Understanding Your Life Insurance Policy

A life insurance policy pays out a death benefit to the beneficiary of your choice upon your passing. It’s usually intended to provide financial help for your loved ones, especially if you were their primary source of income. While it sounds simple enough, a single policy can contain many elements that can be overwhelming at first. We’ll help you learn how to navigate your policy so you can better understand your coverage details.

Know Where to Look

The first step in understanding life insurance is knowing where to look for your policy documents. These documents — whether a packet of physical pages or an online PDF — contain the information you typically need. If you bought your policy through an in-person agent, they might give you these papers then. Otherwise, and more commonly, insurers mail them to you after your purchase.

One of the more important pages in this packet is the declaration page, which is also known as the dec page, schedule of benefits, or information page. This page shows a summary of the coverages you have, as well as policy limits, beneficiaries, premiums, and other pertinent information.

People in Your Policy

Life insurance policies have at least two people named in the policy: the policyholder and the beneficiary. While there is usually a single policyholder, it is common to have multiple beneficiaries.

Policyholder

The policyholder, also known as the owner, is the person who has taken out the policy. Usually, they’re also the person insured in the policy, meaning they’re the person who must pass away before death benefits are paid to beneficiaries.

However, that’s not the case in every scenario, as sometimes there are two names listed in this area: the policyholder and the insured party. This is the case for those who purchase a life insurance policy on behalf of someone else. This can only be done with both parties’ explicit consent, with the exception of when a parent is purchasing a life policy for their juvenile child, which they can do without the child’s permission.

This information is listed on the declarations page and usually includes the policyholder’s name, address, sex, and age.

Beneficiaries

The beneficiary is the person — or people — the policyholder has chosen to receive benefits in the event of their death. You’re not limited to a single beneficiary, as you can choose multiple people, as well as the percentages of the payout you’d like each of them to receive. These beneficiaries are listed on the declarations page.

It’s also possible to select primary and secondary beneficiaries. The primary beneficiary is the main person you want to receive the payout. However, if the primary beneficiary has preceded you in death, the secondary beneficiary becomes the next in line.

Your beneficiary doesn’t have to be a person. For example, you can leave your death benefit to a non-profit or charity that is important to you. You could also leave the proceeds to a trust that can be controlled by your family.

You identify your beneficiary — or multiple beneficiaries — when signing up for your policy. To change it, contact your insurance company and provide them with the information for your new beneficiary.

Your Policy Basics

Your life insurance policy details are listed on your life insurance statement. They’re key to understanding the policy you purchased.

Policy Number

Your policy number is a unique number the insurance company assigns to your policy. It’s another way of identifying a policy, and you might need to provide this number when speaking with your insurance company about your policy. It’s usually on the declarations page.

Policy Type

The type of policy you have is listed on the declarations page. Usually, the type of policy refers to the length and conditions of the policy. There are three main kinds of policies: term, whole, and universal. Here’s a quick comparison of them:

• Term Life: Term life insurance is when you have a policy for a set amount of time. Beneficiaries are paid the death benefit if you die during this period. Level term life policies have the same death benefit throughout the whole term, but decreasing term life policies gradually decrease the payout every year of the policy. This might be an option if you have a loan you anticipate paying off over the years.
• Whole Life: Whole life insurance offers protection for your whole life with a set benefit. As long as you continue to pay your premiums (which are also set), your beneficiaries can get a payout.
• Universal Life: While universal life insurance also offers permanent life coverage, it has more flexibility. You can adjust your policy, including your premiums and payouts, without needing to cancel the original contract.

Policy Dates

Policy dates are also on the declarations page, and they list important time periods for your policy. For example, they can show when your coverage ends or how long you have to recover if you miss a payment. The main dates to keep in mind include:

• Issue Date: The issue date is the date your policy officially started providing coverage.
• Term Length or the Expiry Date: The term length or expiry date applies to term life policies. It lists either the term length or a specific date that the termends.
• Free Look Period: The free look period is the amount of time you have to cancel the policy without any penalties. This is usually 10 to 30 days after the deliveryof your policy.
• Conversion Expiry Date: If you have term life insurance, you may have a period to convert your policy to a whole or universal life policy. The conversion expiry date is the last day you can do this.
• Grace Periods: The grace period is the amount of time you have after a missed payment before a late fee applies or your policy lapses.

Your Coverages

Understanding life insurance policies can help you know what types of benefits your beneficiaries can receive after your death.

Amount of Insurance, or Death Benefit

The amount of insurance or death benefit is what is paid out to your beneficiaries upon your death. While you might have a summary of this on the declarations page, it is explained in detail in the insuring agreement section of your policy.

You typically decide on the death benefit when signing up for your policy. However, you can have a few opportunities to change it, such as during the free look period or the conversion period, or if you have a qualifying life event, like the birth of a child. Otherwise, if you want to change your benefit, you might have to cancel your policy and get a new one. Typically, a good death benefit is 6 to 10 times your annual income, but this may change depending on how many dependents and debts you have.

Many insuring agreements include tables or illustrations that show potential future death benefits, cash value details (in case you ever want to cash in your policy), and potential future premiums (if your rates aren’t locked in). For those with a term life policy, you can see these numbers for the specific length of the term you selected.

Riders and Add-ons

Riders and add-ons are additional coverages you can select that modify the policy. Generally, these are used to expand death benefits in specific scenarios. For example, if you were to die in an accident and had an accidental death and dismemberment benefit rider, your loved ones would receive an extra payment.

Here are a few more examples of some common riders you can add to your policy:

• Waiver of premium: If you’re ever unable to pay your premiums because of a disability before a certain age, this rider ensures you don’t lose your coverage.
• Accelerated death benefit: If you’ve been diagnosed with a terminal illness, such as cancer, an accelerated death benefit lets you cash in on some of your benefits to help pay for your long-term care.
• Guaranteed insurability rider: As you get older, life insurance rates typically increase. A guaranteed insurability rider lets you add on additional life insurance coverage without regard to your current health.
• Family income benefit rider: If you’re the primary provider for your family, a family income benefit rider could be a good choice. It provides a steady flow of income to your family members.

You can find any riders or add-ons you’ve chosen for your policy in the insuring agreement section.

Exclusions

Exclusions are found in the exclusions section of your policy. These are typically certain scenarios or activities in which your insurance company can refuse to pay out your death benefits. Some of the common types of exclusions a life insurance policy may have are:

• Death by suicide: If you die by suicide, your insurance company can refuse to pay benefits, though this is not always the case. Some insurers, for example, only refuse to pay death benefits for deaths by suicide if it occurs within a set amount of months or years of activating the policy.
• Risky activities: If you have risky hobbies, like base jumping or skydiving, your insurance company may specifically exclude any death related to these activities.
• Substance abuse: Death from overdosing is commonly not covered under life insurance policies.

Living Benefits

You can see your living benefits in your insuring agreement. These are things you can take advantage of while you’re still alive. For example, many policies have a cash value option that lets you take a low-interest loan from your policy. The amount you can withdraw usually goes up over time because you’ve paid premiums for longer.

Other types of living benefits can include long-term care benefits that can help with medical expenses and a policy surrender option that lets you cash in the cash value of your policy as a lump sum.

Your Policy Costs

Having a good understanding of your policy costs can help you budget the appropriate amount of money throughout your life.

Premium

You can see your premium cost on your declarations page. This is the amount you pay every month to keep your coverage active. If you have whole or term life insurance, the amount is set when you sign up for your policy, and typically will not go up or down. However, it is sometimes possible to see a change in premiums if you decide to change your coverage amounts. For example, if you have a child and want to add on a child term life insurance rider to your policy, your monthly premiums could go up.

Payment Schedule

The payment schedule for your life insurance is how often you’ve selected to make payments. A common scenario is monthly payments, but some insurance companies also accept quarterly, biannual, or annual payments. Changing your payment schedule is usually something you can do by contacting your insurance company directly.

Rider Costs

If you’ve chosen to add on additional riders to your policy, the costs for these are listed on the declarations page. Generally, you can see the cost of your standard policy, then below, there is a value for each rider you’ve added on. Finally, at the bottom of the page, you can how everything adds up to create your premium.

Penalty Costs and Surrender Charges

Penalty costs are what you have to pay if you make a late payment or let your policy lapse. These are generally found in the conditions part of the policy. It typically includes a list of late fees an insurer may set, as well as reinstatement fees. Not every insurer has late fees, but if they do, the penalty costs section covers them. Surrender charges may be included on certain types of policies. These are charges you pay if you decide to cash in a policy early. Typically, these charges decrease over time until they reach zero.