Existing Policy Owners

What should I do now that I have a life insurance policy?

Two very important things to do now that you have a life insurance policy:

1. Let your beneficiaries know about your life insurance policy. After all, it is them who will be the ones receiving the benefits in case of your death. If they don’t know the policy exists, how will they know to file a claim? It can be hard to talk about the end-of-life with your loved ones, but this is a conversation that can remain brief and will make a world of difference if something tragic does happen to you.

2. Safeguard your life insurance policy by making copies of it to store in your home (under lock and key), in your bank’s deposit box, and even with a trusted loved one or your lawyer. Even having an electronic copy of your policy, whether scanned or digitized, is important. This way, if anything ever happened to the original copy of the life insurance policy, you can rest assured that redundant copies are out there to allow your family file a claim and receive the death benefit that you paid toward.

I already have a life insurance policy, should I review it on a regular basis? Would I ever need to replace my existing life insurance plan?

As a good rule of thumb, you should check your life insurance policy on a yearly basis to evaluate whether you need to make any changes to your coverage. Major life events such as a marriage, divorce, new baby, purchase of a new home, loss of a job, or positive health changes may necessitate changing parts of your policy or seriously impact how much coverage you may need.

For example, if you quit smoking, lost weight, and brought your cholesterol down to become healthier, you may qualify for lower premiums and would be beneficial to re-apply for another policy with better terms. Or perhaps premium rates have dropped dramatically since you first purchased your policy. It would behoove you to look at how much money you could save if you got a newer, similar policy at a lower premium.

On the other hand, if you went through a divorce, you may need to remove your ex-spouse as the primary beneficiary from your life insurance policy. Or purchase another policy to cover alimony. Be vigilant and reassess your life insurance policy yearly to ensure that you have enough coverage for all the changes in your life and to make sure that your policy correctly reflects your needs and wishes.

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How can I continue to be covered after my term life insurance policy ends? How do I convert my term life insurance policy to a permanent one?

Before your term life insurance policy ends, most plans include an option to convert the term policy to a permanent policy (be sure to verify that these options exist BEFORE applying for a life insurance plan). This is known as a term conversion.

Check to see when your term policy allows you to convert to a permanent policy. Some plans will only allow you to convert within the first few years of starting the term policy. Others may allow you to convert at any time before the term expires. Recognize that conversion to a permanent policy is a long process so allow for plenty of time between submitting the conversion paperwork and when the expiration date is for conversion. Insurance companies do not usually have grace periods to allow you to finish paperwork for conversion; all conversion must be completed before that specified expiration date.

Just realize that the premiums on converting to a permanent life insurance policy are much higher than the premiums were on your term policy, sometimes an increase of 10 times or more. As long as you can pay the premiums, your coverage will continue for life.

If you can’t afford to pay the premiums on a full conversion, you may be able to do a partial term conversion. Recognize that companies may have a minimum face amount for a policy. Your coverage after conversion must be greater or equal to that amount. Otherwise, they will not give you a permanent life insurance policy for any amount less than that face amount. Here’s an example of a partial conversion:

• You have a $150,000 term life insurance policy for 20 years with an annual premium of $250
• A company’s minimum face amount for any policy is $100,000
• The full term conversion to a $150,000 permanent life insurance policy will cost you $4,500 annually in premiums
• You can only afford to pay for a partial term conversion to $100,000, which will cost $3,000 annually, therefore $50,000 of your previous policy will be lost
• You would not be able to do a partial term conversion to $80,000, because the minimum face amount the insurance company will allow is $100,000

What is the grace period for paying my premium?

If you do not make a premium payment by the due date specified by your policy, then you typically have 30 days from that date to make the payment in full.  However, always check your specific policy for your specific grace period. If you cannot make the payment by the end of the grace period, your policy may be in jeopardy and your beneficiaries may not be able to receive the death benefit.

During the grace period, the insurance policy will still be enforced and in case you happen to pass away during this time, a death benefit may still be paid out but the premium owed may be deducted from the benefit that was promised.

What happens to all the money I paid in premiums when my term life insurance policy ends?

So you made it to the end of your term life insurance policy. Good news is that you are still alive! Bad news is that all of the premiums you paid into your term life insurance policy are lost to the insurance company. That’s right, you don’t get anything for outliving your term life insurance policy (unless you have a return of premium option or rider).

Where did all that money you paid in premiums go? Well, when you pay your premium, the insurance company takes that money and places it in a metaphorical large pot where all the other premiums from the other policyholders go. Whenever the insurance company needs to pay out a death benefit, it takes money from that pot to pay the beneficiaries. Your premiums go to help other families, in need, when unfortunate events occur.

Do I pay taxes on life insurance?

Normally, life insurance death benefits are not taxable if they are paid to a named beneficiary who is a real person.

There are certain situations where benefits from life insurance policies could be subject to taxes:

• If the death benefits goes toward an estate, the government can consider that part of the estate and enforce federal or state estate taxes on the benefits
• If the policyholder buys a policy not for him or herself but rather for person A, and person A specifies person B as the beneficiary, then the government may consider the death benefit that person B receives to be a gift and would be subject to taxes.

What are life insurance riders?

Life insurance riders or endorsements are ways to add options to your policy that provide additional benefits to you the policyholder. These riders can extend coverage or provide flexibility to a policy.

Some examples of life insurance riders:

• Waiver of Premium option – if you became disabled while under coverage, the insurance company will pay your premiums for you until you return to work
• Return of Premium – guarantees 100% return of all premiums paid into the policy if you are alive at the end of the term period
• Child rider – extends life insurance to your children
• Accidental Death Benefit – additional coverage should you die as a result of one of many accidents specified and covered under your policy, death benefit to your beneficiaries would be larger if this criteria is met
• Accelerated Death Benefit – should a diagnosis of cancer or some other terminal illness be made during your coverage, this option would allow you to collect your death benefit (either the full or partial amount) while you are alive to pay for medical costs and replace lost income

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