Applying for Life Insurance
What is Life Insurance? How does it work?
- Life insurance involves the transaction of three parties; the insurer, the insured, and the owner of the policy (policyholder), although the owner and the insured are often the same person. In one case, if Sam Johnson buys a policy on his own life, he is both the owner and the insured. But if Jane Johnson, his wife, acquires a policy on Sam’s life, she is the owner and he is the one that is insured.
- One other significant party involved is the beneficiary. The beneficiary is the individual or persons who will receive the policy proceeds upon the death of the insured. The beneficiary is not a party to the actual policy itself, but is initially designated by the owner. The beneficiary can also be changed in he policy unless the policy has an irrevocable beneficiary designation.
- The insurance policy is a legal contract specifying the terms and conditions of the risk assumed. There may be special provisions that apply, for example a suicide clause wherein the policy becomes void if the insured commits suicide within a specified time for the policy time frame. Any misconduct or false information placed on the application by the policy holder is grounds for policy termination. Most policy agreements hold a contestability period; if the insured individual dies within this period, the insurer has a legal right to contest the insurance claim and request additional information before deciding whether or not they decide to pay or deny the claim for proceeds.
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The Uses of Life Insurance
Life insurance can be utilized for either personal or business. Below is a list of common purposes of a life insurance policy.
Individual Uses
Debt coverage - Credit card debt, student loans, personal loans, and personal notes can be covered by life insurance in the event of an individual's death.
Mortgage Loan Coverage - The balance of a mortgage or stream to pay monthly mortgage or can be payed off by the proceeds of a life insurance policy.
Household Income Replacement – In the event of the policy holder’s death, life insurance proceeds can provide a supplemental flow of income to ensure that the surviving family members are able to maintain the same standard of living.
Education Coverage - Life insurance proceeds can cover the education costs of the insured's children and ensure their education.
Funeral Coverage - Life insurance proceeds can ensure that there is enough money for proper funeral and burial expenses.
Business Uses
Business Continuation Coverage – A life insurance policy can be used to fund a buy/sell agreement or stock redemption plan to determine to enable a partner or group of employees to buy the business interest of the deceased partner.
Employee Benefits - Life insurance policies are commonly included in company employee benefits plans.
Key-Person - A life insurance policy can be used to protect a business from the loss of income and profits caused by the death of a key employee.
Business Loans - Life insurance protection on a business owner or a key employee can be used to cover the debts of a business in the event of the death of that policy holder.
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Determining your needs
There are no standard rules to follow for you to determine how much life insurance you should have, but, there are several factors that could help and should be considered when determining how much life insurance you should hold. They include:
- Life adjusting fund – After losing a loved one, the life path to key people connected to that individual may dramatically change. This may be used to help cushion the immediate lifestyle change of those surrounding individual. The life adjustment fund will allow adequate changes to take place in the safest way possible for the family or partner.
- Final Expense Coverage – The life insurance policy may be used to cover funeral expenses, unpaid debts, probate costs, estate taxes, and unpaid hospital bills.
- Educational Coverage – The life insurance policy may be used to cover the children’s education costs, including elementary school, high school, and college.
- Retirement Fund - There should also be adequate funds available to ensure that the spouse can retire comfortably.
- Supplemental Income – The life policy may help to provide a consistent income stream to help pay for the family's living expenses, such as mortgage payments, living bills, and other life expenses.
Keep in mind that these are only some factors that you should consider carefully when estimating how much life insurance you will need. Of course, everybody’s life insurance needs will differ, but in an overall perspective, an individual’s needs are the greatest when they begin their careers or a family until they reach retirement, which at time most individuals needs for life insurance begin to diminish. It is imperative that you review the needs you have for your life insurance policy to fit in your family’s lifestyle.
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