Life Insurance Considerations Keep in mind that policy terms can vary significantly from one insurer to the next, and insurers frequently change the policies they offer. Common Features Term life insurance and permanent life insurance are the two basic types of life insurance that companies offer in various forms. Premiums are determined based on the amount of coverage, the type of plan purchased, and your age and health status. Unlike term policies, permanent policies may have remaining values available to automatically pay premiums when a payment is missed or a policy is cancelled. It is important to note that policies can be in force even if the payment of premiums has stopped or if money has been borrowed against the policy. Provided the policy was in force at death, there is no time limit on claiming a payout. Settlement Options Life insurance benefits can be paid in various ways called settlement options. Some of the options include one or more of the following: a cash or lump sum payment; interest only option - insurance company keeps the benefits and provides payment of the interest; fixed period option - benefits are paid out over a predetermined number of months or years; fixed amount option - death benefit or cash value is paid out in a specified amount each period; and/or life income option - benefits are paid for the life of the beneficiary. Cash values provided upon termination of your policy can be generally be paid out: in cash; as reduced paid up insurance - the cash value is used to purchase a paid up permanent life policy (i.e., no premium payments are required); or as extended term insurance - the cash value is used to purchase a term policy. Grace Period A grace period is defined as the additional number of days beyond the due date you have to pay a premium without interest or fear that the policy will terminate (lapse). If your policy has enough cash value and you have an Automatic Premium Loan, then any available cash value will automatically pay for the premium. An automatic premium loan can prevent the policy from lapsing. In the event you die during the grace period, the death benefit will be reduced by the amount of premium due. Clauses Incontestability Clause All life insurance policies contain an incontestability clause that prevents an insurance company from voiding coverage due to a misstatement, misrepresentation, or concealment by the insured after a policy has been in force two years. Suicide Clause Most insurance policies contain a suicide clause. This clause allows the insurance company to refuse payment of a death claim if the insured commits suicide within the first two years of the policy. The insurance company must return premiums paid on the policy. Delay Clause In most cases, cash value and policy loan requests are granted quickly. However, all life insurance policies contain a delay clause that allows the insurance company the right to wait up to six months before providing a cash value or policy loan. Riders A rider is a written agreement that attaches to a policy to add, subtract, or modify insurance coverage. A rider takes precedence over the original provisions in the policy and may or may not require additional premium. The following are some common riders. Accelerated Death Benefit Rider An accelerated death benefit rider is often available at no extra charge. It will allow you to take all or a portion of the death benefit early if you become terminally ill or have a specific disease. Some of these riders also provide you with a monthly payment if you require long-term care due to a medical condition as defined in your policy. The death benefit and cash value of your policy will be reduced by the amount you have received plus incurred interest on the paid out amount. It is important to consider that the amount of death benefit taken early will likely be considered income. This means that the benefit will be subject to federal taxes and will also be included in any income calculation for purposes of determining eligibility for government programs such as Medicaid. Waiver of Premium Rider A waiver of premium rider will pay your life insurance premiums if you become totally and permanently disabled according to the disability definition in your policy. The insurance policy continues just as if you were paying the premiums. This rider can generally be purchased for a small extra premium. Accidental Death Benefit Rider An accidental death benefit rider doubles or even triples the death benefit if you die from an accident. This rider can be purchased for a small extra premium. The division recommends that before purchasing this rider you carefully consider that the amount of coverage you need does not depend on cause of death. Guaranteed Insurability Option A guaranteed insurability option allows you to purchase additional amounts of death benefit at stated periods of time without providing evidence of insurability. This rider may be of value to those with a family history of significant medical problems who currently have limited income and cannot afford a larger death benefit. Family Rider A family rider allows you to provide term insurance on all or certain members of your family under your policy. Taxes Consult with your tax advisor regarding the taxability of life insurance benefits. Here are some tax rules that generally apply to policies that meet the federal definition of life insurance: Death benefits are not subject to federal income taxes. Dividends are considered a return of excess premium and are not taxable. On dividends left with the insurance company to accumulate interest, the interest is taxable. Interest credited on life insurance cash values is not included in current taxable income. Cash value payments that exceed the sum of premiums paid, less any dividends paid, are subject to federal income taxes. Claims When you purchase an individual policy, your producer will be able to assist your beneficiary in filing a claim. Your producer can help your beneficiaries complete the forms and meet any necessary proof of loss requirements. If your beneficiaries do not know who your insurance producer was at the time the policy was purchased, most insurance companies have consumer service representatives to provide assistance. Your beneficiaries will receive a settlement from your insurer upon receipt of due proof of your death and upon surrender of the policy. What constitutes due proof may differ from company to company. However, a death certificate from the Office of Vital Statistics, a Coroner's Report, an attending physician's statement, or a hospital certificate of death is sufficient for most death claims. Viatical Settlements A viatical settlement is the sale of a life insurance policy to a third party. The owner (viator) of the life insurance policy sells the policy for an immediate cash benefit. The buyer (the viatical settlement provider) becomes the new owner of the life insurance policy, pays future premiums, and collects the death benefit when the insured dies. The Division of Insurance regulates viatical settlement transactions. Brokers, their representatives, and viatical settlement providers must be licensed in Alaska. In Alaska, viatical settlements include what is commonly referred to as life settlements, in which the viator is not terminally ill. Other Considerations Avoid Lost Policies Follow these steps to ensure your beneficiaries can easily locate your life insurance policy: Check that your company and agent have current contact details for all listed beneficiaries. Provide your beneficiaries with the name and contact info of your agent and the company that wrote the policy. Keep a current copy of your policy in a safe place, with your will or estate paperwork. Make sure your family or beneficiaries know the location and will have access. Consider asking your insurance company for an annual policy statement if one isn't provided. Need help finding a policy? See Lost Policy. Joint Policies for Couples There are two types of policies that insure the lives of more than one person on a single policy. A first-to-die policy pays a death benefit when the first person dies. Since joint life policies are less expensive than purchasing two individual policies, they are commonly purchased by spouses who are each other's beneficiary. A second-to-die policy pays a death benefit when the last person insured under the policy dies. Second-or-later-to-die policies are often purchased by married couples who want to protect their assets from federal estate taxes. Group Versus Individual Policies Life insurance is sold on both an individual and group basis. Group Policies Group policies provide coverage to individuals under a single master policy issued to the group policy owner. The policy owner may be an employer, an association, a labor union, or other entity. Unless the group is small, generally ten employees or members or fewer, no individual medical underwriting is performed. Instead, insurers require employee or member minimum participation levels and minimum employer contribution levels in order to assure that there are sufficient individuals in the group in good health to balance those in the group in poor health. One drawback to group life insurance is that it will often terminate when you leave the group unless there is a conversion option to an individual policy. Individual Policies Individual policies provide coverage to a specific individual under a policy issued solely to that individual. In order to be considered for individual coverage, you will be asked several medical questions and may be required to undergo a medical examination. The insurer will use the results to determine whether to sell you the policy. This is called medical underwriting. Changing Policies Your insurance agent may suggest that you replace an existing life insurance policy because your life insurance needs have changed, a new policy has some additional features that would be useful for you, or for another reason. However changing policies may not be in your best interest. Before you agree, understand the advantages and disadvantages. If you replace a current policy, you could lose valuable benefits and rights that may not be available under a new policy at all or for a number of years. You could have a costlier premium due to older age or deterioration of health, and your two-year contestability period would restart. Compare your current policy with the new policy - consider the guaranteed benefits, cash values, and your rights under both policies. Also make sure you are medically fit to qualify for a new standard policy before you discontinue the old policy. If you are sick at the time of application, insurers may add additional premium or decline your application.