Although it’s often an uncomfortable topic to discuss, life insurance remains a great way to provide for your family and loved ones in the event of your death. But there are a number of different kinds of life insurance as well as relevant laws that may apply to your policy at some point. The article below provides an overview of common life insurance policies and laws.
Types of Life Insurance
As you start to plan for the future, it’s good to have an idea of the different life insurance policy options you can choose from. One decision entails whether you want an individual policy or a “second to die” policy (also known as survivorship life insurance). An individual policy insures just you, while a survivorship policy insures two people, like spouses. When the first person dies, the second continues the premium payments. When the second person dies, then the beneficiaries are paid from the policy. Some of the most common types of policies include the following:
- Term Life Insurance: This is usually the cheapest option since you are only insured for a certain amount of time, such as the five, 10, or 20 years that you pay the premiums, and it does not build a separate cash reserve.
- Whole Life Insurance: This insures you for your entire life, as long as you continue making the fixed premium payments. Those payments also build up a cash reserve and serves as a type of investment.
- Universal Life Insurance: This is similar to whole life except it offers more flexibility in terms of being able to change the amount of life insurance and the premium payments. It also builds a cash reserve.
- Variable Life Insurance: This allows the policyholder to invest the cash reserves (tax deferred) into stocks, bonds, and securities, with the insurer guaranteeing a certain return on the investment.
Common State Life Insurance Laws
States vary in how they regulate the insurance industry, but some of the more common types of life insurance laws are listed below.
- Free look periods: These allow a new policyholder to review their policy for a specified amount of time with the option of cancelling it for a full refund.
- Grace periods: These give a policyholder a certain amount of time to have a past due premium payment before the policy can lapse. It also specifies that beneficiaries must still be paid if the insured dies within the grace period.
- Timely Payment on Claims: Many states require insurance companies to make payments on a claim within a specified amount of time, or face fines and interest costs.
- Insurance Guaranties: Many states also maintain a fund that will cover your policy up to a certain amount if your life insurance company goes out of business.
- Personal information: Some state laws also regulate what insurance companies can do with your personal information.
The Duties of a Life Insurance Company
Each state has its own insurance code that details the specific obligations of insurance companies. However, these companies are generally required to act in good faith and avoid unfair dealing. This includes investigating and paying proceeds within a reasonable timeframe, providing a written explanation for denied claims, and refraining from unfair settlement practices. If you’re dealing with an insurance company who’s acting in an unfair or deceptive manner, you may be able to file a bad faith lawsuit, or pursue a complaint with your state’s insurance commissioner.
Tax Law and Life Insurance Benefits
Tax laws regarding life insurance premiums and proceeds can be complex. Generally, though, premium payments are not deductible, and policy proceeds you receive as a beneficiary are not counted as gross income. However, some proceeds may be subject to an estate tax. For this reason, some estate planners recommend the irrevocable life insurance trust, which can provide the following benefits:
- Reduces the size of the estate for estate tax purposes
- Protects the cash value of your policy from creditors
- Controls when, how, and why your beneficiaries receive policy benefits
- Helps protect the benefits of a beneficiary receiving government aid
There are a number of ways to set up a life insurance policy with its tax implications in mind. Your individual circumstances and the current federal and state tax laws will dictate what makes the most sense for you.
Is Life Insurance Protected from Creditors?
The answer here again depends on the laws of your state. In some states, creditors can seize the cash value of a life insurance policy if you own it in your own name. In other states, some or all of the cash value and the death benefits are protected from creditors. This is another scenario in which you might set up a trust to protect your assets and the interests of your beneficiaries.
Get Legal Advice Regarding Your Life Insurance Policy
Depending on your situation, there are many different life insurance laws that could be important to you. Whether you’re thinking of setting up a life insurance policy, dealing with difficult life insurance company, or trying to manage a claim and the proceeds of a life insurance policy, you shouldn’t have to tackle all of the complexities on your own. Speak with an experienced insurance attorney who can help with your particular situation and advise you on how best to protect your assets and loved ones.