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How Do Life Insurance Policies Work

When Should I Choose A Whole Life Insurance Policy

How Life Insurance Works
  • You’ll need to make your monthly payments for as long as you’re alive or risk losing your coverage with whole life insurance. Before committing to a policy, make sure you’ll be able to afford the premiums as you age into different stages of your life.
  • Because whole life policies never expire, your beneficiaries are guaranteed a payout after your passing, which can help secure their financial futures.
  • Whole life insurance can be used to set up a trust for someone in your family who will need financial support for their lifetimes, such as a disabled child or older family member. Consult with a lawyer before going this route there may be better ways to protect them financially.

Putting Life Insurance In A Trust

One benefit of a trust is that it allows you more control over how the assets in it are used. You can have the money distributed over time as a trust fund, or only have the trustee disburse money only under certain conditions or purposes .

Life insurance proceeds are typically paid all at once to the named beneficiary, after which you have no say over how the money is spent. However, if you have a living trust you can direct the life insurance death benefit to be paid to the trust, and then distributed to the trust beneficiaries. This helps to prevent the life insurance proceeds from becoming part of the probate estate and allows you to manage how the funds are used from beyond the grave. The trustee will make sure the trust beneficiaries get the proceeds according to your terms.

Many people choose to set up a trust for a minor child so it can hold onto assets, or a large sum of money, until they reach a specific age. You can even limit the amount of money they receive, which can be handy if you’re worried about their spending habits.

Can I Use My Will To Distribute A Life Insurance Death Benefit

You shouldnt include a life insurance policy in your will, since it can be distributed separately.

A strong estate plan starts with life insurance

A life insurance policy allows you to designate a beneficiary and it is payable on death. That means your life insurance beneficiary will receive the proceeds directly from the insurance company after you die. The money never goes to you, the policyholder, so it wouldn’t be distributed as part of your will.

If you have life insurance, that doesn’t mean you should skip out in getting a will. You still need a will to pass on your personal possessions and to name a guardian who will take care of your minor children when you die.

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What If You Stop Paying Life Insurance Premiums

If you stop paying your life insurance premiums, your policy could lapse depending on the specific terms outlined by your insurer. Your policy may come with a grace period a certain amount of time in which your policy will not lapse for nonpayment. However, a standard term life insurance policy will typically lapse if you miss a payment. If your policy does lapse, your dependents would no longer receive a death benefit if you were to pass away, leaving them vulnerable to financial risk.

Missing a life insurance policy payment may be treated differently with permanent life insurance policies, which include cash value accounts. Money in the cash value account can typically be used to pay premiums after a stipulated amount of time, so if you forget to make a payment, your policy might not lapse if the cash value is utilized.

Special Considerations For Servicemembers And Veterans

What is Whole Life Insurance and How Does It Work?

As a servicemember, spouse or dependent child of a servicemember, or veteran, you are eligible for life insurance that is not available to the general public.

  • Servicemembers Group Life Insurance : Provides up to $400,000 of term life insurance coverage to servicemembers. All servicemembers are automatically enrolled when they join the military, and coverage lasts for the duration of their service, expiring 120 days after separation.
  • Family Servicemembers Group Life Insurance : Provides up to $100,000 of term insurance coverage to spouses and $10,000 of free coverage to children of servicemembers with SGLI coverage while the servicemember is in the military. Coverage expires upon separation.
  • Veterans Group Life Insurance : Allows servicemembers the opportunity to convert their SGLI coverage to renewable term coverage upon separation from service without requiring a medical exam, provided they do so within 240 days of separating. Coverage amounts initially match the servicemembers SGLI coverage. VGLI is not available to spouses or children.

Navy Mutual offers affordable life insurance coverage to servicemembers, veterans, and their families. We work with you to understand your familys needs, so you get the right amount of coverage for your personal situation. If you need help, schedule an appointment with a representative, get a quote, or give us a call at .

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What Does Whole Life Insurance Cover

Reasons you may need whole life insurance include:

» MORE: Term vs. whole life insurance: How to choose

Do I Really Need Life Insurance

While it isnt a legal requirement to have a life insurance policy though its likely that a mortgage provider will recommend you have one before theyll grant you the loan its often recommended to invest in a suitable policy, for the simple reason that youll have peace of mind that your loved ones finances will be protected after your death.

However, if youre a mortgage-holder, its even more important to have a policy in place. A mortgage will probably be the biggest financial commitment you ever make, with it not uncommon to owe hundreds of thousands of pounds to your lender. Could your family afford to cover that kind of sum if they didnt have your income? If not, life insurance is essential, as if they couldnt keep up with the repayments, theres the chance theyd have to sell the property to repay the debt. Having life insurance for a mortgage prevents this from happening. You can find out more about this kind of policy in our guide ‘Do you need life insurance to get a mortgage?’.

That said, if you dont have a partner, children or any dependents or if their income wouldnt be impacted should you die it may not be worth getting cover. Its all about your individual circumstances.

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Term Life Or Permanent Life: Which Is Right For Me

All permanent or whole life policies typically offer the advantage of coverage during your entire life but can charge higher premiums than term life products. Therefore, your death benefit can be smaller than with term life for the same amount of money. People choosing whole life are likely to prioritize certain features that fit with their individual financial goals, such as the ability to plan for consistent benefits and premiums and the potential for tax-deferred savings growth via the cash value component of their policy.

Click here for more details on whole life/permanent life insurance.

How Long Do You Have To Pay Into A Life Insurance Policy Before It Pays Out

What is Whole Life Insurance? How does Whole Life Insurance work?

Life insurance will pay out upon the death of the insured as soon as it is in force. This usually counts as the first premium payment. Some life applications, however, come with the option of binding a certain amount of coverage while the underwriting process takes place in case the applicant dies before the policy is issued . The binder usually requires payment up-front when the application is taken and will either be returned or credited toward the first premium once approved.

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How Are Insurance Premiums Paid

Typically, insurance companies offer installment-type premium payments, which can be paid monthly or semi-annually. However, there are some insurance companies that require you to pay the entire price of the policy up front each year with an annual payment. Today, these payments can often be made online, but it can also be paid via a physical check.

If youre buying insurance through your employer, your organization may pay for part or all of the premiums. Your contributions also may be made through a payroll deduction.

Where To Buy Life Insurance

You can buy life insurance from an insurance agent or directly through an insurance company, both of which must be licensed by the Financial Services Commission of Ontario . Find a licensed agent near you by visiting Agents Licensed in Ontario. You can also check to see if an insurance company is licensed by visiting FSCOs Licensed Insurance Companies in Ontario.

For more information on where to buy life insurance visit Shopping for Life Insurance.

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How To Choose A Beneficiary

A life insurance beneficiary is the person who can claim the death benefit after you pass away.

You can name multiple beneficiaries and decide what percentage they each will receive when you die. Additionally, you should add contingent beneficiaries who will receive the death benefit if your primary beneficiaries have died.

Not everyone names people as beneficiaries. Some people name trusts. By creating a revocable living trust and naming it as the life insurance beneficiary, you can ensure that the money is used according to your wishes. For example, the trust money could be used to take care of children.

If you decide to name a trust the beneficiary of your policy, make sure to work with an attorney to structure the trust correctly. Its also wise to work with a financial planner so that a trust is part of your larger financial plan.

Its crucial to update and review your beneficiary selections regularly. For example, life events such as a marriage or a divorce can impact your selection.

To update your beneficiaries, contact your life insurer and submit a change of beneficiary form. Making changes only on a will wont affect life insurance.

What Happens If The Insured Dies Without Paying The Missed Premium Within The Grace Period

Life Insurance How Does It Work

If the insured dies on the date the premium is due or during the grace period, the policy is still valid, and the beneficiaries will receive the life insurance payout minus the missed premium. However, if the insured dies after the grace period ends and before reinstating the lapsed policy, the insurer will deny the life insurance claim due to policy lapse.

The policy can be reinstated only when the insured is alive. Beneficiaries cannot ask for reinstatement after the insureds death to recover the life insurance death benefit.

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Can You Get Life Insurance With A Pre

If you have pre-existing conditions, you may find it difficult, but not impossible, to purchase life insurance. Coverage will depend on various factors, primarily your individual health situation. Depending on the life insurance company, some pre-existing conditions like diabetes, high blood pressure, and anxiety may be covered but with higher premiums.

Potential Tax Savings With Long

If you need long-term care down the road, qualifying expenses will be paid tax-free. If you do not need to use the long-term care benefits of your hybrid life/LTC policy, eventual death benefits will be tax free to your beneficiaries.

Depending on your age and income, you may be able to take a tax deduction on a portion of long-term care insurance premiums from your federal income.

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How Does Universal Life Insurance Work

Universal life insurance, like whole life, is another form of permanent life insurance. These policies offer a death benefit and a cash value account. Universal life insurance stays with you until the end if you pay your monthly premiums. There are three kinds of universal life insuranceâ âvariable, guaranteed, and indexedâ âbut with all three, you have the flexibility to change your death benefit or lower your premiums. Your cash value account’s earnings can help pay the premiums on your account.

Can I Choose Who The Money Goes To When I Pass Away

How Does Life Insurance Work?

Generally, the answer is yes but youll need to make sure the right arrangements are in place.

If you have a joint life insurance policy, when you pass away, the money will usually go to the surviving policyholder that is, the other person you had the policy with unless you made other arrangements. If you and your partner seperate, you may be able to split your joint policy into single policies.

If you have a single life insurance policy, the money will be paid into your estate. Heres where its really important that you make your wishes known.

If you want to choose a beneficiary you could consider placing it into a Trust. Here are the potential benefits of doing this:

  • As the policy is being placed in a Trust, it wont be counted as part of your taxable estate when you pass away. This means the any money passed on to your beneficiaries is usually exempt from Inheritance Tax 1
  • The money can reach your beneficiaries more quickly if you appoint additional trustees who then deal with this after you pass away

You can also make it clear who youd like to receive the money from your life insurance policy when writing a will – however, this may not be as tax efficient as placing it into Trust.

It’s a good idea to seek independent legal and financial advice when thinking about placing a life insurance policy into Trust or writing a will.

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What Is Whole Life Insurance Used For

Whole life insurance can be used in many ways:

  • Financial support for your family: The death benefit, paid tax-free, can be used by the beneficiaries to replace the loss of income, to pay off debts, maintain their lifestyle, or pay for your childrens education.
  • Cover your final expenses: The guaranteed, lifelong coverage provides funds that can be used to pay for final expenses or end-of-life medical costs.
  • Leave a legacy: The tax-free death benefit creates an inheritance for the family or a financial gift for your favourite charity.
  • Preserve an inheritance: The proceeds can pay for taxes and fees that are triggered when assets are transferred upon death, keeping the initial inheritance intact for future generations.
  • Access to your money: The dividend payments build up the cash value, which can be accessed to supplement your retirement income, help pay for your childrens education, or even pay future premiums on your policy.
  • Protect your children: It can be purchased to provide your child or grandchild with paid-up, lifelong coverage at a low cost, plus access to cash values to fund their education or to support a downpayment for a home.

For your business: Business owners may use it to fund the purchase of partners shares in the business at death or support loans as collateral.

How To Choose A Life Insurance Beneficiary

You should choose a beneficiary whos financially tied to you, or who you can trust to receive the death benefit on your behalf.

  • Many choose to name their spouse or adult children.

  • If your children are minors, you can also list a family member who would be their guardian in your absence.

  • However, Policygenius recommends using estate planning tools like trusts to ensure the money is used the way you want it to be used.

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How To Determine The Amount You Need And Where To Get It

If you have a young family, it will take many years of income to pay to feed, house, clothe, and educate your children through to adulthood. If youre not there to provide for them, life insurance can help with those costs but you have to make sure your policys death benefit is enough to do so. Here are a few general rules people use to help determine how much they need:

71-75 1/2 times net worth

Any of those methods is a good start, but it also makes sense to talk with an experienced professional who can guide you through the process of calculating your actual need.

How Does Hybrid Long

Level Term Life Insurance: What It Is and How It Works

Traditional long-term care insurance may feel like a use it or lose it purchase. If it turns out you dont need to use the coverage in the future, you might consider those premium payments wasted.

What hybrid means in insurance is that the product is a combination of two different types of insurance. There is both long-term care insurance and life insurance. You pay premiums either as one lump sum or over a period of years.

If you dont use the long-term care benefits, your beneficiaries receive a death benefit. If youre wondering if you can add long-term care to life insurance you already own, the answer is no, but you may be able to exchange existing life insurance policies when you purchase a combination life/LTC policy.

Learn more about how long-term care insurance works, including how much coverage you may need and how to apply.

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When Benefits Are Paid

Life insurance benefits are typically paid when the insured party dies. Beneficiaries file a death claim with the insurance company by submitting a certified copy of the death certificate. Many states allow insurers 30 days to review the claim, after which they can pay it out, deny it, or ask for additional information. If a company denies your claim, it generally provides a reason why.

Most insurance companies pay within 30 to 60 days of the date of the claim, according to Chris Huntley, founder of Huntley Wealth & Insurance Services.

âThere is no set time frame,” he adds. “But insurance companies are motivated to pay as soon as possible after receiving bona fide proof of death, to avoid steep interest charges for delaying payment of claims.”


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