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Top 25 Life Insurance Frequently Asked Questions

Life insurance can be considered a safety net designed to give you and your loved ones financial security should the unthinkable happen. As an independent insurance broker in Franklin, TN, I’ve received many questions concerning life insurance throughout the years, so I decided to compile a list of the ones I come across the most.

Life Insurance FAQ

1. What are my life insurance options?

Depending on your needs, you can choose between a term life insurance policy or a permanent one. Term insurance provides coverage for a certain amount of years (usually up to 30), while permanent insurance, such as whole or universal life, guarantees lifelong protection. In addition to these rather popular options, you can also consider:

  • no-exam life insurance, such as simplified issue, guaranteed issue, or accelerated underwriting. These can be either term or permanent. For more information, check our article on no-exam insurance.
  • final expense insurance, a form of permanent coverage with a limited death benefit, suitable for seniors who would otherwise not qualify for traditional insurance.
  • survivorship insurance, a form of protection that covers two individuals and pays the death benefit only when both pass away.
  • mortgage life insurance, a form of term protection that lasts as long as you have an ongoing mortgage and is limited to the loan value. Credit life insurance is very similar.
  • group life insurance, usually provided by employers for their employees.

2. How does life insurance work?

It’s quite simple, really – an insurance policy implies a transfer of risk. So, in exchange for a certain sum of money – or premium – the insurance carrier issues you temporary or permanent protection under the guise of a death benefit awarded to your beneficiaries in the event of your passing. To be issued a life insurance policy you first have to undergo a medical exam or questionnaire. This allows the carrier to underwrite risks and rate the policy accordingly.

3. What is life insurance cash value?

Cash value, also known as policy surrender value, is the amount of money you’re entitled to in case you cancel your permanent life insurance policy. Cash value accumulates over time, earns interest, and is tax-deferred. You can use your policy’s cash value to pay your premiums or as collateral for a policy loan.

4. Do I need to undergo a medical checkup to get life insurance?

Usually, yes. Getting a checkup helps the insurance carrier assess the risk and choose your rating tier: preferred plus, preferred, select, or standard. You can forgo this step and opt for a no-exam insurance policy, but you’ll likely pay more money for less coverage.

5. Can anyone be my beneficiary?

Yes. You can name your relatives, a friend, a charity, or your estate as your life insurance beneficiary. This is entirely your decision.

6. Is term life insurance a bad idea?

It depends on who you ask. Insurance agents work on commission and it’s more advantageous for them to sell a permanent life insurance policy. However, most people don’t need more than temporary coverage, which is cheaper and easier to understand. Unless you expect to have people who’ll depend on your income well after you die of old age, then term protection is the way to go.

7. Can I pay my life insurance policy in advance?

Insurance premiums can be paid monthly, quarterly, semi-annually, or annually. You can also pay them in advance. In the case of permanent insurance, once you accumulate sufficient cash value you can use it to pay remaining premiums.

8. What happens if I don’t pay my life insurance premiums?

If you miss a payment, you’ll have a 30-day grace period to amend the situation. If your policy accumulated cash value, the value of the missed premiums will be subtracted until you exhaust your savings. If you can no longer finance your policy, it will be canceled by your carrier.

9. How do I access the life insurance death benefit?

It all starts with filing an insurance claim with the carrier. To substantiate the claim, the beneficiary will need to provide a certified copy of the insured’s death certificate. Once the company receives the request, it will take between 30 and 60 days to process the payment. For more info on insurance death benefits, make sure to give this a read.

10. Can I be denied life insurance coverage?

Unfortunately, yes. You can be denied life insurance due to serious pre-existing medical conditions or high-risk hobbies. You may also be denied insurance if you’re a convicted felon (some carriers may consider you high risk) or if you lied on your insurance application. Your beneficiaries may also be denied payment if you died by suicide during the contestability period (the first two years of the policy), if you passed away while committing a felony, or if they were responsible for your death.

11. Can my carrier cancel my life insurance policy?

Yes, for reasons such as fraud or nonpayment.

12. Is life insurance a good investment?

Absolutely. While term insurance policies are a great decision for families with small children who want to secure their wellbeing, a permanent insurance policy is a great way to supplement your retirement income.

13. How much life insurance do I need?

It depends on where you are in life – if you’re young, busy, and with children, start by multiplying your annual income by 10. The same goes if you have significant debt.

14. Can I earn dividends through life insurance?

Yes, you can – some insurance carriers give you the option to actively participate in their earnings. They’re called participating life insurance policies – make sure to ask your agent about them if this is something you’re interested in.

15. What happens to my policy’s cash value after I die?

While some permanent insurance policies pay out both the death benefit and the cash value when you pass away, the standard rule of thumb is that the carrier keeps the cash value and pays out solely the death benefit.

16. How does the insurance company determine the price of my policy?

They assess the risk by reviewing factors such as your health status, family medical history, lifestyle, profession, and smoking habits. For a full review of how insurance costs are calculated, check out our dedicated article.

17. What is a contestability period?

The first two years of a life insurance policy is commonly referred to as the contestability period, as the insurance carrier has the right to contest claims made by beneficiaries in this time frame. Simply put, if you pass away during the contestability period, your carrier may find it suspicious and will want to rule out fraud before they award the death benefit.

18. What is an accelerated death benefit?

An accelerated death benefit provision allows you to withdraw part of the insurance payout before passing away – for example, if you become critically ill or incapacitated. Depending on the policy, it can go as far as 80% of the policy’s value.

19. What is graded benefit life insurance?

A graded benefit insurance policy will award the full payout only if you pass away after the policy has been in force for a number of years. If you die before that limit, your beneficiaries will be entitled to a smaller payout. Graded benefits are usually found within guaranteed issue life insurance policies.

20. What is a life insurance rider?

An insurance rider is a special clause added to your policy that further personalizes your coverage. Common life insurance riders include accidental death, return of premium, and child term. For more information, read this.

21. What can I do if I’m denied coverage?

Understand the reason behind the denial. If not explicitly stated by the company, ask – is it because of pre-existing health conditions? Did you lie on your insurance application? Do your criminal or driving records raise concerns? Once you figure out why you’ve been denied coverage, you can either work toward changing your circumstances (i.e. get in better shape, clarify misunderstandings), opt for a different kind of policy (i.e. no-exam if your health is what’s preventing you from coverage), or engage with a different insurance carrier. Contact a licensed insurance broker to learn more about your options.

22. Does being bankrupt make me uninsurable?

While insurance companies do look at your financial records to assess insurability, being bankrupt doesn’t prevent you from getting coverage – at least, not permanently. You’ll have to wait until your bankruptcy has been discharged to apply for coverage, and you can expect your rates to be higher, but most companies won’t deny you a policy.

23. Are life insurance premiums tax-deductible?

The short answer is no. Seeing how the state isn’t mandating life insurance in any way, the IRS considers your policy a personal expense. There are, however, three exceptions to this rule which we discuss at length here.

24. Will I pay more for insurance if I’m a smoker?

Absolutely. Seeing how smoking causes numerous illnesses and predisposes you to lifelong health conditions, you can expect your rates to be up to four times higher if you’re addicted to nicotine. Even if you quit, you’ll need to wait for several years before your rates can drop to preferred plus prices.

25. Does vaping raise my insurance rates?

Most insurance companies don’t differentiate between vaping and smoking, so you can expect your rates to be much higher if you vape. Also, make sure you don’t check the “nonsmoker” box on the insurance form if you’re vaping – it may lead to claim denial.

What other life insurance questions do you have?

If you still have questions about life insurance, make sure to drop me a line. Williams Insurance Group is deeply invested in making its clients feel safe and comfortable with their insurance choices. I’ll gladly do the same for you.