Guest Post: Options for Term Life Insurance Death Benefits Payouts
There are pages written about how to buy term life insurance, but very few devoted to death benefit claims and payouts. Sadly, this topic is so neglected, that awareness levels on this matter are very low. Term life insurance is the best kind of life insurance available today, and it would be a shame if your beneficiaries do not know or are misled about payout procedures. This article
will help fill the gap and provide some insights into the types of term life insurance payouts.
The first step
When a loved one has expired and the funeral formalities are finished, you, the beneficiary needs to submit a certified copy of the death certificate to the insurance company. The death certificate is a must in order to file an insurance claim. Instead of contacting the insurance company, contact the agency or agent that sold the policy to the insured. Numbers of both the agent/agency and the life insurance company are usually found on the policy itself. The agent will help you understand the procedure better, and will ease the process for you in your time of grief.
Death benefit payout options
When your claim has been filed and approved, the life insurance company will ask you how you would like to receive the death benefit amount. There are two main payout options:
Lump Sum
Almost every term life insurance policy allows you to withdraw the entire death benefit amount in a lump sum. Most beneficiaries opt for this payout plan if there are pressing financial commitments like loan payments or an urgent need for the entire amount. Some beneficiaries prefer to withdraw the entire amount, and then direct it to tax-deferred investment vehicles.
Annuity Methods
For those who do not wish to receive the death benefit in a lump sum, life insurance companies offer several types of annuity (yearly) payout options depending on how you want to receive the amount. These include:
- Life income: The beneficiary is guaranteed an annual income as long as he or she lives. The insurance company determines the payment amounts based on the age and gender of the beneficiary. If the beneficiary dies, the insurance company retains the balance amount.
- Life income, period certain: The beneficiary is guaranteed an annual income for life, or a specified period of time, whichever is longer. If the beneficiary dies before the specified period, his or her beneficiary i.e. a second beneficiary receives the outstanding payments.
- Last survivor income: If there is more than one beneficiary, life payments will be made until the last surviving beneficiary dies.
- Specific Income: The beneficiary gets to choose how much and for how many years death benefits will be received, until the entire death benefit is exhausted. If the beneficiary dies before the last payment, his or her beneficiary receives the remaining payouts.
- Interest income: This is a great option for minor beneficiaries. The beneficiary is guaranteed payments on the interest paid on the death benefit for a specified time, or until the beneficiary reaches a certain age. The original benefit is then made available to the beneficiary.
Always think your options through
Before choosing a payout option, evaluate your financial needs to determine which option is best for you. It is always wise to speak to a financial advisor or a tax consultant. Though the payment options are relatively simple and easy to comprehend, it is wise to understand them thoroughly and know the implications of each kind of payout method. Beneficiaries must be aware that though the lump sum benefit is tax-free, all interest amounts received on the lump sum are taxable.
If you do not own a term life policy yet, the Internet is a great place to shop around and get free term life quotes. Just make sure that your beneficiaries are kept in the loop about the options available to them when claiming your death benefit.
15 Key Questions to Ask when Looking for an Insurance Policy
I was contacted recently by a reader who also happens to be an employee of State Farm Insurance. He passed along to me a list of 15 questions that you will want to ask an insurance company when either shopping for a new policy or evaluating your current provider. So, if you happen to be in the market for a new insurance policy or want to re-evaluate your current policy (something I would actually recommend you do periodically), here are some questions to get you started.
Again, I did not create this list, I’m just passing it on to you as I feel it’s a good list of questions to discuss. I’d be particularly interested in the answers to questions 2, 3, 6, 7 and especially 10. Regarding #10, I’ve always found quite annoying the idea that I faithfully pay my premiums to the insurance company but they raise my rates as soon as I file a claim (wasn’t that why I was giving you all that money in the first place? So, you could cover my claim if I needed something?).
State Farm® Key Questions for Consumer Empowerment
- How do I know that I’m getting the right amount of coverage for my situation – not overpaying for things or leaving me exposed?
- What are the advantages of having different types of insurance policies (home, auto, life, etc.) with the same provider?
- What disadvantages are there of having multiple insurance policies (home, auto, life, etc.) with the same provider?
- How can I understand what comprises a good policy for my situation under each of the insurance categories? Language is complex and difficult to understand.
- How does your company make sure that I can get smart, trusted advice if my personal situation changes?
- What can I do to make sure that I get all of the discounts I’m entitled to?
- Are there benefits to renewing with the same company when my policy ends?
- How can I ensure that I’m making an apples-to-apples comparison if I’m price shopping among several companies?
- How can I make sure that my insurance decisions fit into my overall personal financial picture?
- What is the impact on me if I file a claim? Explain to me why my policy goes up when I make a claim? How is this protecting my financial needs if my insurance company raises my premium?
- What are the most overlooked discounts that are relatively easy to get?
- How frequently should I review insurance policies to ensure they are up-to-date and meet my needs?
- How can I tell if an insurance agent is being “straight” with me, or just trying to sell something else?
- Do my kids get a discount when they buy a policy with the same company that I have been with for years and years?
- Will a poor credit rating influence the coverage I qualify for and my premiums? How do I know if an insurance agency is investigating my credit report? Is that legal?
Things to Consider when Replacing a Life Insurance Policy
Over the past few posts, I’ve been talking a lot about insurance, specifically life insurance. In the last two posts, I’ve discussed the process we used to buy new life insurance policies and then discussed why we decided to cash in our variable adjustable life policies and replace them with term policies . Though I recommend buying term life insurance, I would be remiss to not discuss some of the concerns to be aware of if you decide to replace your current policy. (I would also be remiss to have any more posts concerning life insurance in the near future!)
Be cautious when replacing life insurance coverage
If you currently have a variable or whole life insurance policy (let’s call it "cash value" today), I urge you to be very cautious when replacing your existing coverage.
The first and most important rule when replacing your current coverage, term or cash value, is do not cancel your current policy until you are sure your new policy is in effect . This is absolutely critical – you can’t afford to have something untoward happen after you’ve canceled your policy but before your new one is in effect. Or, what if you cancel your current policy and your application for new coverage is rejected? For someone who needs life insurance, expensive coverage is much better than no coverage at all! Please, proceed slowly and cautiously when doing this.
Your current policy may have surrender charges
If you haven’t had your cash value coverage very long, you might have to pay a surrender charge to free your money. Yes, you may have to pay the insurance company more of your money to take out your money. Of course, since almost 100% of the premiums go to the insurance company the first year or so, you might not have much money to take out anyway.
Make sure a new policy is cost-effective
On the other hand, if you’ve had your policy a long time, even a new term policy might be just as expensive as your current policy. This is especially true if you’ve developed health issues or started smoking (or took up sky-diving) in the meantime.
But on the other hand (that’s 3 now?), insurance rates have gone down quite a bit in the last few years, so it might be worth it to check out the current rates. You might be able to save a significant amount of money, especially if you’ve improved your health by quitting smoking or losing weight (or stopped sky-diving)
Two miscellaneous words of caution
Remember that most insurance policies have an exclusion period during which they won’t pay the death benefit under certain circumstances. For instance, on my new policy, they will not pay the death benefit if I commit suicide within the first two years. Also, if they determine that I lied about something on my application, they won’t pay out if I die within the first two years and the thing I lied about contributes to my demise. (don’t lie and don’t commit suicide and you can ignore this warning – you know, that’s just two real good pieces of advice for everyday living right there)
Also, when choosing a replacement term policy, remember that the insurance company still has to be around in 25 years or whatever to pay out the death benefit if you die while you have the policy. So, don’t scrimp too much and get a unstable company just to save a little money each year. (Of course, in the current economic climate it is very difficult to determine which companies, if any, are stable…but do your best) Check out ambest.com to get the current ratings of insurance companies – you do have to register to see their ratings but registration is free.
Talk to someone
If you are considering replacing your cash value policy, my advice would be to talk to a professional or someone with a lot of experience in this area to see what makes sense for you. Of course, talk to someone who will have your best interests in mind and not just his/her commission check. Whatever you do, don’t let him/her churn you into another expensive cash value policy that will trigger another set of surrender charges and crazy first year fees.
So, check out rates on insweb.com or selectquote.com and see if replacing your current coverage is worth it, then go through the entire process before doing anything with your current policy .
Photo Credits: Picture Perfect Pose and upyernozWhy We Switched to Term Life Insurance
In a previous post, I mentioned that my wife and I had recently cashed in our variable adjustable life (VAL) policies and replaced them with term life insurance policies . I’d like to take you through my thought process for deciding to take this step.
Term or Universal/Variable/Whole?
When I first started my journey to learning about personal finances, most of the books and advice I read suggested purchasing term life insurance policies and not to combine your investing and life insurance. The main reason were the onerous costs and fees typically associated with the universal policies that tend to eat into your investment results (can I just refer to universal/variable/whole/etc as "universal?" – it’s a real pain to write them all out). I also have a friend who is a financial planner and he told me that he has never recommended a universal policy for one of his clients.
The fees really are pretty crazy on these policies. For instance, during the first year almost 100% of your premiums go toward…well, I don’t know where it goes but I do know that it does not go into your investing account. After putting around $5000 into the account during the first year, I remember having a few hundred dollars in cash value! During the last few months that I owned the policy, I reduced the premium amount to $50 and that sounds like a pretty good deal. But after riders and fees, less than half of that actually made it into the investing portion of my policy. You might say, not too bad – only $30 per month for insurance? Well, sorta, this did not actually cover the cost of the coverage – each month they would take money from the cash value to fund the difference. And these policies are terribly complicated: it took me more than a few phone calls to figure out where all the money was going. At one point, the agent did not even know what some of the fees were – he had to check with the home office and call me back.
Do universal policies ever make sense?
To be fair, In limited situations and for specific purposes, it might make sense to use a universal policy. The situation of which I am speaking applies to high-income earners who have maxed out their tax-advantaged investment options and still have more money to invest. Universal policies are typically tax-deferred and present another opportunity for avoiding the tax bite. Also, your universal policy usually affords some liability protection compared to a standard taxable investing account. If this applies to you, it might work for you to over-fund a universal policy to take advantage of liability protection and tax-advantaged growth. I certainly would not recommend doing what we did though – putting less into 401k accounts and Roth IRAs so we could fund an expensive life insurance policy.
Our experience with VAL
In 2001, my wife and I both purchased VAL policies on the advice of our financial planner at the time. We owned these policies until 2007. Of course, the investments started out rough during the early 2000’s but for the past few years, a pretty good bull market had been raging. My wife paid the minimum amount in premiums while I overpaid to build up extra investing equity.
So the result when we investigated how much they worth if we cashed them in? Well, let’s look at the bright side – at least I wouldn’t have to pay any taxes on the money. That’s right, the cash value amount after six years of funding the policies, even through a bull market, was less than I had paid in premiums. So, that pretty much sealed the deal for us. Unfortunately, that left me with the nagging feeling that if we had purchased much less expensive term policies and invested the difference in a Roth IRA we would be a lot better off now (my wife has repeatedly urged me not to dwell on this).
So we decided to investigate term policies
Previously, I discussed the process that we used to investigate and purchase term life insurance policies . Well, we followed that process and ended up with much more insurance with guaranteed premiums for 20 years at a much lower cost (basically I now pay yearly for 2x the coverage what I used to pay for 2 months).
Do something constructive with the extra money
If you replace a universal policy, you may have a chunk of cash when you cancel your policy and you will probably have a monthly savings as a result of paying lower premiums. Don’t just squander this money. Even if the fees are high on the universal policy, it does act as forced savings. You would have been better off keeping the universal policy than just blowing the premium savings each month.
Personally, we used the cash value of our old policies to pay down some of our student loans. Then we used the monthly savings to accelerate the remaining loan. These two factors were actually a big part of us finally getting out of debt except for the mortgage .
Do not cancel your current policy before the replacement is in effect
That’s the most important item to remember when replacing life insurance. In my next post I will expound on the topics that should be considered when deciding whether or not to replace a life insurance policy – please check back. This one is so important, however, that I have to point it out here and now. Let me repeat: even if your policy is super expensive, do not cancel it until your new policy is fully in effect.
Parting questions…
Has anyone else switched from universal to term? Were you able to be good about using the monthly savings constructively? Has anyone gone the other way? I would be very interested to hear the reasons for that switch.
Buying Life Insurance
Last year, my wife and I bought new term life insurance policies to replace our expensive universal life insurance policies. Those old policies weren’t earning me nearly as much money as I was told they would – but that’s the topic of another post. So we researched how much term life insurance policies would cost and decided it was the best decision for us to replace ours. Be aware that replacing a policy is NOT always in your best interest depending on how long you’ve had the policy and how much a replacement policy would cost.
We bought term life insurance policies
First, a disclaimer – I am a big proponent of life insurance. I think it is a very important piece of most people’s financial planning process. In fact, in my previous posts I have discussed the importance of insurance in general and the importance of life insurance for a stay-at-home spouse .
I am also a big proponent of term life insurance policies. Term policies are currently so inexpensive for most people, they can really enable you to buy sufficient protection without a huge yearly outlay. I’ve read about the different types of policies and I would maybe concede that for some very high-income earners, the more expensive whole life or universal life might be worthwhile for tax reasons. But certainly for the vast majority of us, I think term life insurance is the best value. In fact, I have a friend who has been a fee-only financial planner for many years and has never recommended that any of his clients purchase anything other than term life insurance.
First determine your life insurance need
Maybe this isn’t the best way to buy it…but I’ll take you through the process we used and hopefully that will be helpful to you. We started off our search by determining how much life insurance we wanted to purchase. There are a number of useful calculators you could use to do this, such as these at msnmoney.com or smartmoney.com . Honestly, though, they all seemed so complicated and nebulous to me (how do I know how much my wife and kids would need to live on in 20 years?), so I didn’t really use one. I just picked a huge number and used that (by huge I mean 20 times my salary – its seems like that should be enough).
You should also take into account other sources for insurance coverage as well. For instance, my company provides a little life insurance at no cost and I can also get up to 7 times my salary at very low cost. So, I took advantage of that to get very inexpensive life insurance. Be careful not to count on these employer plans for too much of your need, however. If you change jobs or lose your job you won’t have it any more (or, if you can continue it, it will probably be at a much higher price). Also, the price goes up over time and will eventually become too expensive. So, I took all of this into account and used this extra to supplement our coverage for the next few years while my kids are young. As they get older and we can build up our net worth, we’ll be able to let this employer coverage drop when its gets too expensive. Supplementing with these policies enabled us to purchase less private life insurance.
The final thing to consider with term life insurance is how long you want the guaranteed rate. I think you can purchase a policy that will not change premiums for up to 30 years. Obviously, that will cost more than a 10 year policy. So, if your mortgage will be paid off and your kids will be finished with college and out of the house in 10 years, you might not need a 30 year policy. Remember that your ultimate goal here is self-insurance and decreasing your expenses and increasing your net worth leads you there.
Start by looking online
We then turned to the internet with some online searches to get an overview on what insurance was available and how much it would cost. There are a number of popular websites to start with like insweb.com , reliaquote.com , selectquote.com , intelliquote.com . (Note that I’m not endorsing these – I found them via a search…I do think I used insweb though)
We ended up using a local agent
On some of the websites, you enter your contact information and some local agents will typically end up calling you. I took some calls and asked some questions to see if I wanted to use a local agent. I told them right away that I wanted $X of term-life insurance to see what they would say. One actually told me he wasn’t interested in working with me since if I only wanted a term policy i could just get it from any online place. I guess that’s his prerogative if he feels like its not worth his time to sell me a term policy (but what does that tell you about how lucrative for the agents those expensive policies are?)
I did agree to meet with an agent who came to my house and brought a bunch of quotes (the same quotes as I saw online so I was comfortable with them). So we filled out forms and he arranged all the medical exams and such. I felt like it was beneficial to meet face to face as he was able to answer the questions we had and we got the coverage we wanted (he didn’t even try to convince me to buy the expensive stuff). Plus, since it wasn’t any more expensive, it was nice to help out a seemingly honest local agent trying to make a living like the rest of us.
Our agent actually saved us some money too
For my wife, she was rated as preferred by the insurance company. Our agent was surprised that she did not get the absolute highest rating so he went back and talked to his contacts and determined the reason that she only got preferred. He also determined which insurance companies have different underwriting standards. He then re-submitted her application to another insurance company and we ended up saving a few hundred dollars a year as a result – that was very good bonus!
So just get some life insurance
Anyway, the main takeaway is … get life insurance. Yes, yes, determine if you need it first (you probably do). If you do, consider an inexpensive term policy and since it is so cheap, get a lot of coverage. Be cautious if you are replacing a policy – please seriously consider whether that is the best thing to do. Start your search online but also consider using a local agent who will sell you what you want, not what makes him/her the most money.
Photo Credits: Joe Howell and *clairity*Subscribe to Borrow From None
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