Understanding Your Life Insurance Policy
People who own life insurance typically get an Annual Statement summarizing the policy and its benefits. Unfortunately, many of them don’t understand the information provided, especially if the policy is very old and their memory of the initial purchase has faded. You really should take a minute to carefully review your Annual Statement. Here’s some information that might help you to understand what it says:
- First, be aware that you were given the actual life insurance policy when you purchased the insurance. The “policy” is simply a contract between you and the insurance company with terms and conditions related to your premium payment and the death benefit. It’s good to try to dig out that policy because it will tell you who you named as beneficiaries and other important details of the policy. The Annual Statement is just an updated summary based on that initial contract.
- Policy owner/insured. In most cases the policy owner is also the person whose life is insured. However, that does not have to be the case, and you should carefully check to see if the insured and policy owner are the same. The policy owner is the only one with authority to change beneficiaries and cash in the policy. The policy insured is the person whose death triggers the death benefit payout.
- Your policy is one of two types: term coverage or permanent insurance.
- Term coverage typically provides a guaranteed premium and death benefit for a term of years. If you have “15-year term” then you have a guaranteed death benefit at a guaranteed premium for 15 years from the date you purchased the policy. Once you hit the end of that 15-year term, the policy typically doesn’t terminate but the premium is no longer capped and most people get rid of the policy because of the substantial premium increase at that point.
- Permanent insurance has a death benefit and typically a cash value. It’s called “permanent” because it is intended to last for your lifetime. For insurance to be permanent, the amount you pay into the policy is greater than the premium requirement for the death benefit. The amount you pay over the premium requirement is kept in a separate account that gets a fixed interest rate (whole life) or is invested in the stock market (variable life). If you have a whole life policy, you will be able to see your minimum guaranteed interest rate and current interest rate. If you have a variable life policy you will be able to see your investment subaccounts (similar to mutual funds).
- Death benefit (sometimes referred to as Face Value) is just as it sounds, the amount that will be paid to your beneficiaries at your death.
- Beneficiaries. Many, but not all, Annual Statements will indicate who your current beneficiary is on the policy. If it’s not listed, it’s a good idea to contact the company to ask what they have on record. Insurance companies get purchased by other insurance companies and sometimes the beneficiary designations don’t completely make it to the new company. If the beneficiary designation is missing or incorrect, request a change of beneficiary form to complete and send back to the insurance company.
- Riders and endorsements. This is where things get complicated. Your policy might have an assortment of “bells and whistles”. Perhaps it has a terminal illness benefit that accelerates the death benefit for your use before the end of your life. It may also offer an accelerated benefit if you are confined to a nursing home. It’s a good idea to call your agent or the insurance company if you see a rider or endorsement to review the details of the benefit and (equally important) what you’re paying for the benefit. Every added benefit on an insurance policy has a cost and it’s good to review the likelihood that you will use that benefit and compare it to the cost of the benefit. You can save some money if you decide that a rider is no longer needed.
- Some policies have the premium paid from the cash value or investment value. If your policy is doing that, you need to carefully review the cash value each year to see if it is rising or dropping based on the deduction of premium and costs. If it’s going down, then you need to estimate when the cash value will be used up because at that point the insurance company will contact you about how you want to cover the premium payment which can be very large later in life. If you don’t pay it, your policy ends (“crashes”) and that can be a big surprise. You can call the insurance company and ask them for a report on how long the premiums will be covered by the policy value.
Fun fact: I don’t know how fun it really is but it’s important to know. Millions of dollars of insurance policies go unclaimed simply because the beneficiaries didn’t know they exist. The National Association of Insurance Commissioners (NAIC) has a website available for anyone who believes they might be a beneficiary for an unclaimed insurance policy. To use the website you have to have the policyholder’s legal name, Social Security number and date of birth and date of death. Here is the link: Life Insurance Policy Locator
