Life insurance is the name of the contract signed between an insurance policy company and the policyholder. Under this contract, a set beneficiary receives a lump sum amount of money upon the policy holder’s death. Of course, the holder needs to pay premiums as set by the contract in exchange.
Main types of Life insurance-
- Term Life insurance
This is the most popular as well as the affordable type of life insurance. Coverage for just a specific period is provided which is agreed upon in the contract. And the payments for its premium remain constant throughout the policy duration. Typically, the lengths of these policies are 10, 15, 20, 25, or 30 years.
The beneficiary can claim and obtain the death benefit money if the holder passes away during that period. One-year increments in its coverage are available after the policy expiration. But the rate of renewal is higher each passing year in this case.
- Permanent Life insurance
Lifelong coverage is provided by Permanent Life insurance. It is comparatively costlier since it is for the whole life period and the cash value is also built by it. The cash value keeps accumulating based on tax deference. Borrowings or withdrawals can be made using this cash value. You will get the cash value after subtracting any surrender charge in case you end the policy.
Permanent Life insurance has further classifications such as-
- Whole life insurance– It provides a fixed cash value component as well as death benefit with a guaranteed growth rate.
- Universal life insurance– It is comparatively more flexible than whole life insurance.
- Survivorship life insurance– This is also known as “second to die life insurance”. Two people get insured under a single policy. Most often a married couple takes this type of insurance. The beneficiary receives the death benefit after both of them pass away.
- Burial Insurance- It covers only the final costs including funeral expenses. Therefore it usually provides a small death benefit, approximately between $5,000 and $25,000.
How much does a policy cost?
It depends on several factors including the insurance company, insurance type, overall health and wellness, and sometimes the family history. For instance, it might cost just $30 per month if you are a healthy person and go for a term life insurance of 20 years. The death benefit would be around $0.5 million in this case. On the other hand, universal or whole life insurance could cost anywhere above $125 based on the holder’s age, health, etc.
How to choose a beneficiary?
A beneficiary is the one who will get the death benefit after you pass away. Other than this primary beneficiary, you can also choose multiple contingent beneficiaries. He/she will receive the benefit in case the primary beneficiary also passes away. The beneficiaries might not necessarily be the family members. They could be some organizations or trusts as well.
Filing a claim and time frame to get the death benefit
The beneficiary must file a claim with the insurance company to get death benefit after the holder dies. Some necessary documents while filing a claim include the policy’s copy, the claims form, and the death certificate’s copy. Other documents if required can be confirmed by the respective insurance companies.
Most life insurance companies pay the death benefit to the beneficiary within 30 to 60 days of filing the claim. There might be a delay of six to twelve months when the holder passes away within the first two years. This is due to the contestability clause of 1-2 years. It could also get delayed or canceled if the death cause is homicide or the insurer died due to illegal activity.
Some of the most common payout options for obtaining the death benefit are given below-
- Lump-Sum Payments- It is the most used as well as the default payout option.
- Installments and Annuities- It pays the proceeds and interest regularly throughout the beneficiary’s life. This helps the beneficiary in income protection.
- Retained Asset Account- It keeps the amount in an account and the beneficiaries can write checks to obtain the amount they need. The amount in the bank account keeps earning interest as well.
A life insurance policy provides major peace of mind to the insurer as well as the beneficiary. It is essential to overcome financial uncertainties. This is not as much costly and complex as people think. It is always better to take precautions to avoid any suffering later.