How to Understand a Life Insurance Policy
You purchase life insurance to protect loved ones against economic hardship if you die. There are different phases of life where a person may need more or less insurance. Of course, protecting your family during your income-earning years to provide for mortgage payments, college tuition and basic living expenses is a priority. During retirement, life insurance may not seem as important as an income protector but may become a way to mitigate the tax exposure of your estate assets, funding the amount needed to pay estate taxes. The many variations of life insurance can lead to confusion among insurance buyers.
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Instructions
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Realize what type of policy you own. Life insurance policies are temporary (term life) or permanent (whole or universal life). Temporary ends at the term date and is much less expensive than permanent, which remains until you die regardless of your age.
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Locate the basic components of your policy on the face page--this is the first page of the policy that states the insured's name and other personal and policy specific data. The basic components of interest are: insured, beneficiaries, premium payment, death benefit, surrender charges.
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Confirm the name listed as the insured. If the policy should pay benefits when you die, then you are the insured. Confirm that the name, date of birth and address of record are correct.
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Confirm the names of the beneficiaries. Beneficiaries receive the death benefits when the insured dies. You may need to amend the beneficiaries or add contingent beneficiaries--if your wife is your primary beneficiary, your children might be contingent beneficiaries in case your wife is not alive to claim the benefits.
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Review the premium payments. A premium payment is the money you send to the insurance company to pay for your insurance coverage guaranteeing the death benefits. Always confirm that the policy reflects the premium payments you were quoted in the application process.
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Confirm that the death benefit provides the financial coverage you desire. Death benefits are the benefits paid to beneficiaries when the insured dies. Some permanent policies allow for loans against the policy--in the case of outstanding loans, the death benefit is paid to beneficiaries less any outstanding loan balance.
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Read through the surrender charge schedule of fees. Term insurance has no surrender charge but permanent insurance does require you to maintain the policy for a specified number of years. Changing insurance carriers or canceling the policy to take out the cash value results in a penalty called a surrender charge that is a percentage of the cash value--these charges usually decline with each policy anniversary.
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Tips & Warnings
Cash value is the accumulation of premium payments less the cost of insurance plus any earnings obtained in a permanent life insurance policy. Term insurance has no cash value.
