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A “Need-to-Know” Glossary for all Medical Professionals
[By Staff Writers]
Attained age: The premium rate charged to an insured at his or her current age on a policy conversion that would be the same as that offered by a company to new insureds who could qualify for standard rates.
Beneficiary: A person or entity named by the policyholder to receive death benefits under a life insurance policy.
Cash value: The amount available in cash that accumulates in a whole life, universal life, variable life, or universal variable life policy upon voluntary termination of a policy before it becomes payable by death or maturity.
Death benefit: Gross proceeds payable to a beneficiary from a life insurance policy. This includes the policy face amount and any additional insurance amounts paid by reason of the insured’s death, such as accidental death benefits and the face amount of any paid-up additional insurance or any term rider.
Deficit Reduction Act of 1984 (DEFRA): Act that changed the way life insurance companies are taxed, including a tax law definition of life insurance for purposes of determining whether a policy qualifies for favorable tax treatment. DEFRA made endowment policies obsolete.
Grace period: A period of 31 days past the payment due date, during which the premium may be paid without penalty.
Investment yield: Yield calculated after investment-related expenses and before taxes.
Lapse ratio: Percentage of policies that are terminated by the insured or lapse, prior to death.
Life insurance: The transfer to an insurance company of part or all of the risk of financial loss due to the death of an insured person. Upon such death, the insurance company agrees to pay a stated sum or future income to the beneficiaries.
Mortality charges: Charges a company makes against the policy to cover the policy’s share of the cost of death claims, which is the cost of providing the insurance protection.
Nonforfeiture option: Choices available to a policyholder who surrenders a cash value policy before the maturity date based on his or her interest in the contract.
Period of contestability: A stipulated period of time in which a life insurance company is prevented from voiding a life insurance contract and challenging the coverage because of alleged statements by the insured. When fraud is involved, the period of contestability does not expire.
Tax and Miscellaneous Revenue Act of 1988 (TAMRA): Act that created a new class of life insurance contracts (modified endowment contracts), which are subject to less favorable taxation rules than those applying to life insurance that failed the TRA 1986 test.
Conclusion
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- FINANCE: Financial Planning for Physicians and Advisors
- INSURANCE: Risk Management and Insurance Strategies for Physicians and Advisors
- Dictionary of Health Economics and Finance
- Dictionary of Health Information Technology and Security
- Dictionary of Health Insurance and Managed Care
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Six Life Insurance Beneficiary Mistakes to Avoid
Life insurance has long been recognized as a useful way to provide for your heirs and loved ones when you die. Naming your policy’s beneficiaries should be a relatively simple task. However, there are a number of situations that can easily lead to unintended and adverse consequences. Here are six life insurance beneficiary traps you may want to avoid.
Not naming a beneficiary
The most obvious mistake you can make is failing to name a beneficiary of your life insurance policy. But simply naming your spouse or child as beneficiary may not suffice. It is conceivable that you and your spouse could die together, or that your named beneficiary may die before you. If the beneficiaries you designated are not living at your death, the insurance company may pay the death proceeds to your estate, which can lead to other potential problems.
Death benefit paid to your estate
If your life insurance is paid to your estate, several undesired issues may arise. First, the insurance proceeds likely become subject to probate, which may delay the payment to your heirs. Second, life insurance that is part of your probate estate is subject to claims of your probate creditors. Not only might your heirs have to wait to receive their share of the insurance, but your creditors may satisfy their claims out of those proceeds first.
Naming primary, secondary, and final beneficiaries may avoid having the proceeds ultimately paid to your estate. If the primary beneficiary dies before you do, then the secondary or alternate beneficiaries receive the proceeds. And if the secondary beneficiaries are unavailable to receive the death benefit, you can name a final beneficiary, such as a charity, to receive the insurance proceeds.
Naming a minor child as beneficiary
Unintended consequences may arise if your named beneficiary is a minor. Insurance companies will rarely pay life insurance proceeds directly to a minor. Typically, the court appoints a guardian–a potentially costly and time-consuming process–to handle the proceeds until the minor beneficiary reaches the age of majority according to state law.
If you want the life insurance proceeds to be paid for the benefit of a minor, you may consider creating a trust that names the minor as beneficiary. Then the trust manages and pays the proceeds from the insurance according to the terms and conditions you set out in the trust document. Consult with an estate attorney to decide on the course that works best for your situation.
Per stirpes or per capita
It’s not uncommon to name multiple beneficiaries to share in the life insurance proceeds. But what happens if one of the beneficiaries dies before you do? Do you want the share of the deceased beneficiary to be added to the shares of the surviving beneficiaries, or do you want the share to pass to the deceased beneficiary’s children? That’s the difference between per stirpes and per capita.
You don’t have to use the legal terms in directing what is to happen if a beneficiary dies before you do, but it’s important to indicate on the insurance beneficiary designation form how you want the share to pass if a beneficiary predeceases you. Per stirpes (by branch) means the share of a deceased beneficiary passes to the next generation in line. Per capita (by head) provides that the share of the deceased beneficiary is added to the shares of the surviving beneficiaries so that each receives an equal share.
Disqualifying the beneficiary from government assistance
A beneficiary you name to receive your life insurance may be receiving or is eligible to receive government assistance due to a disability or other special circumstance. Eligibility for government benefits is often tied to the financial circumstances of the recipient. The payment of insurance proceeds may be a financial windfall that disqualifies your beneficiary from eligibility for government benefits, or the proceeds may have to be paid to the government entity as reimbursement for benefits paid. Again, an estate attorney can help you address this issue.
Taxes
Generally, life insurance death proceeds are not taxed when they’re paid. However, there are exceptions to this rule, and the most common situation involves having three different people as policy owner, insured, and beneficiary. Typically, the policy owner and the insured are one in the same person. But sometimes the owner is not the insured or the beneficiary. For example, mom may be the policy owner on the life of dad for the benefit of their children. In this situation, mom is effectively creating a gift of the insurance proceeds to her children/beneficiaries. As the donor, mom may be subject to gift tax. Consult a financial or tax professional to figure out the best way to structure the policy.
Daniel J. Antokal MBA
[Financial Advisor]
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