A Basic Understanding of Life Insurance in Washington State
Boiling down the definition of life insurance from the Office of the Insurance Commissioner of Washington State shows that basically, the person purchasing the life insurance policy in Washington is asking the life insurance company to guarantee a certain amount of money will be paid to the holder’s named beneficiaries upon his or her death.
That definition lacks the information you need to know to keep a life insurance policy in force and what having a life insurance policy in Washington can mean for your beneficiaries. Whether you live in Seattle, Tacoma, Olympia or anywhere in the state of Washington, understanding the basics of life insurance will help you make important decisions.
There are two types of life insurance: whole life and term life.
Both forms of coverage will pay a predetermined and guaranteed payment—known as the death benefit—to your designated beneficiaries. Your beneficiaries might be your spouse, children or any party or parties selected by you. If you die while the policy is in force, your beneficiaries will receive the financial benefit.
Important note: If your life situation changes, remember to make immediate updates to your policy to reflect the changes.
Meanwhile, that understanding of “while the policy is in force” is a critical one. It’s there that the concept of whole life vs. term life comes into play.
Select Between Term Life and Whole Life Insurance in Washington
Once you’ve decided to purchase life insurance in Washington, your first decision is to find the policy that will best reflect your needs and protect your loved ones. That means deciding between whole life and term life insurance. Here are the main differences between the two.
The definition of this type of policy is very much like it sounds. It stays in effect over the policyholder’s “whole life.” Since death is inevitable, the payout is guaranteed, assuming that you keep up with the payment of the annual premiums. If your payment lapses, then the policy ends and your beneficiaries won’t receive the death benefit. A whole life policy is likely to be your best choice if you want your spouse, adult children or other loved ones to receive an inheritance once you’re gone.
This type of life insurance policy covers you only for a designated period of time. You can typically buy a term life policy for ten, 15, 20 or 30 years. If you were to lose your life over that window of time, your beneficiaries would receive the policy’s face value. However, if you’re still alive after that designated time period, the policy ends and there’s no payout.
Young parents might take out a term life policy for financial security while their children are young. Their thinking might be that after their children are grown and educated and gainfully employed in the work world, they will no longer need their financial support. Therefore, the coverage can lapse.
Sometimes investors or partners in growing companies might require the CEO to take out a term life policy if they feel that the leader’s death in the early years could be fatal to the business.
Which Policy is Right for You?
A whole life policy is likely to cost you more since it will typically cover you until your death and then payout in full if the proper conditions are met. Term life is a cheaper life insurance alternative since there is an end date when the policy stops and you don’t get any of the money back that you have paid during the term.
With whole life, you’ll pay premiums for the rest of your life, and you probably hope that will be for a long duration! The advantage is that your beneficiaries are guaranteed a payout if you keep a whole life insurance policy in force. If you own a term policy, they’ll only receive a death benefit if you die within that time window.
Therefore, if you want your beneficiaries to receive a guaranteed benefit, your best option is likely to be a whole life policy. If you only feel responsible for the financial security of beneficiaries for a limited time, such as when they are uneducated minors, a less expensive term life policy might be the right choice.
Don’t Treat Your Washington Life Insurance as an Investment
In some ways, you can think of your life insurance policy as having investment potential. But you should primarily think of it as an important tool of financial security. It might protect your young children or a spouse who would otherwise be financially overwhelmed by your death. Your policy might also be about the only form of inheritance you’re able to pass on to loved ones.
However, your whole life insurance policy might also have certain mechanisms that can create financial returns even while you’re living. Discuss this in greater detail with your insurance representative while you’re making your purchase decision.
Once you’ve paid into your policy for a while and it accumulates cash value, you can often borrow against this amount. But that amount, plus interest, will be charged against your policy’s death benefit if you die without paying it back. If your heir is to receive a $100,000 death benefit from your policy, but you owe $5,000 in what you borrowed from the account, plus interest, your heir will receive $95,000 rather than the full amount. The lesson here is that if you do borrow from your policy, keep track of your balance statements and at least pay back the interest so your debt to your policy won’t continue to grow.
In limited circumstances, the owner of a whole life policy can even be their own beneficiary to some degree. You might be able to buy riders that enable you to cash in some of your death benefit while you’re still living. This might be permissible if you contract a terminal illness or certain serious chronic illnesses.
Of course, the amount that you cash in will be deducted from the death benefit your beneficiaries receive, and it will likely increase the cost of your policy. So again, these riders are something that should be discussed with your insurance agent.
Ask a Trusted Representative for Answers
Life insurance can be a complicated topic, and everyone’s financial needs are different. That’s why it’s so important to consult with an agent you trust. Call Vern Fonk Insurance at (800) 455-8276, visit us online or stop into one of our offices for a personalized quote. We’ll help you find life insurance in Washington that will boost your sense of financial security and protect your loved ones.
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