Six major sections are covered in this guide. Advice is based on years of experience from policy holders and agents alike.
1. Quality Life Insurance Companies Described
Before considering any life insurance plan it is important to investigate the company offering coverage.
First, a company without adequate reserves to pay claims should be avoided. Consider as your minimum standard that the insurance company should have at least one of the top 3 ratings for financial strength, or claims paying ability.
Insurance company ratings including the ability to pay are available are available from the following organizations:
Never cancel existing coverage until the replacing policy has been issued and you have verification of this!
Always photocopy your applications and any form bearing your signature. It is a good practice to keep these copies for seven years after canceling a policy.
Complete the forms thoroughly and if some question doesn't apply write "Not Applicable". Application forms are frequently returned due to incomplete information. Make sure you know what you are applying for by obtaining a complete written proposal first.
3. Ownership and Beneficiaries
It is strongly advised that when purchasing life insurance an attorney and or a Certified Public Accountant is consulted. There are several crucial decisions that need to be made with respect to the policy details. Although the policy may be financial protection for your life, the owner of the policy doesn't need to be you. In many cases it is beneficial for your spouse, a trust, an estate or a business/corporation to own the policy. The general rule that applies is that the owner and beneficiary need to have an "insurable interest". Simply put, that person or corporation needs to have a financial interest in your living.
Some life insurance companies pay dividends to policyholders after they have owned a policy for a specific period of time. Policies with participating stock insurance companies and mutual insurance companies sometimes pay dividends if the company is profitable and declares a dividend. Dividends are in no way and under no circumstances guaranteed and are only one factor in determining the potential value of a policy. The Internal Revenue Service has considered dividends on life insurance policies to be a return of excess premium and therefore not a taxable event (Consult your tax Advisor).
Know what your grace period is and make certain that the insurance company receives your premium on time. Coverage can be canceled if premiums are not paid on time. It is possible to reinstate coverage if this occurs, but if you need it badly you will most likely be denied.
Ask for all options of paying your premium (monthly, Electronic Funds Transfer, quarterly, semi, annual, and annual) in order that you may evaluate your options carefully.
Read your policy carefully. Among typical exclusions are suicide, death while in the commission of a felony and death that occurs as a result of an act of war, but a few exceptions exist.
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Always consult your tax advisor and attorney when considering the purchase of any insurance policy.