How to Explain Your Life Insurance Policy to Your Loved Ones
The purpose of life insurance is to protect your family from financial hardship after you die. For example, you wouldn’t want your spouse to be without a means to pay the mortgage if you weren’t around.
Likewise, if they rely on your income, you need to secure some form of income replacement in case something happens to you.
Nevertheless, life insurance doesn’t walk or talk. It won’t explain itself, so even if you have the most comprehensive coverage available, your family needs to know the following:
- That you have a life insurance policy
- What the policy means
- How to access the policy if you die
Take the time to read this guide and relay the following information to your loved ones, so your life insurance does not go unutilized in the event of your death. We know it’s not the most comfortable or uplifting conversation to have, but it can be a much easier chat when you know how to explain your policy.
Here’s what we'll cover in this post:
Quick Article Guide
Here’s what we'll cover in this post:
What Type of Policy Do You Own?
First, you’ll want to tell your loved ones how long your coverage lasts.
A term life insurance policy provides protection for a set number of years. Terms typically last for 5, 10, 15, 20, 25, or 30 years. Term life insurance is the easiest type of life insurance to understand, because it does not have the “bells and whistles” that drive up the cost of cash value life insurance and other permanent life insurance policies.
Just like the name implies, permanent life insurance lasts your full life span, regardless of age or how long you’ve had the policy. There are many different types of permanent life insurance, all of which fall under one of two categories: universal life insurance or whole life insurance.
If you have purchased a permanent policy, speak to your life insurance agent and have them explain your policy to you—and take notes! Some permanent policies, such as those tied to the stock market, can be rather complex and they may carry investment risks.
Anatomy Of A Life Insurance Policy
Don’t feel like reading pages and pages of fine print? You don’t have to—at least not for the purposes of explaining your policy to your loved ones. Here are the main parts of your policy that you will want to walk them through:
Face Amount/Death Benefit
The sum of money that the insurance company will pay upon your death.This might be $250k, $500k, or even $1 million. If you’re relatively young and in good health, term life insurance makes it very possible for you to secure a favorable face amount for a low monthly premium.
The beneficiary is the person, such as your spouse or heir, who will receive the death benefit after you die. Most of our clients list their spouse as their beneficiary, but you can also list other family members, business partners, or even a trust.
You might also consider listing a contingent beneficiary to be next in line if your beneficiary dies. Our clients often list their children as contingent beneficiaries, but if your children are minors, you may want to list a relative that will likely care for them instead.
An investment component attached to a permanent life insurance policy. If you have term life insurance, you can ignore this item. If you have permanent life insurance, ask your agent if you have cash accumulation—more so for your own good.
Because cash value life insurance is commonly misunderstood, you should make a concerted effort to understand your investment. For more information about cash accumulation, read our previous article, “What Happens to the Cash Value in Your Life Insurance After You Die?”
The Human Element: Easing the Awkwardness
No parent enjoys talking to their child about their own mortality. No husband or wife wants to force their spouse to envision living alone. Death is never a comfortable topic—for anyone, anywhere, any time. However, dying is a part of living. That’s why life insurance exists. Having no plan can be much more upsetting for your loved ones in the end than having a proactive conversation. Here are a few tips for a short and productive talk:
Don’t Give a Prelude
“I need to talk to you about something” is an instant anxiety trigger for many people and can add more weight to the conversation. Instead of this phrase, use something more casual and straightforward, like, “Hey, let’s run through this life insurance policy really quickly.”
If your loved one doesn’t know you’ve purchased life insurance, you can be just as terse. Outwardly stating, “I bought life insurance and want to explain it to you,” will help you and your loved one snap into serious mode without a sense of impending discomfort.
Purpose Before Print
Life insurance means more in life than it does on paper. Be sure to help your loved one understand that the policy is meant to protect them and provide peace of mind.
It’s not an insinuation that you are ill or dying; it’s just another form of financial planning. When you think about it, life insurance serves the same simple purpose as a savings account, just to a much higher degree.
Have a Copy of the Policy
You wouldn’t go into a presentation without a presentation, so don’t go into a talk about life insurance without a hard copy of the life insurance policy you are talking about. It’s important for you to be able to point out different aspects of the policy.
This is also the time to designate where you will keep a copy of the policy for your loved one to refer to if you die. During a time of grief, it’s best if they can easily pull the file and initiate the claim process. A life insurance death benefit is usually paid out within two weeks.
Move On with the Day
It’s likely that your loved one will want the conversation to end as soon as possible, and you probably want the same. Once you’ve explained the basics, ask if there are any questions. If there aren’t, turn the conversation to another topic, and the uneasiness will be gone before you know it.
Reviewing Your Policy
Explaining your life insurance policy to your loved ones is also a chance for you to review the policy yourself. Sometimes, people purchase life insurance through a bank or credit union, not realizing that the policy only covers accidental death.
Since many people purchase life insurance without understanding the policy themselves, these types of discoveries are fairly common. If you see something in the paperwork that you’re unsure about, give JRC a call, and we will help you decode your policy. It’s our job to translate the language of insurance to our clients in clear, simple terms.
You should also review your life insurance policy annually. Unless you end up changing your policy, it’s not necessary to bring your loved ones into the annual review.
If you purchased your policy through work, find out what options you have, if any, to keep your coverage if you change jobs or retire.
Life Insurance for Estate Planning
For those who own a large estate, you are probably all too familiar with the high taxes levied on an estate that exceeds the federal estate exemption. You can use life insurance to equip your heirs with the financial resources they to keep the family estate intact after you pass.
Life insurance is commonly used in estate planning to fund an irrevocable trust. If set up correctly, an irrevocable life insurance trust can effectively shield an insured’s surviving from hefty estate taxes.
We know estate planning can be difficult, so we’ve created an estate tax calculator to help you gauge how much life insurance you should buy in order to keep your property in the possession of your loved ones after you die.
Life insurance for estate planning requires a great deal of strategy and legwork. If you own a large estate, you should speak with both your financial planner and a life insurance agent to ensure your policy meets your needs. This article offers a helpful primer to get you started.
Need Help Understanding Your Policy?
At JRC, we take the time to provide the highest level of customer service to each and every client. We are an independent owner-operated agency, which means we’re not held to daily call center quotas or corporate politics.
We take our time with each client to make sure they understand all of the coverage options available to them before making a decision.More than selling life insurance, we aim to educate people on the many nuances of life insurance. By working with more than 50 reputable life insurance companies, we’ll also make sure we always provide you with the most affordable options available.
Whether you are shopping for life insurance or have already purchased a policy, JRC can help you to truly grasp the purpose of life insurance. Call us at 855-247-9555, or request a free instant quote online below.
Managing Partner and Co-founder
Cliff is a licensed life insurance agent and one of the owners of JRC Insurance Group. He has helped thousands of families of businesses with their life insurance needs since 2012 and specializes with applicants who are less than perfect health. In his spare time he enjoys spending time with family, traveling, and the great outdoors.