Life Insurance FAQ - Frequently asked questions and answers

The key difference between mutual life insurance companies and stockholder-owned life insurance companies lies in their ownership structure and how profits are distributed. Here's a detailed breakdown:

Mutual Life Insurance Companies

• Ownership: Owned by policyholders. When you buy a policy from a mutual life insurance company, you essentially become a partial owner.
• Profit Distribution: Profits are typically returned to policyholders in the form of dividends, reduced premiums, or enhanced policy benefits.
• Focus: Operate with the primary goal of benefiting policyholders. Decisions are made to prioritize the long-term interests of policyholders rather than external investors.
• Examples: Companies like New York Life and Northwestern Mutual are prominent examples of mutual life insurers.

Stockholder-Owned Life Insurance Companies

• Ownership: Owned by shareholders (investors) who hold stock in the company. Policyholders do not have ownership rights.
• Profit Distribution: Profits are distributed to shareholders as dividends or reinvested into the company to increase shareholder value. Policyholders typically do not share in these profits unless their policy explicitly includes dividends.
• Focus: Operate to maximize profits for shareholders, which may sometimes create competing interests between policyholders and shareholders.
• Examples: Companies like MetLife and Prudential Financial are examples of stockholder-owned insurers.

Key Considerations for Consumers

• Dividends: If you value receiving potential dividends, a mutual company might be more appealing.
• Premiums: Both structures can offer competitive premiums, but mutual insurers may provide more stability over time since profits go back to policyholders.
• Products Offered: Stockholder companies might offer a broader array of products because they are driven by market competition and shareholder expectations.
• Company Stability: Mutual companies often emphasize long-term financial stability since they do not have to meet the short-term profit demands of shareholders.

Ultimately, the choice between the two depends on your priorities as a policyholder.

Term vs. Whole Life Insurance

• Term Life: Covers a set number of years (e.g., 10, 20, 30 years) and is usually cheaper but has no cash value.
• Whole Life: Lasts a lifetime, builds cash value, and can be used as an investment.

🛑 Common Misconception: Many people think whole life insurance is "too expensive." It offers lifetime protection and builds savings they can borrow against.

📢 Tip for Clients: If you only need coverage for your working years (e.g., to protect your family or pay off a mortgage), term life may be the better option.

What It Covers: Helps pay for funeral costs, medical bills, and outstanding debts.

• Policies typically range from $2,000 to $50,000 in coverage.
• Easier approval process (no medical exam, just health questions).

🛑 Common Misconception: Some believe Social Security pays for funerals. In reality, it only provides a $255 lump sum—not nearly enough to cover funeral costs.

📢 Tip for Clients: Final expense insurance ensures their loved ones won’t have to worry about funeral expenses during a difficult time.

💡 Face Amount vs. Cash Surrender Value

• Face Amount (Death Benefit): The amount paid to beneficiaries when the insured passes away.
• Cash Surrender Value: The amount a policyholder gets if they cancel their whole life policy early.

🔹 Clients may think they can cash out the full face amount, but it’s usually much lower due to fees and loan balances.

📢 Tip for Clients: If a client needs access to cash but still wants coverage, you should consider a policy loan instead of surrendering the policy. Remember when taking a "loan" it is not a loan in a real sense, you actually don't have to pay it back, upon your death or the person that is actually insured by the policy, the loan amount and any interest will just be deducted form the policy face amount, which essentially is, it's the dollar amount that will be paid to the beneficiaries upon the death of the insured person. 

The face amount is the original death benefit or coverage amount specified in a life insurance policy. It is the amount that the insurance company agrees to pay to your beneficiaries upon your death, before any deductions like loans or unpaid premiums. For example, if you have a policy with a $100,000 face amount, your beneficiaries will receive $100,000 upon your passing, assuming the policy is active and there are no outstanding debts or adjustments.

The face amount and cash value are two different aspects of a life insurance policy:

• Face Amount: The face amount is the sum that is paid to your beneficiaries upon your death, as mentioned earlier. It is a predetermined sum that does not change throughout the life of the policy.
• Cash Value: Cash value refers to the savings component found in certain types of permanent life insurance policies (like whole life or universal life insurance). It grows over time as you pay premiums and may be borrowed against or withdrawn during your lifetime. Unlike the face amount, the cash value is not paid to your beneficiaries; instead, it is part of the policy’s value that you can access while alive.

Several factors can influence the face amount of your life insurance policy:

• Age: Younger policyholders typically qualify for higher face amounts at lower premiums, while older individuals may face higher premiums and might be limited in the face amount they can choose.
• Health: Health plays a key role in determining the face amount. Those in better health can often secure a larger face amount for a lower premium, while individuals with pre-existing conditions may be restricted to lower coverage amounts.
• Income and Financial Goals: The face amount should ideally be based on the insured’s financial needs, such as income replacement, paying off debts, or covering future expenses like education. People with higher income may choose larger face amounts to ensure their dependents’ financial security.
• Policy Type: The type of life insurance you purchase (term, whole life, universal life, etc.) can influence the available face amount. Permanent policies often offer more flexibility in increasing the face amount, while term policies may have a fixed face amount.

In some cases, the face amount can change:

• For permanent life insurance: Some policies allow you to increase or decrease the face amount by paying additional premiums or adjusting your coverage level. However, decreasing the face amount may affect your premium rates.
• For term life insurance: Typically, the face amount remains fixed throughout the term of the policy. However, some term policies include an option to convert to a permanent policy, which may allow adjustments to the face amount.

There are several types of life insurance policies, each offering different structures regarding face amounts:

• Term Life Insurance: Offers a fixed face amount for a specific period (e.g., 10, 20, or 30 years). The face amount is typically straightforward and doesn’t change.
• Whole Life Insurance: This type of permanent life insurance provides a fixed face amount with a cash value component that grows over time. The face amount remains the same, but the policy may accumulate cash value, which can be borrowed against or used to pay premiums.
• Universal Life Insurance: A flexible permanent life insurance policy where the face amount can be adjusted (increased or decreased) based on changes in premium payments or the policyholder’s needs.
• Variable Life Insurance: A type of permanent life insurance that offers a fixed face amount, but the policyholder can invest the cash value in various investment options, which can potentially increase or decrease the overall cash value.
• Final Expense Insurance: A type of policy specifically designed to cover end-of-life expenses. The face amount is typically smaller (ranging from $2,000 to $50,000) and is intended to cover funeral costs, medical bills, and other final expenses.

Yes, in some cases, you can adjust the face amount of your life insurance policy:

• Permanent Policies: Some permanent life insurance policies offer flexibility in adjusting the face amount. You can increase your coverage by paying higher premiums or decrease it to reduce your premium costs.
• Term Policies: Typically, term life insurance policies do not allow adjustments to the face amount, but some term policies may offer the option to convert to a permanent policy, which can have a more flexible face amount.

In general, the higher the face amount, the higher your premiums will be. This is because a larger face amount means the insurance company is taking on more risk, and therefore, you’ll need to pay more to maintain that level of coverage. Additionally, other factors like your age, health, and the type of policy you have will affect your premiums.

Suicide Clauses and the Incontestability Period

Most life insurance policies have a suicide clause that generally states the insurer will not pay a death benefit if the policyholder dies by suicide within a specific period—usually the first two years of the policy. This is because insurers consider suicide during this time to be a risk they cannot fully assess when underwriting the policy. If the policyholder takes their own life within this time frame, the insurer may only return the premiums paid rather than paying the full death benefit.

After the Incontestability Period

Once the incontestability period (typically two years) has passed, the insurer can no longer contest the validity of the policy, except in cases of fraud. This means that if the policyholder dies by suicide after the incontestability period, the insurer is generally required to pay out the full death benefit to the beneficiaries. The suicide clause no longer applies, and the death is treated like any other cause of death.

Important Notes

• State Laws: Some states have different regulations regarding suicide clauses and contestability periods. It's always best to review the policy terms and check local laws.
• Exclusions: If the policyholder has committed fraud when applying for the policy (for example, lying about medical history or mental health issues), the insurer may still deny the payout even after the incontestability period.

In conclusion, life insurance policies will typically pay out after the incontestability period if the policyholder dies by suicide, provided there are no fraudulent actions or other exclusions involved.

🔹 Many clients don’t realize they can add extra features to their policy.
Some popular life insurance riders include:
✔ Accelerated Death Benefit – Access part of the death benefit early if diagnosed with a terminal illness.
✔ Waiver of Premium – Stops premiums if the insured becomes disabled.
✔ Guaranteed Insurability – Allows more coverage later without a medical exam.

📢 Tip for Clients: Riders add value to a policy for a small extra cost—sometimes even free!

Underwriting in insurance is the process by which an insurer evaluates the risk of insuring a person or entity and determines the terms and conditions of the policy. Essentially, it's the insurer's way of deciding whether to offer coverage and at what price, based on the applicant's risk profile.

Here’s a breakdown of the underwriting process:

1. Risk Assessment: Underwriters examine various factors about the applicant, such as health history, lifestyle, occupation, and financial stability. For life insurance, this could involve looking at age, medical records, and family health history.
2. Classifying the Risk: Based on the assessment, underwriters classify the applicant into a risk category. This could range from preferred (lower risk) to substandard (higher risk), and the classification will influence premiums and policy terms.
3. Setting Premiums: The underwriting process helps determine how much the applicant will pay in premiums. The higher the perceived risk, the higher the premiums, and vice versa.
4. Policy Terms and Exclusions: The underwriter may set certain exclusions or conditions based on the applicant's profile. For example, someone with a serious pre-existing medical condition might have exclusions related to that condition.
5. Approval or Denial: Based on the risk evaluation, the underwriter can approve, deny, or offer a modified policy. They may also suggest higher premiums or a different type of coverage.

Underwriting ensures that the insurer is able to manage its risk effectively while offering fair pricing for customers.

What It Is: The process insurers use to decide approval and premium costs based on risk.
💡 Factors Considered: Age, health, lifestyle, and medical history.

🛑 Common Misconception: Some think they can wait until they’re older to buy insurance.
✅ Reality: Premiums increase with age, and health conditions may develop, making approval harder.

📢 Tip for Clients: The best time to buy insurance is when they are young and healthy!

📌 Why It’s Critical:
✔ Without a named beneficiary, the payout could go to the estate, leading to delays and legal fees.
✔ Some policies allow multiple beneficiaries or contingent beneficiaries (backup).

📢 Tip for Clients: Update beneficiaries after major life changes (marriage, divorce, births, etc.).

Life insurance can play a key role in financial planning by providing financial security, building wealth, and serving as a tool for estate planning, among other benefits. Here are several types of life insurance commonly used for financial planning:

1. Term Life Insurance

• Primary Use: Income replacement for dependents in case of the policyholder's death.
• How it Helps in Financial Planning: While term life insurance is primarily designed for protecting your family, it’s also a more affordable way to ensure that your dependents are financially supported if something happens to you, especially in the early years when you may have significant debts or dependents. It’s typically used to cover financial obligations like mortgages, college tuition for children, or ongoing living expenses.

2. Whole Life Insurance

• Primary Use: Permanent life insurance that covers you for your entire life.
• How it Helps in Financial Planning: Whole life insurance has a cash value component, which grows over time. This cash value can be borrowed against or used to pay premiums later on. It's a long-term financial planning tool, especially for wealth preservation, as it can provide a guaranteed death benefit, and the policy’s cash value can be used as an asset.

3. Universal Life Insurance

• Primary Use: Flexible, permanent life insurance with an investment component.
• How it Helps in Financial Planning: Universal life insurance combines life coverage with a savings component. The policyholder can adjust the death benefit and premiums as their financial needs change. It also builds cash value that grows based on market interest rates, making it a versatile tool for those seeking long-term financial stability and asset growth.

4. Variable Life Insurance

• Primary Use: Permanent life insurance with an investment component that allows the policyholder to choose where the cash value is invested.
• How it Helps in Financial Planning: Variable life insurance offers both life insurance coverage and the potential for significant cash value growth. The cash value is tied to investments in stocks, bonds, or mutual funds, which means it has more growth potential (and risk). This can be a good option for someone looking to incorporate insurance into a broader investment strategy, particularly if they are comfortable with the market's fluctuations.

5. Indexed Universal Life Insurance (IUL)

• Primary Use: A permanent life insurance policy with a cash value that grows based on the performance of a stock market index (e.g., the S&P 500).
• How it Helps in Financial Planning: IULs offer flexibility similar to universal life but with more growth potential tied to market indices, while still providing a guaranteed minimum interest rate (protecting against market losses). It can be a great way to accumulate wealth tax-deferred while still providing life insurance coverage.

6. Final Expense Insurance

• Primary Use: Insurance designed to cover funeral and end-of-life expenses.
• How it Helps in Financial Planning: Final expense insurance helps ensure that your loved ones aren't burdened with funeral and burial costs. It's typically a small face-value policy, but it can be an important part of financial planning for those looking to ensure they don’t leave behind financial hardship related to their passing.

7. Survivorship Life Insurance (Second-to-Die)

• Primary Use: Covers two individuals, typically spouses, and pays out after both have passed away.
• How it Helps in Financial Planning: This is often used for estate planning, as the death benefit is paid to beneficiaries after both policyholders have passed. It can help provide for heirs, cover estate taxes, or fund trusts, and it is commonly used in wealth transfer strategies.

Financial Planning Benefits of Life Insurance:

• Estate Planning: Life insurance can be a critical tool for transferring wealth to heirs while avoiding estate taxes.
• Tax-Deferred Growth: Cash value in whole, universal, and variable life insurance policies grows tax-deferred, allowing the policyholder to build wealth over time.
• Liquidity: The death benefit provides immediate liquidity for heirs to cover expenses, debts, or continue their lifestyle.
• Living Benefits: Some policies may offer living benefits, such as the ability to access the cash value for things like retirement income or in case of emergencies.

Incorporating life insurance into your financial plan ensures both protection for your family and an additional wealth-building opportunity. However, the right policy depends on your unique financial

An Accelerated Death Benefit (ADB) rider is an optional feature you can add to your life insurance policy. It allows you to access a portion of your death benefit while you're still alive if you're diagnosed with a serious, terminal, or chronic illness. This rider is designed to provide financial assistance in difficult times, particularly when you need funds for medical treatment or other expenses related to your condition.

Key Points about Accelerated Death Benefit Rider:

• Eligibility:
  • To use the ADB rider, the policyholder typically needs to meet certain criteria, such as being diagnosed with a terminal illness (often defined as having a life expectancy of 12 to 24 months or less) or a chronic illness (such as being unable to perform activities of daily living).
  • The specific conditions that qualify for an accelerated benefit may vary between insurers and policies.
• How It Works:
  • If you become eligible, you can access a portion of your death benefit—often up to 50% or 75%, depending on the policy terms—before your death.
  • The amount you can access will typically be based on the severity of your illness and the terms of the rider.
  • The money from the ADB rider can be used for any purpose, such as medical bills, hospice care, paying for home modifications, or even daily living expenses.
• Impact on Death Benefit:
  • Any amount you withdraw through the ADB rider will reduce the death benefit that is paid to your beneficiaries when you pass away.
    • For example, if your policy has a $500,000 death benefit and you access $200,000 using the ADB rider, your beneficiaries will receive the remaining $300,000 when you die.
• Cost:
  • The cost of adding an ADB rider is usually minimal, and some life insurance policies include it for free as a standard feature. However, some policies may charge a small additional premium for this rider.
• Types of Illnesses Covered:
  • Terminal Illness: Most commonly, an ADB rider is triggered when you are diagnosed with a terminal illness, with the expectation of death within a specific time frame (usually 12-24 months).
  • Chronic Illness: Some riders also cover chronic illnesses, which may not be immediately fatal but severely impact your ability to perform basic activities of daily living, such as bathing, dressing, or eating.
  • Critical Illness: In certain cases, critical illnesses like heart attack, stroke, or major organ failure may also qualify for accelerated benefits, depending on the rider.
• Pros of the Accelerated Death Benefit Rider:
  • Immediate Access to Funds: It gives you financial relief during a health crisis without needing to take out loans or deplete savings.
  • No Restrictions on Usage: The funds you access from the death benefit can be used however you need, giving you flexibility in managing your care.
  • Peace of Mind: Knowing you can access part of your death benefit during your lifetime can reduce stress and help focus on your health and well-being.
• Cons of the Accelerated Death Benefit Rider:
  • Reduced Death Benefit for Beneficiaries: Your beneficiaries will receive a smaller death benefit after your passing if you use the rider, which can affect the financial security you planned for them.
  • Potential Tax Implications: In some cases, the amount you withdraw under an ADB rider may be subject to taxes, although most benefits are tax-free if they are used for qualifying medical expenses.
  • Not All Policies Offer It: Not every life insurance policy automatically includes an accelerated death benefit rider. It’s important to check whether this option is available and what conditions apply.

How It Fits into Financial Planning:

An ADB rider can be a valuable tool in your financial planning, particularly for those who are concerned about long-term health care or terminal illness. It allows you to use the life insurance policy as a financial safety net, ensuring that you don’t need to worry about accumulating medical debt or depleting your savings during a critical illness. It can also give you peace of mind knowing that you’re covered for both long-term care and end-of-life expenses.

Ultimately, the Accelerated Death Benefit rider is an option worth considering if you want the flexibility to access life insurance funds while you're still alive in the event of a serious illness.

If you are unable to make payments on your whole life insurance policy for several months, several things can happen depending on the insurer, the policy's provisions, and how long the policy has been in force. Here's what typically happens:

1. Grace Period:

• What It Is: Most whole life insurance policies include a grace period—usually 30 to 60 days—after the premium due date. During this time, you can make the payment without losing coverage.
• Impact: If you miss a payment, you won’t immediately lose your coverage, but if you don’t catch up within the grace period, the policy may lapse.

2. Lapse of the Policy:

• What It Is: If you don't make the payment during the grace period, your policy can lapse. This means the insurance coverage is no longer active, and your beneficiaries will not receive a death benefit if you pass away.
• Impact: If the policy lapses and you have not paid premiums for several months, you may lose any accumulated cash value (depending on the insurer’s policies and how much cash value you’ve built up). In addition, a lapsed policy can be hard to reinstate without additional paperwork, health evaluations, or even new underwriting.

3. Use of Cash Value:

• What It Is: Whole life insurance policies build a cash value over time. If you miss premium payments, the insurer may use the cash value to cover the missed payments (known as premium offset).
• Impact: This can keep your policy in force even if you temporarily stop paying premiums. However, using the cash value to pay premiums reduces the cash value available for loans or future policy needs, and if the cash value is depleted, your policy could eventually lapse.

4. Loan Against Cash Value:

• What It Is: If you’ve accumulated enough cash value, you may be able to take out a loan from your policy to cover the premiums.
• Impact: The loan will accrue interest, and if not repaid, the loan amount and interest will be deducted from the death benefit. It’s important to manage loans carefully to avoid reducing the policy’s value.

5. Reinstatement Options:

• What It Is: Some insurers offer a reinstatement option if the policy has lapsed, allowing you to reinstate the coverage by paying the overdue premiums, interest, and possibly proving that you are still in good health.
• Impact: Reinstating a lapsed policy can be challenging and may involve additional underwriting or a waiting period before your coverage is fully restored.

6. Surrender of Policy:

• What It Is: If you stop paying premiums for an extended period, you might choose to surrender the policy (or the insurer may do so). This means you give up the policy in exchange for the cash value.
• Impact: Surrendering the policy can provide a lump sum, but once surrendered, the policy no longer provides any life insurance coverage, and the death benefit is forfeited.

7. Potential for Reduced Coverage:

• What It Is: Some policies may offer a reduced paid-up option if premiums are not paid. This means the policy will continue with a lower death benefit, but no future premiums are required.
• Impact: If you choose this option, the policy will remain in force with a reduced death benefit, but it may not provide the same level of financial security as before.

What You Should Do:

• Contact Your Insurer: If you anticipate missing payments, reach out to your insurer as soon as possible to discuss options such as the grace period, using cash value to pay premiums, or taking out a loan.
• Review the Policy Terms: Familiarize yourself with your policy’s provisions related to missed payments, grace periods, and reinstatement options.
• Consider Policy Alternatives: If paying premiums becomes challenging, you may want to explore options like reducing the coverage, switching to a more affordable policy, or considering other life insurance solutions.

Missing payments on a whole life policy can have serious consequences, but there are often options to keep the policy in force or reinstate coverage. The sooner you address the issue, the more flexibility you'll have.

If you miss payments on a term life insurance policy, the consequences are somewhat similar to what can happen with a whole life policy, but there are some important differences due to the nature of term life insurance. Here’s what typically happens:

1. Grace Period:

• What It Is: Like whole life policies, most term life insurance policies have a grace period—usually 30 or 31 days—after a missed payment. During this time, you can still make the payment and keep the policy active without losing coverage.
• Impact: If you miss a payment, the grace period gives you a cushion to catch up on payments. Your coverage remains in effect during this period.

2. Lapse of the Policy:

• What It Is: If you do not pay the premium within the grace period, your term life insurance policy will lapse, meaning your coverage will be canceled, and you won’t be able to collect any death benefit if you pass away.
• Impact: A lapsed term life policy offers no payout to beneficiaries, and you would need to apply for a new policy if you want coverage again. Depending on your age and health, this could result in higher premiums or being unable to qualify for a new policy.

3. No Cash Value:

• What It Is: Unlike whole life insurance, term life insurance does not build cash value. Therefore, you can't use accumulated funds (like the cash value in a whole life policy) to cover missed premiums or keep the policy active.
• Impact: If you stop paying premiums and the grace period expires, there are no funds to tap into, and the policy will simply lapse.

4. Reinstatement Options:

• What It Is: Some insurers offer a reinstatement option for lapsed term life policies. This allows you to restore your coverage if the policy lapses, typically by paying the overdue premiums and possibly meeting certain requirements, such as proving that you're still in good health.
• Impact: If you miss payments and your policy lapses, reinstatement may be possible, but you could face additional underwriting (health checks), and the process may take some time. Reinstating a term policy is usually more difficult than maintaining it with regular payments.

5. No Reduced Coverage:

• What It Is: Term life insurance does not have the option for reduced paid-up coverage, which is sometimes available with whole life insurance. With term policies, if the premium is not paid and the grace period is exceeded, the policy simply lapses without any coverage remaining.
• Impact: Unlike whole life policies, term policies do not offer a way to keep some form of coverage with reduced benefits if premiums are missed.

6. Possibility of Renewing the Policy:

• What It Is: Some term life insurance policies may offer a renewal option that allows you to renew the policy after the initial term expires, without providing evidence of insurability.
• Impact: If you are unable to make payments and the policy lapses, the renewal option may allow you to restart coverage at the end of the term. However, the premiums for renewal are often significantly higher because they are based on your age at the time of renewal, and they may be more expensive than when you first bought the policy.

What You Should Do If You Miss Payments:

• Contact the Insurer: If you're unable to make a payment or anticipate missing one, reach out to your insurer as soon as possible. They may offer options for grace periods, reinstating the policy, or finding another solution.
• Review Your Policy Terms: Make sure you understand the specifics of your grace period, reinstatement options, and any other features your term life insurance may have.
• Consider a Payment Plan: If you’re struggling to pay the premium, some insurers may allow you to set up a flexible payment plan or modify the policy in ways that make payments more manageable.

In summary, if you miss payments on a term life insurance policy, the primary risks are that your policy could lapse and leave you with no coverage. The best course of action is to catch up on premiums within the grace period, or, if the policy lapses, inquire about reinstating it as soon as possible. If neither is possible, you may need to apply for new coverage, potentially at higher premiums.