Frequent Questions About Life Insurance
- Why do I need life insurance?
- What are the different types of life insurance?
- How do I determine how much life insurance I need?
- Should my spouse and children be insured as well?
- What about group life insurance?
- What is a policy rider?
- How are life insurance cash value funds, dividends and death benefits taxed?
- What information is needed to file a death claim?
- How do you file a death claim?
- How do I choose a good, reliable company?
View our Answers to Commonly Asked Questions About Life Insurance for additional information.
Why do I need life insurance?
Life insurance provides cash to your beneficiary that can be used for any purpose, and typically this payment is received income tax-free. This income can provide several benefits:
- Pay funeral expenses
- An income for your spouse or children
- Paying off a mortgage or loan
- Financing your child's education
- Protecting your assets
Cash value life insurance offers living benefits*, including:
- Buildup of a cash fund that can be borrowed from in case of an unexpected financial need
- Supplemental income at retirement, or help to pay the cost of long-term care
- Reducing the financial burden of terminal illness on families by allowing policyholders to collect a portion of the death benefits early (before dying) to cover such extraordinary expenses
- A guarantee that money will be paid to the individuals you select at exactly the time it is needed most
*Each of these living benefits reduces or terminates the actual life insurance death benefit.
What are the different types of life insurance?
Today, there are literally thousands of different life insurance policies available from hundreds of companies, with a variety of combinations, options and benefits that can be tailored to fit your individual needs. However, most policies fall into one of two basic groups: term insurance and cash value/permanent insurance.
- Level Term Insurance provides protection for a specific, limited amount of time, usually in five-year segments, such as for 10, 15, 20, 25 or 30 years. In the vast majority of policies, the cost of term life insurance covers only death benefits and policy expenses. It does not accumulate cash value. Initially, this is the least expensive option; but in the long run, it may be more costly. Term insurance is generally convertible to a permanent policy.
- Cash value/permanent insurance is designed to stay in force for an individual's entire life. The main advantages of this policy type include a premium which typically does not increase over time, and a cash value that accumulates over the life of the policy. Whole life has a cash value that can be accessed if needed, and can provide you with a guaranteed income after retirement.
- Annual renewable term insurance is another option Amica offers, and is renewed on a year-to-year basis. It's typically owned by policyholders with short-term life insurance needs, such as people whose children are in college or those who need financial protection over the last years of a mortgage or equity loan.
How do I determine how much life insurance I need?
Financial planners suggest a life insurance amount equal to seven to ten times your annual income. However, this is just a rule of thumb, and many other factors should be considered before determining the amount of life insurance you need.
These include other income sources, such as any existing life insurance coverages, investments, pension plans or other assets. If you are married, your spouse's earning capacity and the number of individuals who are financially dependent on you (and for how long) could significantly impact the amount of coverage you may need. This may include money for your children's education and paying off any other liabilities, such as a mortgage or loans.
The process of determining how much insurance you need should not be approached lightly.
Keep in mind that it is very useful to prepare a conceptual budget of what your family's financial needs will be should you die prematurely. Your budget should include everyday living costs (food, utilities, insurance, taxes, etc.) and the need for future cash for items including children's education, paying off a mortgage, relocation expenses, and the like.
We offer a free needs-analysis calculator that can help you organize the needs determination process and make it easier to develop minimum and optimal budget estimates.
Should my spouse and children be insured as well?
In a dual income household, it is vitally important to protect the income-earning capacity of both spouses. Life insurance on an at-home spouse is recommended to pay for household services and child care that may be otherwise unavailable should the at-home spouse die.
In some cases, it may be advisable to have life insurance on children, but not if it reduces purchasing appropriate amounts of life insurance for the family-s main income earner. Most insurers offer some type of inexpensive "children's insurance benefit" rider that provides a small, but usually adequate, amount of life insurance coverage to pay for funeral and other final expenses.
What about group life insurance?
Many life insurance companies offer employers and various organizations the fringe benefit of life insurance for their employees or members through group life insurance policies. But, in most cases, this insurance generally only provides coverage equal to one or two times your salary, which is much less than the recommended amount. This insurance is typically not transferable, so you may not be able to keep your coverage if you change or lose your job.
What is a policy rider?
Policy riders are additional benefits that can be added to your base life insurance policy. They enable you to design your life insurance coverage so that it fits your individual needs. There is a cost for each rider since they entail additional risks for and/or financial commitments. Common riders include:
- Accidental death benefit: this adds an additional death benefit to your policy if the insured dies from an accident. The amount typically cannot exceed the face amount of the base policy.
- Waiver of premium: the insurance company will waive the requirement to pay premiums and will continue your coverage should you become disabled for a time, usually six months. After six months, the company refunds your premiums back to the date of disability, and all future premiums are waived until you recover.
- Purchase option rider: a valuable benefit for younger insureds, this allows the purchase of additional insurance without answering any health questions, having a medical exam or otherwise having to show proof of insurability at some time in the future.
- Cost of living rider (COLA): a COLA rider enables you to increase the face amount of your insurance based on increases in the Consumer Price Index. COLA is a great way to systematically keep your coverage in step with inflation. Your company may not make it available on all policies or in all states.
How are life insurance cash value funds, dividends and death benefits taxed?
The annual increase in a policy's cash value does not incur any current income tax liability for the policyholder. Dividends generally are considered to be a "return of premium" and are not taxable for the policyholder. (However, if the cash value and dividends are withdrawn, any excess over premiums paid may be taxable.)
In most instances, life insurance death proceeds will not be subject to income taxation for the beneficiary. If the insured has ownership in the policy at the time of death, the proceeds may be counted in the insured's estate for federal estate tax purposes.
State inheritance taxes and federal gift taxes may also apply to life insurance proceeds in certain situations. You should consult with your tax adviser regarding questions about possible income, estate, and gift taxes in connection with life insurance that you own or may be planning to purchase.
What information is needed to file a death claim?
The beneficiary or beneficiary's representative can file a death claim in one of two ways: they can report the claim online or they can call 800-234-5433 and ask for Life Claims.
How do you file a death claim?
To file a death claim you will need the insurance policy, information regarding the manner and cause of death, and a certified copy of the death certificate. In some instances, we may need to obtain medical history information, including doctor's names and medical treatments. An Amica representative is always available to assist and make this process as easy as possible.
How do I choose a good, reliable company?
In general, state laws regulate all life insurance companies. Each state insurance department keeps close tabs on the life insurance operations within its borders, with the goal of assuring consumers that companies are managed in an acceptable fashion and have the financial reserves to pay their contractual obligations when the time comes.
Some important differences between life insurance companies:
- Some are large, multi-line companies that offer both casualty (home and auto) and life insurance.
- Some concentrate only on life insurance and annuities.
- Some focus on specific markets such as small businesses or seniors or "niche" products, such as variable life. There are approximately 1,600 companies providing life insurance in the U.S., according to LIMRA.
- They distribute products differently: many are involved in some type of national or regional general agency system, where the general agent is authorized to retain and train agents who sell the company's lines. A growing number of companies, like Amica Life, sell their products on a "direct basis" to consumers.
Amica Life prides itself on an A+ rating (the second highest available) from A.M. Best Company*, arguably the best-known and most highly regarded life insurance rating service. In choosing your company, you should concentrate only on companies that have achieved an A++, A+ or A rating over a long period of time.
*A.M. Best Company. Jan. 11, 2013. For the latest rating, access ambest.com.
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