Life Insurance: How To Get the Most Out Of Your Policy

Life insurance can be a very important investment for you, especially if you have a growing family. You can get hassle-free wealth distribution among your children, emergency loans at low interest, assured benefits and in the end, a death benefit. All you need to do is to work out a sensible plan with your insurance advisor, through which you can avail yourself of these aspects of your life insurance policy. 



In this article, we'll show you how these life insurance concepts can make a huge difference in your life now.

Tutorial: Insurance 101

BeneficiariesThe most prominent feature of a life insurance policy is the beneficiary clause, which facilitates the easy transfer of your money to your successors. (For more information on the beneficiary classes, see Life Insurance Clauses Determine Your Coverage.)

However, you need to be aware of the different kinds of beneficiaries in life insurance:

Multiple Beneficiaries You can have your children as multiple beneficiaries. All you have to do is to indicate the names of these recipients and the amount of proceeds that they are going to get.

Contingent BeneficiaryNaming a contingent beneficiary is always practical. Suppose that your first (primary) beneficiary dies near the time of your own death. In this case, your children will qualify for your insurance money if you nominate them as contingent (secondary) beneficiaries. A contingent beneficiary can get life insurance proceeds if the primary beneficiary dies before he or she can receive the assets.

Minor as a BeneficiaryIf you have named your minor child as a beneficiary, you will have to appoint a guardian/trustee who will administer the insurance proceeds upon your death.

Revocable BeneficiaryHere, the recipient can be changed any time during the policy.

Irrevocable beneficiaryIn this type of beneficiary class, you cannot change your beneficiary's name unless they consent to it. With an irrevocable beneficiary, creditors cannot touch the policy proceeds as these monies are not considered to be a part of your assets.

LapseIt can happen that due to certain circumstances you forget to pay your premiums, even in the specified grace period. Unfortunately, because you have missed the deadline your policy will lapse.
Consequently, your insurance company can stop covering you or may provide you reduced insurance coverage equivalent to the total premiums paid formerly (also calledpaid-up policies). Nonetheless, a lapsed policy may be renewed in some plans, although the exact renewal procedure varies among different insurers.

Cash Surrender ValuePermanent life insurance policies like universal life insurance, whole life insurance and variable life insurance are more attractive thanks to the presence of built-in cash value. (Term life insurance policies do not offer cash values). The interesting aspect of these policies is that you can surrender your policy and get the accrued cash value in your hands provided you have a substantial amount of cash value.

Cash ValueHere, a part of your premium is put in savings or another investment account according to the type of policy you purchase. As a result, the ongoing interest you receive from your investment account gradually increases your cash value.

Non-Forfeiture OptionsIn permanent life insurance policies, if you fail to pay the premiums in the grace period, you won't lose your life insurance - your accumulated cash value will come to your rescue with the following options: 

1. Terminate your policy and get the cash surrender value in hard cash.
2. Go for reduced coverage for the remaining term of the policy with no future premiums. (i.e. paid-up policy)
3. Use your accumulated cash value to pay the future premiums (also referred as automatic premium loan).
4. Buy an extended term insurance with the remaining cash surrender value. (no further premiums required)

The above non-forfeiture options may differ from one insurance company to another.

It is always easy to terminate (surrender) your policy and get the entire cash surrender value, which will solve your liquidity problems. However, you need to consider many factors before surrendering your policy, such as the increase in the cash surrender value if your policy is maintained for the full term. Consult your insurance advisor to about the full consequences of these issues before deciding whether the policy should be cashed or kept.

Policy LoansAnother positive characteristic of a life insurance policy is that you can take out a policy loanagainst your policy to cater to your emergency needs. The interest is relatively low and the policy loan can be repaid in a lump sum or installments.

If you are incapable of repaying your policy loan, your insurance company will use your cash value to settle the loan.

Participating Vs. Non-Participating PoliciesYou can opt for participating policies in which you participate in the profits of your insurance company and get dividends annually. Here, the premiums are somewhat higher.

Conversely, non-participating policies do not participate in the profits of the insurance company and therefore do not have the dividend option. Here, the premiums are relatively lower.

Unlike permanent life insurance policies, term life insurance policies are non-participating policies. (To further explore the differences between term and permanent life insurance, seeBuying Life Insurance: Term Versus Permanent and What is the difference between term and universal life insurance?)

Policy DividendsDividends are the earnings paid out by the insurer to its shareholders and/or policyholders. You are entitled to enjoy the fruits of your insurance company's labor, for example, dividends if you own a participating policy.

If you do receive a dividend, it is up to you to decide how to make use of it. Here are some common options:

1. Get your dividends in cash.
2. Use your dividends to reduce existing premiums.
3. Keep the dividends on deposit with your insurance company where they will steadily earn and accumulate interest.
4. Use your dividends to purchase extra coverage, such as a one-year term insurance or whole life insurance, that  matures along with your original policy.

ConclusionThere are many benefits to owning a suitable life insurance policy, including fast loans at comparatively low interest rates (with no restrictions on how to spend the loan amount), annual policy dividends and the presence of the cash surrender value. Life insurance also comes with the assurance that the financial worries of your loved ones will be taken care of in your presence as well as your absence!

by Pooja Dave (Contact Author | Biography)

Pooja Dave is a content writer/developer cum research associate at InfoAnalytica, India. She also works as a business writer for the Hyderabad-based Strategic Industry Services (SIS) Infotech Pvt. Ltd and Referee Finance. In addition, she has worked as a financial writer at print/web publications such as Investor Concepts and InvestorGuide.com. She has received professional certification as an Associate Financial Planner (AFP) in risk management and insurance planning from the Financial Planning Standards Board in India and a creative writing certificate from the Writers Bureau, U.K.