The insured’s Bill of Rights

You bought a life insurance policy to ease the financial burden of loved ones upon your death. But that policy also contains a number of rights and options, some of which can help you get through your own financial hiccups through life.

When young and single, you might start off with less expensive term insurance. As your needs and income grow, you have the right to convert to a permanent form of insurance—universal, variable or whole life—without proof of insurability.

Did you know?

No medical exam needed, says Al Lurty, senior vice president, head of Retail Life Business Development at ING U.S. Insurance. The conversion privilege on a term life policy typically extends from a year after the policy is bought to the end of the premium, or to the maximum age set by the insurer, which is usually 65 or 70 years old, says Jeremy Day, Life Insurance Product analyst for Life Quotes, Inc. The coverage of the new policy is limited to the coverage amount on the previous one.

Need cash?

You can take a loan out on your permanent policy, sell it, cash it in or use it as collateral on a loan.

“Life insurance policies are kind of made for the economic problems like we have today,” said Michael Weintraub, chairman of Life and Health Insurance Foundation for Education (LIFE). “People today are saving their homes by being able to borrow against their life insurance to pay their mortgage.”

Insurance experts say people also take out loans on the cash value of their policies to pay for a child’s education, their down payment for a mortgage and medical needs. If you pass away with an outstanding loan, the death benefit will be reduced by the amount of the loan.

“If you have a policy for $250,000 or more and you’re in poor health you can potentially sell your policy for more than you would get if you cashed it in. It’s not something we encourage, but some people no longer need life insurance coverage,” says LIFE secretary Stephen Rothschild.

Lurty says banks may request a life insurance policy as collateral for a small business loan. This way, the bank can be assured of getting its money should the business’ sole owner die before the loan is paid off. Weintraub adds that once the loan is paid off, you can change the beneficiary from the bank to a loved one.

Life insurance policyholders bill of rightsOther options to consider

* Those with a participating whole life insurance policy have the  right to share in the insurer’s profits through dividends, and you can  change your dividend options on an annual basis.

* Some permanent life insurance plans allow the owner to change from  one permanent plan to another issued by the same company without a  medical exam.

* You have the right to reinstate a policy if you’ve forgotten to  make payments and the policy  lapses, provided you’re in good health and make back payments within six months to one year.

* With extended term life insurance you won’t need to keep making premium payments.

* In some flexible-premium policies, premiums may be reduced or  skipped as long as sufficient cash values remain in the policy. However, this will result in lower cash values and a shortened coverage period.

And remember…

Life insurance provides income protection while you are still working.  When you retire, it can then be used to cover the assets you’ve accumulated throughout your lifetime. During your work life, life insurance protects your family’s livelihood in the event you die by providing regular payments to them that would replace your lost income.  While retired, there is a possibility you have assets such as a home… if something were to happen to you,  life insurance can be used to cover estate taxes so the bill doesn’t get passed down to your loved ones.

If the IRS comes knocking at your door or the door of your loved ones  because of unpaid taxes… they may be able to seize other assets, but they cannot seize your life insurance policy. The same goes with any creditors  regardless of how far in debt you are when you die. No one can legally take the benefits in your life insurance policy from your beneficiaries. However, if you failed to name a beneficiary on the policy or the beneficiary on the policy died prior to your death, then the proceeds would be transferred to your estate. If this happens, creditors CAN file a claim in probate court against your estate to try to use the life insurance proceeds to pay off your debt.

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