Life Insurance in Pennsylvania

Life insurance in the Commonwealth of Pennsylvania is a contract between an insured and an insurance company that provides financial protection for the insured’s loved ones after they die. In return for coverage, the insured pays a monthly or yearly premium to the insurer. There are over 20 life insurance companies operating in Pennsylvania.

Life insurance pays a death benefit to the beneficiaries of an insured in the event of death. Such payouts can pay for final expenses and the insured’s outstanding obligations. Like in most states, in Pennsylvania, life insurance is available from private insurance companies that comply with Title 31, Chapter 146 of the state insurance laws. This law set minimum standards for insurance practice which must not be violated. Pennsylvania life insurance is under the supervision of the Pennsylvania Insurance Department (PID), and life insurance companies in the Commonwealth must be members of the Pennsylvania Life and Health Insurance Guaranty Association. Life insurance premiums vary across insurers. Therefore, it is best to seek the advice of a Pennsylvania-licensed life insurance agent for the best rates when purchasing a life insurance policy.

How Does Life Insurance Work in Pennsylvania

In Pennsylvania, life insurance insures the lives of individuals in exchange for monthly or yearly premiums, and insurers pay death benefits to named beneficiaries if the insured dies. The essence of life insurance coverage is to protect family members and loved ones from the financial burden that may result from the insured’s demise. However, depending on the type of life insurance policy, the insured may enjoy some benefits while still alive through the cash value component of their policy. For instance, in Pennsylvania, the cash value component of permanent life policies allows individuals to save part of their premiums and access the funds while alive. Also, life insurance riders pay some benefits to insureds under certain conditions.

Life insurance in Pennsylvania may serve immediate or future needs. For instance, it may serve as surety for mortgages, loans, and debt or as financial securities for the insured's loved ones after passing away. Consult with a licensed PA life insurance agent to further understand how life insurance works before purchasing a life insurance plan.

What Are The Main Types Of Life Insurance in Pennsylvania

There are two broad categories of life insurance in Pennsylvania. These are permanent and term life insurance.

CASH VALUE LIFE Insurance

Cash value life insurance plans are permanent life insurance policies that allow the insured to build up savings. These types of policies grant insureds access to part of the death benefits while alive. With cash value life insurance, you can access the cash value savings by making withdrawals while alive. Cash value plans are lifetime plans and are more expensive than term life plans. Pennsylvania insurance companies offer different types of cash value life insurance and each comes with varying death benefit amounts. For instance:

• Whole (or Ordinary) Life Policy has a fixed life insurance premium for certain death benefits for the duration of the policy. The cash value for this policy grows based on an agreed dividend

• Universal (or Adjustable) Life Policy allows flexibility with premium payment, which can be increased for a larger death benefit if the insured passes a certain medical exam. This policy offers guaranteed payment for benefits if the premium can cover them. Universal life insurance cash value growth is slower than that of whole life

• Indexed Universal Life (IUL) policy is flexible and comes with a guaranteed minimum death benefit which has the potential to rise. Insurers link the cash value components of IULs to indexes such as S&P 500 and the NASDAQ 100, and their values change with these indexes. Life insurance companies do not invest in the indexes; they only use them to determine the value of the IUL policy’s cash component

• Variable Life Policy has a cash value that depends on the performance of investment subaccounts. It invests money from the savings account in stocks, bonds, mutual funds, and money markets, and their performance determines the cash value of the policy.

• Variable-Universal Life (VUL) Policy combines attributes of variable and universal life policies. It allows flexible premiums, and the insured can decide the funds on which to invest the cash value. The downside of this policy is that the cash value fluctuates based on the performance of the investment, and there is no guaranteed minimum death benefit

NOTE: Variable life insurance products can be sold only by Pennsylvania life insurance agents who are also licensed by the Financial Industry Regulatory Authority (FINRA).

TERM LIFE Insurance

Term life insurance policies in Pennsylvania offer coverage for a set (limited) period, which can be between one and 30 years, or even more. It provides options for renewal (up to 100 years) if an insured outlives the plan, else the insurance company terminates the policy at the end of the specified period. Unlike permanent life plans, term life insurance plans do not:

• Guarantee death benefits unless the insured dies within the policy's active period

• Build cash value

• Have an investment component (the premium goes towards the death benefit)

• Offer lifetime protection (coverage is within the policy term)

The types of term life insurance in Pennsylvania include:

• guaranteed level term life,

• decreasing term life,

• return of premium term life,

• annual renewable term life,

• modified term life, and

• convertible term life.

Pennsylvanians can leverage term life insurance policy to meet their needs while alive or when they are no more. Access to living benefits with term life insurance can be achieved through certain riders like the critical illness and accidental disability rental benefit riders. For instance, term life insurance can:

• Be a source of income for beneficiaries if the insured dies during the policy term

• Help pay insured’s outstanding loans if they die while the policy is active

• Pay for burial expenses of the insured if they die within the policy term

• Pay for children's college tuition if the insured dies while their policy is still active

• Provide financial security to the loved ones of an insured who dies during their policy term

• Provide surety for mortgages and debts if the insured dies within the policy’s active period

Regardless of the type of term life policy, coverage is only within a specified period as agreed in the policy contract. Make sure to seek further clarification from a Pennsylvania-licensed life insurance agent before buying a term life insurance policy.

What Type of Life Insurance Does Not Require a Medical Exam?

Typically, individuals applying for life insurance coverage are required to fill out some paperwork and may take medical exams. However, some life insurance plans do not require applicants to take a medical examination. Such life plans are known as “no medical exam” or non-medical exam plans. Non-medical life insurance is not a new category of life insurance but are permanent life plans that come with reduced cash value benefit payouts. There are two categories:

• Guaranteed issue life insurance (guaranteed acceptance life insurance) - Similar to permanent life plans, it builds cash value but does not review medical histories or require applicants to take medical exams. However, applicants may need to answer some simple questions like:

• Are you a smoker?

• Do you have HIV?

• Do you have any terminal illnesses?

• Are you undergoing long-term care treatment or hospitalization?

Guaranteed issue life insurance is more expensive than traditional life plans and offers lower death benefits

• Simplified issue life insurance - Although this does not require a medical exam, applicants must answer more detailed medical questions, and their medical histories may be scrutinized. An insurance company may reject an application based on answers provided or medical records. An example of a simplified issue life insurance is a final expense (FE) life insurance

In Pennsylvania, no medical exam life insurance is an excellent option for individuals:

• With terminal illnesses

• Who need a non-underwritten life policy

• With high-risk jobs that consistently expose them to danger

• With health issues and have no employer-provided life insurance

What Can you Do with Life Insurance?

In Pennsylvania, life insurance can meet different needs before and after the insured’s death. For an insured, withdrawals from the permanent life cash value component (living benefit) can help:

• Provide tax-free income during retirement,

• With living expenses

• Pay the life insurance premium. However, the insurance company will deduct the money borrowed from the death benefit or dividends (where available) if the insured cannot repay

As a beneficiary of a life insurance policy, you have full control of how you may use the proceeds from a death benefit. In most cases the death benefit is used to:

• Pay for burial expenses of the insured

• Pay off the deceased’s outstanding obligations

• Pay for student loans

• Pay for loans left behind by the insured such as credit cards, car loans, or mortgage

• Maintain the living standard

Retirees without dependents or mortgage repayment may not need life insurance plans with high death benefits; final expense life/burial insurance would be sufficient. Also, if you have no dependents or family members but have enough savings to take care of final expenses, you may not need life insurance coverage. Before you buy a life insurance policy, contact a Pennsylvania-licensed life insurance agent to determine how much life insurance you need.

What is a Premium in Life Insurance?

Premium in life insurance is the cost of life insurance. It is the money the insured pays to have coverage under the policy and to keep it active. Life insurance premiums in Pennsylvania may be monthly or yearly payments, depending on the insurance provider and as stipulated in your policy contract.

What is a Death Benefit in Life Insurance?

A death benefit in life insurance is the amount stated in the contract document that the beneficiaries of a life insurance policy will receive if the insured dies in exchange of premiums paid. Insurance companies pay death benefits after the beneficiaries provide proof of the insured’s death. To have access to a death benefit in Pennsylvania, a life insurance policy beneficiary must:

• Provide the death certificate of the insured

• Complete a death claim form

• Provide the policy number of the deceased

• Provide the name, social security number, date of death of the insured, and state the preferred payout method

A death benefit can be a lump-sum payout, but some insurance companies in Pennsylvania may have options that allow insureds to structure installment payments. For instance, an insured with dependents who are minors may request that the beneficiaries get the death benefit when they come of age. There are other payout methods in addition to a lump sum payment. For example, an insured may want a payout into a non-qualified retirement account, but such benefits may be subject to taxation, unlike traditional life policy death benefits. To get more information on how death benefits work and how the payout value is calculated, contact a financial professional in addition to consulting with a state-licensed life insurance agent.

When is Death Benefit Payable?

Life insurance death benefit is payable when the insured dies. Beneficiaries must show proof of death, fill out a death claim form, and provide necessary information regarding the deceased. A beneficiary should be able to state the insured’s social security number, policy number, date of death, and preferred method of payment. In Pennsylvania, beneficiaries do not pay income tax on death benefit payouts. However, beneficiaries may need to pay estate taxes. How a death benefit is paid at the time of death is usually structured by the insured.

What is a Living Benefit in Life Insurance?

A living benefit in life insurance is a feature that allows an insured access to a part of the death benefits while alive. It can provide urgent funds in times of need. In Pennsylvania, permanent life insurance policyholders can access living benefits through:

• Cash value withdrawal - This allows withdrawal against their cash value savings. The money withdrawn is not subjected to tax. Also, if the amount withdrawn is less than or equal to the premiums paid, it will not be taxed. However, if it is from capital gains, interests, or dividends from an investment component, it will be taxed

• Policy surrender - Provides a one-time payment by the insurance company to an insured who voluntarily cancels a permanent life policy. The amount paid is the value of the cash value portion of the policy less any outstanding loan repayments or premiums by the insured

• Policy loan - An insured can take a low-interest loan against the cash value of a permanent life policy. The loan is tax-free and if it's not repaid prior to the insured’s death, the debt is typically subtracted from the death benefit.

What is MEC in Life insurance policy?

A MEC (modified endowment contract) describes a life insurance policy that fails the IRS 7-pay test or whose funding exceeded the legal tax limits established by the Technical and Miscellaneous Revenue Act of 1988 (TAMRA). In Pennsylvania, permanent life insurance that fails the IRS 7-pay test may lose its tax advantage and be reclassified as an investment. Life insurance policies that fail IRS 7-pay test lose their tax privileges and are subject to changes to their taxation policy. A modified endowment contract guards against the abuse of tax advantage enjoyed by permanent life policies, and if activated, MEC can not be reversed.

MEC life policies pay similar tax as non-qualified annuity withdrawals, which charge a 10% additional tax for withdrawals made by the insured before the age of 59½ years. A modified endowment contract status wipes out the tax privileges of a life insurance policy and makes money inside the MEC account less accessible to the insured. Although MEC differs from ordinary life insurance, it also pays death benefits and builds up cash values, and the insured pays a premium when due. A modified endowment contract only applies to permanent life policies.

MEC is not considered a good option of life insurance coverage for most, but it has its uses. Consult with a knowledgeable Pennsylvania-licensed life insurance professional for more details.

What is a Rider in Life Insurance?

These are optional terms and conditions added to life insurance to enable the insured to maximize or access additional benefits or coverage. Rider benefits are in addition to the compulsory life policy benefits, and they may increase the cost of coverage. Hence, before you add a rider to your life insurance, contact a Pennsylvania-licensed life insurance agent or broker. A knowledgeable agent will provide more details and help determine what insurance rider may suit your needs and financial status.

Why are Riders Important in Life Insurance?

In Pennsylvania, an insurance rider is important in life insurance for the following reasons:

• Life insurance riders eliminate the need for multiple policies by providing extra coverage for unique needs. For example, an insured can activate a life insurance disability rider instead of buying additional disability insurance, which may likely be more expensive.

• It enhances coverage by including adversities that may not have coverage under the original policy.

• It provides options for financial planning for insured who may anticipate future issues but lacks the finance to get additional insurance coverage. For instance, a long-term care rider on life insurance can help plan for coverage at old age while you are young.

• It offers flexibility and allows for customization. With the right rider, a life policy can offer benefits that were not available in the original plan. For instance, a critical illness rider can modify a life policy and make funds available to an insured with a life-threatening illness.

• The extra premiums paid for the riders are eligible for tax benefits.

What are the Top 8 Most Important Life Insurance Riders?

Although life insurance riders are personal choices, in Pennsylvania, the top 8 most important life insurance riders include:

• Accelerated death benefits rider - With this rider, an insured may qualify for a payout if medically certified with a severe condition like cancer. Payouts may be used to settle medical expenses

• Waiver of premium rider - An insured diagnosed with an illness or has an injury that incapacitates them can be excused from paying the premiums by the insurance company. Illnesses like loss of limbs, paralysis, vision loss, and spinal trauma may activate waiver of premium rider. Premium payment continues when the insured resumes work and is able to pay premiums

• Term conversion rider - Applies to term life policies and guarantees an automatic renewal of a term life policy if the current plan ends

• Guaranteed insurability rider - Individuals who envisage additional responsibilities in the future can increase the death benefit of their whole life plans through this rider. A guaranteed insurability rider may become active at a predetermined date, or if the insured achieves certain milestones like getting married or having children

• Accidental death and dismemberment rider - This rider is popular among individuals with high-risk jobs and hobbies. It pays out either to the insured or their beneficiaries in the event of loss of limbs or death through a work-related accident

• Long-term care rider - Pays for expenses involved in committing the insured to long-term care when they can no longer carry out two of the six daily living activities without aid. The six daily living activities include bathing, eating, toileting, transferring, continence, and dressing

• Family income benefit rider - Pays death benefit as monthly income to policy beneficiaries for a specified number of months or years after the insured dies

• Child term insurance rider - Entitles the beneficiaries to payouts in the event of the death of a child. The beneficiary may use the death benefit to pay for burial expenses

Is There a Deductible in Life Insurance?

No, unlike other types of insurance, life insurance does not have a deductible which must be paid at the time of the claim.

Is Life Insurance Tax Deductible?

In Pennsylvania, life insurance is not a tax-deductible expense because it is classified as a personal expenditure. However, there are exceptions, and these include:

• Business-paid premiums - Businesses offering life insurance as employees benefit can deduct premium payments made for the life policies. A tax deduction only applies if the business owners, their spouses, and the business are non-beneficiaries of the policy. Also, premiums higher than $50,000 are tax-deductible

• Certain alimony cases before 2019 - Premiums paid for life insurance of ex-spouse as part of alimony settlement or divorce decree are tax-deductible

• Policy donations to charity - Life insurance policies donated to charities are tax-deductible from the date of donation onward. This exemption applies to permanent life policies because an insured may outlive a term life plan, leaving the beneficiaries with no death benefit

For additional information on tax-deductible insurance policies in Pennsylvania and how it applies to life insurance premiums, seek the advice of a tax professional.

How Do Life Insurance Companies Operate in Pennsylvania?

Life insurance is a contract between an insured and an insurance company, in which the insurer pays death benefits to the insured’s named beneficiaries in exchange for paid premiums when the insured dies. To keep a life insurance policy in force, the insured pays monthly or yearly premiums. In Pennsylvania, life insurance companies make profits through:

• Premium paid by insureds - Insurance companies engage the services of actuaries who use advanced statistics and probability to determine the appropriate premium for coverage. Through calculations, insurance companies determine the financial costs and their risk exposure in providing coverage to the insured by considering factors like:

  • Age

  • Health condition

  • Medical history

  • Nature of job, and

  • Lifestyle

• Investment of part of the premium - After subtracting the administrative costs from the premium, insurance companies may invest the rest in high yield bonds or other short-term investments for profits

• Lapsed and term life policies - Life insurance companies in Pennsylvania also make income through lapsed policies, policy cancellations, and term life plans. Insureds will forfeit the premiums paid if their policies lapse, and may pay fines if they voluntarily cancel their policies. Also, term life policy holders may forfeit the premiums paid if they outlive their policies

Life insurance companies in Pennsylvania offer a 10-day free look period in addition to a 30-day grace period in the event of a default in premium payment. The free period allows insureds to review their policy and decide whether or not to keep them. If an insured decides not to keep a policy after review, the insurance company makes a full refund of all the money paid. Grace period offers an insured an opportunity to pay the premium past the due date, before the policy lapses.

Mutual vs. Stock Insurance Companies

Mutual insurance companies are owned by the policyholders. They are not listed on the stock exchange and hence, are not traded as stock. In Pennsylvania, mutual insurance companies underwrite coverage for the policyholders and are run by a board of directors. They hold annual meetings that policyholders can attend. The purpose of a mutual insurance company is to provide coverage to the policyholders at a low cost, and if profits are made, they are shared as dividends or reflected in lower premiums. Since they are not listed on the stock exchange, mutual insurance companies tend to avoid the pressure of having to turn in profits by all means. However, a mutual insurance company can undergo demutualization and become quoted on the stock exchange as a stock insurance company, a process that opens its shares to public purchase. Demutualization enables mutual insurance companies to raise capital through the stock exchange.

Unlike mutual insurance companies, stock insurance companies in Pennsylvania are owned by the stockholders (or shareholders). Gains and losses are made on stocks and are shared as dividends if the value of the stocks rises or falls over time. Key differences between mutual life and stock life insurance companies in Pennsylvania outlined in the table below:

How Can Life Insurance Companies Afford to Pay Out the Claims?

Life insurance companies in Pennsylvania can afford to pay claims in the following ways:

• Premium payments by insureds: Life insurance companies engage the services of underwriters to determine the appropriate amount of premiums that will cover their costs and yield profits. The premium calculation takes into account the insured’s health status, life expectancy, and length of coverage. Also, considerations are made based on the size of the death benefit, cost of policy administration, and the insurance company’s expected profit

• Investing some of the premiums paid by the insured in high-yield bonds, mortgage securities, and stocks.

• Through forfeited premiums of unclaimed benefits of term life policies outlived by insureds

• By charging policy surrender fees for cancellation of policies by insureds

• Growing the premiums paid for other insurance products such as annuity plans

How Do Life Insurance Companies Make Money if Everyone Dies?

Life insurance companies in Pennsylvania make profits by calculating premiums in such ways that they bring in more money than they will pay out should the policy run the full term. Part of the premium is invested for profits. However, if everyone dies at once, or earlier than predicted, life insurance companies may not make money due to the loss of premiums and also the death benefits they will have to pay. The sudden death of all policyholders may lead the insurance company to bankruptcy.

What Does Life Insurance Cover in Pennsylvania?

In Pennsylvania, life insurance covers an individual’s life both while they are alive and after their death. After the insured’s death, it can provide funds to pay for:

• Insured’s final and burial expenses

• Mortgages

• Student loans

• Tuitions

• Child care

• Daily expenses

• Healthcare bills

• Outstanding loans

• Lost income due to the insured’s death

In addition, life insurance may cover other insureds’ pressing expenses while they are still alive. For instance, a permanent life insurance policyholder may make a withdrawal from the savings component and use it as they please. Also, rider options may entitle an insured to payouts if they meet certain conditions.

Who Should Buy Life Insurance?

You should buy life insurance in Pennsylvania if:

• You have dependents and want to create an income source for them when you are no longer around

• You owe debts you do not want to leave behind for others when you die

• You intend to keep your business afloat for your family after you die

• You do not wish to burden others with your final life expenses

• You seek to leave a financial legacy for dependents or beneficiaries

• If you are a senior citizen who wants to access some of the living benefits that comes with permanent life plans

Can I Buy a Life Insurance Policy on Anyone?

Yes, you can buy life insurance for anyone, but only if you have an emotional or financial relationship with them. In Pennsylvania, to buy life insurance for someone else, the following criteria must be met:

• You must show proof of relationship and insurable interest that you will suffer a loss if the person dies

• You must obtain the consent of the other party. You cannot insure people without their knowledge because they will have to sign paperwork and undergo the necessary underwriting procedures

You can buy life insurance for your spouse, children, relatives, business partners, or other people in whom you have insurable interests.

Who Can you Not Buy Life Insurance On?

In Pennsylvania, you cannot buy life insurance for someone with whom you do not have a relationship or an insurable interest. For instance, you can not buy life insurance for random drug addicts and homeless individuals. The reason for this is to prevent premeditated murder of the insured in order to claim a death benefit.

Who is the Owner of a Life Insurance Policy in Pennsylvania?

A life insurance policy belongs to the policyholder. In Pennsylvania, the policyholder is the individual who signed the contract and pays the premium and has the right to make adjustments to the policy coverage. In many cases, the holders of life insurance policies are the same as the insureds.

How to Choose a Beneficiary for Life Insurance?

In choosing a life insurance policy beneficiary in Pennsylvania, an insured should follow the following steps:

• Decide on who should get the payout: A beneficiary should be able to carry out the wish of the insured so that the purpose of the insurance would not be defeated. For instance, if the insured is married and wants the payout to be used to improve the living standard of the family, the likely choice for the beneficiary may be the spouse. For singles, the more likely choices for beneficiaries may be parents, siblings, or trusted friends. If you are indebted and took life insurance for loan repayments, you may choose whoever was a signatory to the loan, for example, parents or siblings

• Consider the state rules: For instance, the minimum age for a life insurance policy beneficiary in Pennsylvania is 18 years. If an individual is under 18, the law recommends setting up a trust or appointing a guardian to oversee the funds until the beneficiary is of legal age. For minors and disabled beneficiaries, it is best to set up a trust to ensure the money is used for the set goals. A trust will help avoid disagreements and protect the fund in case of divorce proceedings. To set up a trust, you may need the services of a legal practitioner

• Designate secondary (contingent) beneficiaries to get the payout should the policy outlive the primary beneficiaries

• Update choice of the beneficiary when necessary: For instance, if the policy was bought while single, you may want to include a spouse and children when married, or you may want to add some dependents

Who is a Beneficiary in Life Insurance?

A beneficiary in life insurance is an individual or entity designated by the insured to receive all or part of the death benefit payout when the insured dies. In Pennsylvania, a beneficiary can either be a primary or secondary beneficiary.

• Primary beneficiaries are the individuals or entities that receive the death benefit when the insured dies

• Secondary (or contingent) beneficiaries are standby beneficiaries. should the life policy outlive the primary beneficiaries.s. Also, a secondary beneficiary may get the payout if the primary beneficiary chooses not to claim a policy’s death benefit

Life insurance policy beneficiaries can also be classified as revocable and irrevocable. Revocable beneficiaries are those that can later be removed by the insured, while irrevocable beneficiaries cannot be changed without their consent. Beneficiaries may not necessarily have to be individuals. They may also be an entity; for example, a charity organization or religious establishment.

Who Chooses the Beneficiary?

A life insurance policy owner is responsible for choosing their policy beneficiary in Pennsylvania. Typically, insureds choose individuals or entities with whom they have emotional or financial relationships.

How to Change a Beneficiary?

In Pennsylvania, changes to life insurance policy beneficiaries can only be done by the policy owner. Only insureds can legally make changes to an insurance policy at their convenience. However, in rare cases, it may require a sign-off by another individual. The insured requires authorization to make changes if the beneficiaries are irrevocable. Also, a person other than the policy owner may have a power of attorney to make changes to a life insurance policy for reasons such as medical, legal, or financial emergencies.

Depending on the type of beneficiaries (revocable or irrevocable), changing beneficiaries can be done by following some basic steps:

• Contact the insurance company and make your intention known

• Submit a change of beneficiary form (this can be done through the mail or online). On the change of beneficiary form, you must provide information about your policy in addition to the beneficiary’s, including:

• Legal name

• Date of birth

• Address

• Relationship to you

• Social security number

If the death benefit is to be shared among beneficiaries, you are required to indicate the percentage each would get. Typically, a change of beneficiary form should be witnessed (signed) by two persons who are not named beneficiaries.

Under certain conditions, there might be a slight complication, and the insured may not be legally empowered to change the beneficiaries of a life policy in Pennsylvania without authorization. For instance, an insured cannot unilaterally change beneficiaries if:

• The named beneficiaries are irrevocable: The insured must seek the consent of the beneficiaries before making changes (example: Collateral Assignment)

• There is a court order: For instance, in a divorce case, the court may rule that the name of a beneficiary cannot be removed

• Making the changes violates state law

Furthermore, changing a life insurance policy beneficiaries must conform to the rules laid down by the insurance company. Hence, before you embark on any changes, you may need to go over the contract document and also seek the advice of a state-licensed life insurance agent.

Who Should I Name as my Life Insurance Beneficiary?

Typically, you can name a spouse (or partner), children, parents, relatives, business associates, charity organizations, an estate, or a trust as beneficiaries of your life insurance policy in Pennsylvania. However, before naming an estate or a trust as a beneficiary, consult with a tax advisor or an attorney.

Who you Should Never Name as your Beneficiary?

In Pennsylvania, minors (persons under 18 years) cannot be named as life insurance policy beneficiaries. Life insurance benefits meant for the underaged are usually paid into a trust, or legal guardians are appointed to oversee the payout until they are of legal age. To avoid falling foul of the law, before choosing a beneficiary, you may need to contact a Pennsylvania-licensed attorney for further clarifications.

How Can Life Insurance Work as an Investment in Pennsylvania

As an insurance product that makes payouts as living benefits while the insured is alive and death benefits when the insured dies, life insurance may be considered an investment. To use life insurance as an investment in Pennsylvania, there is a need to have an understanding of how it works.

There are two classes of life insurance based on length of coverage and they come with different conditions and benefits; these are term life insurance and cash value life insurance. Term life insurance runs for a specified period, at a lower premium, and does not offer some of the benefits that come with cash value policies unless bought with optional riders. Permanent life plans are cash value plans that have savings and investment components. An insured can make withdrawals or borrow money against cash value life insurance. To use life insurance as an investment, an insured may need to understand the following:

• A universal life policy offers permanent coverage and the benefits include a fixed rate of return and the opportunity for the insured to make withdrawals and policy loans tax free. However, life insurance plans are more of protective plans rather than investment plans, hence, profit yields are limited. Therefore, it makes more sense to buy a term life policy with a longer term and lower premium and invest the saved money for profits. It is also important to carry out a risk analysis before buying because some life insurance has fluctuating rates and returns

• Think it through before investing - Life insurance as an investment may be for the tax benefit the insured may enjoy, but hidden charges may defeat this purpose. Hence, the policy must be structured to pass the IRS-imposed test to differentiate it from a modified endowment contract in order not to lose the profits made

Contact a state-licensed life insurance agent and a financial advisor before turning your life insurance policy into an investment.

Is Life Insurance an Investment Vehicle?

Yes. Cash value life insurance in Pennsylvania can be an investment vehicle since it provides returns on investments (ROI) that can be used to meet future needs. Some of the ways life insurance may act as an investment vehicle include:

• Cash values can grow and be withdrawn and used to meet individual needs.

• Dividends from whole-life policies

• Tax benefits on withdrawals provided they do not exceed the policy’s cash basis

• Tax-free loans from permanent life policies

• Accumulating tax-deferred retirement funds

What is Credit Life Insurance?

Credit life insurance in Pennsylvania pays off the debts or outstanding loans insureds could not pay before passing away. Typically, a lender or a bank may want to sell this type of insurance to a borrower as surety for loans in the event of repayment default due to the borrower’s death. The face value of some of these types of insurance policies may be tied to the amount owed, while some may have a certain death benefit that does not change.

Credit life insurance is a guaranteed issue life insurance policy that does not consider the individual’s health condition for coverage. There are two ways to buy credit life insurance. These are:

• As a single premium - This method calculates the full premium upfront and adds the value to the loan amount. The loan is offered with interest, hence, the credit life insurance premium adds incrementally to the loan interest

• As a monthly outstanding balance that is based on the credit life insurance payment; this varies with the loan balance

Data from the National Association of Insurance Commissioners (NAICO) showed a total of $11.1 million in credit life insurance claims in Pennsylvania in 2020, while 20 companies earned $16.8 million as net written premium for credit life insurance in the same year.

What is a Collateral Assignment?

Collateral assignment is when a lender is listed as a primary beneficiary of the life insurance policy. If the borrower dies before repaying the loan, the lender can collect what is owed to them before any other beneficiaries can.

When Does Life Insurance Mature?

Cash value life insurance policies mature after 95 to 121 years from the date of purchase. If an insured lives up to the maturity age in Pennsylvania, the insurance company pays the maturity value on the insured’s birthday, and the payout is subject to income tax. The maturity date depends on the date the policy was underwritten, and the maturity value is specified in the contract. The amount paid as maturity benefit may be equal to the cash value of the policy.

The main issues with life insurance maturity are:

• It applies only to permanent life insurance

• The coverage ends after the maturity benefit payout leaving the insured with no coverage under the policy

• The cash value payout (in most cases, a large amount) is subjected to taxation

Does Life Insurance Cover Suicide in Pennsylvania

In Pennsylvania, life insurance contracts come with a suicide clause that excludes coverage for suicide within the first two years after the policy is issued. The reason for the clause is to prevent individuals from taking their own lives so that beneficiaries can claim death benefits. Insurance companies in Pennsylvania restore death benefit payments after the exclusion period.

Cryonics and Life Insurance

Cryonics (cryopreserve) is the practice of preserving dead bodies with the hope of reviving them in the future. The preservation processing takes place at the cryonics institute within fifteen minutes after an individual is medically certified dead. Cryopreservation involves treating the body with special chemicals and freezing it to a low temperature using liquid nitrogen.

How does life insurance work with cryonics?

Cryopreservation is an expensive process the costs on which can exceed $200,000. To fund it, applicants may buy life insurance exclusively for the procedure and name the cryonic institute as the beneficiary. The death benefits of life insurance for cryopreservation must be sufficient to cover the costs. Also, there should not be a lapse in coverage.

What type of insurance is required?

In Pennsylvania, cryonics works well with both term life and cash value life policies. However, a permanent life policy has the advantage of a cash value component which may yield living benefits for the insured. Due to the difficulty and costs of purchasing life insurance at an advanced age, it is advisable to initiate the process early.

You may want to add optional riders to the life insurance to access some benefits while alive or add extra coverage. For instance, an accelerated death benefit rider can provide up to 50% of the death benefit if an insured is diagnosed with a terminal illness. Also, a double indemnity rider pays double of the death benefit in a case of accidental death, and the extra money can take care of additional expenses. For the best advice on how to go about getting life insurance coverage for the purpose of cryopreservation, contact a Pennsylvania-licensed life insurance agent.

How to buy life insurance for cryonics

Pennsylvania insurance companies do not sell cryonics life insurance. To get life coverage for cryopreservation, you need to purchase a life insurance policy and name the cryonics institute as the beneficiary. For cryopreservation, get a separate policy for this process, and when shopping for life insurance, research and consult a state-licensed life insurance agent.

Is Life Insurance a Good Investment?

Yes, life insurance is a good investment in Pennsylvania for the following reasons:

• It helps secure the future of beneficiaries who depend on the insured for survival.

• It can serve as a source of a tax free retirement income for insureds (living benefits in cash value policies).

• The death benefit of life insurance can be used as an investment fund.