. Traditional permanent life insurance has fixed annual premiums and may be referred to as “whole life” policies. “Universal” and “Variable” policies have more flexibility in paying premiums.
Who are the parties to a life insurance policy?
The Owner is responsible for paying premiums and controls the ability to make changes to the policy. The Insured is the person whose death would trigger payment from a policy. The Beneficiary is the person or people who receive the benefits upon the death of the insured.
Where can you purchase life insurance?
Life insurance policies may be offered through your workplace, an agent, advertised on television, and/or the internet. An insurance company issuing life insurance policies in the District must be licensed by DISB. Also, insurance agents selling life insurance policies in D.C. must also be licensed by the Department. Before you purchase a policy, it is important to conduct due diligence by researching various life insurance policies on offer and their corresponding rates, shop around to secure a competitive price and coverage that is fit for purpose. Visit disb.dc.gov/page/verify-licensed-insurers to verify that insurance companies and producers are duly licensed in the District of Columbia. If you have concerns, ask questions, and get answers before signing a policy.
What is the application process like?
The application process varies from one insurance company to the next. However, most application processes consist of you completing an application online or in paper form. In certain instances, an insurance company representative may visit you at home a few days after sending the application to measure your height, weight, and take a urine sample. Also, the insurance company will review your medical, family and prescription drug history. After gathering all these facts, they will issue your rating if approved or declined.
Will I need to take a medical exam before I purchase life insurance?
Yes, in most instances. In addition, health information, including medical history and prescription drug history, can trigger a medical exam as a requirement.
What about the life insurance ads that claim “you cannot be turned down” or don’t require a physical?
While certain life insurance policies advertised on television may state that they can be obtained easily or “without an exam,” these policies also assume the person buying the policy is in worse than average health. This has two impacts: benefits may be reduced during the first two years of the policy and premiums are more expensive. It is important to look at several offerings, compare them to your needs and choose the best option that will address the needs of your beneficiaries after your passing.
Are life insurance proceeds taxable?
Based on the current law, death benefits do not need to be reported as gross income and thus are not taxable. However, any interest accrued during the maintenance of the policy is taxable.
What is a policy loan? Can I borrow money from my insurance policy?
Permanent life insurance policies promote the ability to take policy loans as a benefit of purchase. Policy loans can be a valuable feature, but you need to understand the policy loan.
- Unlike traditional loans, policy loans do not come with a repayment schedule. However, you should make payments on your policy loan in addition to the premium payments that are due for your policy.
- Over time, a policy loan can cause the policy to terminate and result in the owner owing income tax on some of the loan amount.
What are early distribution benefits?
Some life insurance policies provide early access to benefits for things like Long Term Care or specific diseases. Life insurance can be a good way to fund these benefits, but it is important to remember these additional benefits usually come as a reduction of future death benefits, so if you need the life insurance coverage, as well as the other early distribution benefits, this may not be your best option.
How do I find a life insurance policy for a deceased person?
Beneficiaries of a life insurance policy can find the insurance policies of the deceased by contacting the National Association of Insurance Commissioners (NAIC). A death certificate from the funeral home that conducted the burial or cremation helps in the search for any forgotten life insurance policies. The life insurance policy locator service is accessible on disb.dc.gov/page/suggestions-how-locate-missing-life-insurance-policies. Searches are free with no limitations, and the process could take up to 90 business days.