Understanding Your Life Insurance Policy

An insurance policy is a contract that is legally binding on all parties to its execution. When it comes to life insurance, it is imperative to completely understand the terms of the contract.

Usually the person who owns the life insurance policy is the person paying the premiums, but not always. The owner, whoever it may be, has the right to exercise control over the policy and the right to direct the life insurance company that sold the policy to take or refrain from action with regard to the policy itself. The owner may reserve the right to exercise their prerogatives with regard to the policy without the consent of beneficiaries.

Beneficiaries of a life insurance policy are usually the people who get the money when the insured person dies. The owner of the policy is the person who names beneficiaries. The owner can legally change beneficiaries as he or she sees fit.

In some cases owners are prevented by the law from changing beneficiaries. For example, some divorcees compel that a former spouse be named as beneficiaries of existing life insurance policies. In such circumstances, the owner’s right to change beneficiaries would be prevented as long as the court remained in effect.

Sometimes the life insurance contract itself can prevent the owner from changing beneficiaries. These are referred to as irrevocable beneficiaries.

The owner of the policy has the ability to make decisions regarding the cash value. Owner have the right to borrow against the cash proceeds, cash in the policy, and decide how assets will be dealt with once they are declared by the company.

The owner of the policy also has the right to choose to exercise policy options.

The payment of benefits upon the death of the insured is referred to as the settlement of the policy. There are many ways that beneficiaries can receive a settlement, the most common one being a one lump sum settlement. The name states it clearly beneficiaries receive a one-time-only payment of all money due under the policy.

Another type is an interest payments only settlement. This type of settlement sets up an account for the beneficiaries out of the death benefit and pays them the interest earned thereon. The principal then acts like a form of savings account available to the beneficiaries. Beneficiaries then reserve the right to withdraw principal as they choose.

Installment payments are another common choice of settlement. The owner of the policy can have the beneficiaries receive their benefits in payments over time. Benefits that remain on the account at the insurance company will earn interest as long as there are proceeds left to be paid out.

Be sure to know all exclusions involved in your insurance policy. All policies are different in the fine print. There are a few exclusions you should look for, a common one being the suicide exclusion. Many people assume suicide invalidates a life insurance policy. This isn’t necessarily true. The suicide exclusion usually states, “If the insured commits suicide within two years from the Date of Issue. We will limit our payment to a refund of premiums paid, less any indebtedness.”