Understanding Your Life Insurance Policy

Imagine this: You’re sitting at the kitchen table, sorting through bills and other paperwork, and you come across your life insurance policy. You know it’s important — after all, it’s there to protect your family’s financial future if something happens to you. But the language seems confusing, and you’re not sure what all the parts mean.

You’re not alone. Many people who have coverage need help when it comes to understanding a life insurance policy. So, let’s take the mystery out of life insurance, starting with the basics.

The Foundation

Every life insurance policy starts with three key roles:

• Policy owner: This is the person who buys and controls the policy.
• Insured: This is whose life is covered. If they pass away, the death benefit is paid out.
• Beneficiary: This is the person (or people) who receive the death benefit when the insured passes away.

You might hold one or more than one of the roles, depending on the policy: owner, insured (if you’re buying a policy for yourself), and beneficiary (if you’re buying a policy for someone else, like a spouse or child, and you would receive the death benefit if they passed away).

After major life events — like marriage, divorce, having children, or the death of a loved one — your financial priorities likely change. So, you may want to update your beneficiary information.

Here’s a hypothetical example of why: A homeowner named Mike bought a life insurance policy 10 years ago and named his brother as the beneficiary. After getting married and having kids, he forgot to update it. If something happened to Mike, his brother — not his wife or children — would receive the death benefit.

Death Benefit

At the heart of understanding your life insurance policy is the death benefit. This is the money your beneficiary receives if you pass away while the policy is active.

It’s designed to help your family cover expenses like:

• Funeral costs
• Mortgage payments
• Everyday living expenses
• Future needs, like college tuition

How does it work? When the insured person dies, the beneficiary files a claim. Once approved, the insurance company pays out the death benefit.

What can affect the death benefit amount?

• The type of policy you choose (term vs. permanent)
• Your age and health when you apply
• Whether you’ve added any riders or extra coverage
• How much coverage you selected
• Any loans or unpaid premiums

You can use the WoodmenLife Life Insurance Calculator to help figure out how much coverage you need.

The Cost Factor

To fully understand your life insurance policy, you need to familiarize yourself with its cost. Called the premium, this is the amount you pay to keep your life insurance policy active. Think of it like a subscription — you pay regularly to maintain coverage.

Premiums depend on several factors, including:

• Your age and health
• The type of life insurance
• The amount of coverage
• Lifestyle factors (like smoking)
• Payment frequency options

Term vs. Permanent Coverage

Life insurance policies usually fall into two main categories: term and permanent.

Term Life Insurance

• Provides coverage for a set period of time (10, 20, or 30 years)
• Typically has lower premiums
• No cash value component

Permanent Life Insurance

• Provides coverage for life (as long as premiums are paid)
• Typically has higher premiums
• Can build cash value over time

Which is right for your family? If you’re raising kids, paying off a mortgage, or building savings, term life might be a good choice. If you want lifelong coverage and a potential cash value component, then permanent life could be a better fit. Or you might want to consider both term life and permanent life to help with your short-term and long-term needs.

Added Protection: Common Policy Riders

Life insurance policy riders are optional add-ons that provide extra benefits. You can use them to customize your life insurance coverage to better fit your needs. Riders usually come with an added cost.

Common riders include:

• Waiver of Premium Rider — This allows you to stop paying premiums if you become seriously ill or disabled.
• Accidental Death Benefit Rider — This provides an additional payout if you die due to an accident.
• Accelerated Death Benefit Rider — This allows you to receive a portion of your death benefit if you become chronically or terminally ill, depending on the rider.

When considering riders, it’s important to assess your specific needs, understand the costs involved, and consult with an insurance professional to make informed decisions.

Cash Value Component

If you have a permanent life insurance policy, it may include a cash value component. This is money that grows over time within your policy. Cash value grows slowly at first. It’s not a get-rich-quick feature, but it can be a helpful financial tool over time.

How does it grow?

• A portion of your premium goes toward building cash value.
• It grows tax-deferred, meaning you don’t pay taxes on it as it grows.

How can you use it?

• Borrow against it (with interest)
• Withdraw from it (may reduce your death benefit)

Withdrawals may be taxable if they exceed the amount you’ve paid into the policy. Loans aren’t taxed, but they must be repaid. Keep in mind that excessive loans or withdrawals may cause the policy to lapse, and loans and withdrawals will reduce the policy’s death benefit and available cash value.

Exclusions and Limitations

Life insurance policies include exclusions and limitations. These are situations where coverage may not apply.

Common exclusions may include:

• Death due to illegal activity
• Suicide (within two years from the effective date, or within any shorter period as may be required by applicable state law)
• Misrepresentation on your application

Cancellation options:

• You can cancel your policy at any time.
• Some policies may offer a refund of your premium if canceled within a certain period.

Next Steps

Understanding your life insurance policy doesn’t have to be overwhelming. By knowing the key components, like who’s covered, how much is paid out, and what extras you can add, you’re better equipped to protect your family’s financial future.

Take a few minutes to review your current policy. Make sure your beneficiaries are up to date, your coverage fits your needs, and you understand what’s included.

Need help? Your local WoodmenLife Representative can walk you through your policy and answer any questions.

Written by: Gary Peterson, Senior Copywriter

There may be tax implications for policies recognized as modified endowment contracts (MECs). Distributions, including loans, from a MEC are taxable to the extent of the gain in a policy, and may also be subject to a 10% additional tax if the owner is under age 59½.
Death benefit proceeds from a life insurance policy are generally not included in the gross income of the taxpayer/beneficiary (Internal Revenue Code Section 101(a)(1)). There are certain exceptions to this general rule including policies that were transferred for valuable consideration (IRC §101 (a)(2)). This information should not be construed as tax or legal advice. Consult with your tax or legal professional for details and guidelines specific to your situation.
For tax advice, consult with your professional tax advisor.

Read More

Your Complete Guide to Understanding Traditional Life Insurance

How to Buy Life Insurance: A Simple Guide

Calculate Your Life Insurance Needs Without the Confusion

First-Time Buyer’s Guide: 5 Mistakes to Avoid When Purchasing Life Insurance

WEB899