Life insurance policies can provide financial security for your family in the event of an untimely passing, and while life insurance is a common way to help protect your loved ones, information regarding the death benefit may be confusing.
Questions may arise concerning whether the benefit received by beneficiaries will remain consistent, regardless of the circumstances of the policyholder’s death.
In this article, we will discuss some factors that determine life insurance payouts and potential variations that occur depending on these numerous circumstances.
Life insurance provides coverage that can become vital in the event of an unexpected passing, and understanding your personal life insurance policy is very important.
Understanding Life Insurance Benefits
Life Insurance is a contract between the policyholder and the insurance company. The policyholder is responsible for paying premiums to the insurer, and in exchange, the insurer will pay out a sum of money (a death benefit) to your designated beneficiaries upon your passing.
Key Factors Influencing Life Insurance Payouts
- Policy type: Life insurance policies come in various types, and your specific type can affect your payout. The two main types of life insurance policies are term life and whole life insurance. Term life insurance offers coverage for a specific period of time (typically a set number of years), and whole life insurance offers coverage for the remainder of the policyholders lifetime. Term life insurance will only pay out if the policyholders passing occurs within the designated time period.
- Premium payments: When you buy a life insurance policy, you are obligated to pay the premium payments. These payments are required to keep the policy active and failure to make the payments can result in loss of coverage or policy cancellation. Some premiums are recurring, and some are single-premium policies.
- Contestable period: Most life insurance policies have a period of time known as the contestable period. It is typically the first two years of the life insurance policy. During this time, the insurance company can review the application and rescind the policy if they find evidence of fraud or a material misrepresentation of health history at the time of application.
- Circumstances of death: Each policy is different, which is why its so important to fully read the terms of each policy and understand any exclusions identified in the policy. There are certain circumstances surrounding the death of the insured which may result in a claim being denied by an insurer or a beneficiary losing their right to receive the death benefit. Below is a list of some of the most common circumstances.1
- Suicide (during first two years of policy)
- Murder (where the beneficiary was involved in the murder of the insured)
- Death of the insured while engaging in felonies
- Policy riders and adjustments: Some life insurance policies offer optional attachments or riders, which are additional benefits that can be added to your pre-existing plan. There is a wide range of available riders, and these additional benefits may increase your payout or offer more protection than a typical life insurance policy.
- Riders can be additional conditions added to the life insurance policy such as accelerated death benefits.
If you’re still unsure about your policy and its coverage, we recommend reaching out to your insurer or life insurance agent for further information and policy-specific details.