Life Insurance in New York
Life insurance is an insurance product that allows an individual to provide some sort of financial coverage for their loved ones or any dependents after their demise. It is a contract between an insurer and a policy owner. In some cases, the policy owner and the insured may not be the same individuals. For instance, a child (policy owner) can insure their parents (insured), or a business (as the group policy owner) may offer coverage to all of its employees.
Life insurance coverage guarantees the insurer pays a sum to named beneficiaries of the undertaken policy when the insured dies in return for premiums already paid during the insured’s lifetime. Signing up to a life insurance policy in New York will help you to:
Provide money for the people you love after you die
Pay less in taxes
Cover college costs
Donate to charitable organizations after your demise
Fund business or partnership buyouts
Life insurance policies in New York are of two types: term life insurance and permanent life insurance. Term life insurance provides coverage for a fixed tenure, which could be within the range of 5 to 30 years or in some cases, to a specified age of 80. On the other hand, permanent life insurance provides coverage for the entirety of an insured’s lifetime. Discuss with a New York-licensed life insurance agent who can help you compare life insurance policies from different insurers to help you decide on the best option for your unique needs.
How Does Life Insurance Work in New York?
In life insurance, an insured pays premiums, which accumulate and serve as a tax-deferred source of income, known as a death benefit, for their loved ones upon their death. Life insurance policy beneficiaries may include close relatives, friends, adopted children, and organizations, not excluding cryonics institutions. In New York, however, a child under the age of 14 years and six months may not be named as a beneficiary of a life insurance policy.
The purposes of life insurance policies vary. Sometimes, an insured can tap into the policy and receive living benefits depending on the nature of the policy. Living benefits can be used in taking care of children's tuition, immediate medical expenses, and day-to-day costs. As such, before purchasing a life insurance policy in New York, you should consider the following:
The purpose of purchasing the insurance
The type of policy to purchase (term life or permanent life policy)
The cost of premium
The type of riders to add
The difference between life insurance quotes for each available policy
To obtain the death benefits of a life policy, the policy beneficiaries must file a claim, providing the details of the insured. The beneficiaries will also need to verify their identities in the same manner as the insured may have provided, and other documents to support the claim, such as a death certificate. Payout structures for death benefits could be by lump sum, monthly or yearly installments, or even directed toward donations.
Note: If the insured dies during the first 2 years of the life insurance policy, New York-licensed life insurers may contest the claim in order to verify if the information supplied with the original application was truthful. Death by suicide is also not covered during the first 2 years of the policy.
What Are The Main Types Of Life Insurance in New York?
There are two types of life insurance options in New York:
Term Insurance: Provides coverage for a specific period which could be as short as a year or a specific number of years, up to about 30 years
Permanent Insurance: Provides insurance coverage for a whole lifetime. In New York, permanent insurance is majorly either ‘traditional whole life’ or ‘interest sensitive whole life’. Other types include the universal life and participating whole life, which comes with a cash value component.
CASH VALUE LIFE Insurance
All permanent life insurance has a cash value component. A cash value life insurance policy is one that includes a cash value account that sometimes earns dividends or market earnings depending on the policies and product. Such earnings are normally tax deferred. When choosing a cash value insurance plan, there are many options. Different cash value policy types accrue cash value in distinct ways but may be accessed through a loan, surrender, or withdrawal. Withdrawal can be nontaxable; but if the policy is surrendered, it can be taxable.
Cash Value in life insurance is meant as a living benefit tool that the insured is supposed to use while still alive. Typically, whatever CV is not used up by the insured at the time of death is taken by the insurance company and is used to offset a portion of the death benefit paid out to the beneficiaries.
Some of the cash value (CV) life insurance policies offered by New York life insurance companies are:
Universal Life Insurance: Under the universal life policies, the cash value earns fixed interest on the fixed portion, while the rest is kept in indexing, where the earnings have a ceiling and losses have floor, below which they cannot drop.It is a flexible plan that allows an insured to change or skip premium payments or even increase or reduce the death benefit payout sum. Note that changing premiums may alter a universal life insurance policy’s death benefits. Likewise increasing or decreasing the death benefit payout might affect the cost of your premium.
Indexed Universal Life Insurance: IUL policy offers the opportunity to grow the CV by following the stock exchange index. The cash value grows with the market up to a cap determined in the policy, but in case of the market downturn, the loss of the CV is limited to ZERO-Return, instead of pulling the account into the negative. In the worst case scenario, you are back to what you started the year with.
Final Expense Life Insurance: FE policies are meant to cover a limited amount (typically up to $50,000) of death benefit. Since FE insurance is a permanent life insurance, it also has a CV component, however negligible. CV of final expense insurance is typically used to make monthly premium payments.
Whole Life Insurance: The CV of a whole life policy is dividend-based.
Variable Life Insurance: Variable life insurance gives more control to the insured on how they want to allocate the funds of the CV. The risks of CV loss are generally much larger in Variable policies, which is why to sell Variable life insurance in New York, the life insurance agent must be dually licensed by the DFS and the Financial Industry Regulatory Authority (FINRA).
TERM LIFE Insurance
Term life insurance policy has no cash value. In New York, term life Insurance offers coverage for a fixed tenure, usually ranging from 5 to 30 years. In certain cases, coverage may extend to a specified age of 80. Term life Insurance policies do not offer a savings component or cash value. Where an insured outlives their term life insurance policy tenure, no death benefit will be paid out. A term life insurance policyholder who outlives their policy may renew it. In such a case, premiums for the new policy may be increased due to age progression and the likelihood of the insurer paying out death benefits during the new term.
The types of term insurance policies in New York include:
Level Term - The value of a level term policy remains the same throughout the duration of the policy. The cost of premiums also remain the same
Decreasing Term - For a decreasing term policy, the value reduces over the duration of the policy, while the cost of premiums remains the same
Renewable Term - A renewable term policy allows an insured to renew their policy at the end of a term regardless of the insured’s health status at the time of renewal
Adjustable Premium - This type of policy offers insureds lower premium costs with a right to change premiums in the future. However, such changes can not exceed the maximum guaranteed premium agreed in the policy contract
Convertible Term - A convertible term policy allows an insured to convert their policy to a more permanent plan.
What Type of Life Insurance Does Not Require a Medical Exam?
Generally, life insurance companies in New York hesitate to offer insurance coverage to high-risk individuals with long-term terminal health conditions or persons with careless lifestyles. This is to guarantee that the insurance company would not be paying out claims sooner than they anticipate. However, persons that are considered low-risk usually have relatively good health and as such, are usually not required to take medical exams. Under conversion rules, an insured would not be required to take medical exams while upgrading from term life to permanent life plans.
Life insurance policies that do not require medical exams in New York are:
Simplified Issue Life Insurance: To obtain this policy, a person will only need to answer a health questionnaire, without the need of an in-person examination. Final Expense
Guaranteed Issue Life Insurance: This policy is available to people with specific health conditions and does not require a medical exam. The amount of life insurance coverage offered is usually lower than other forms of life insurance, meanwhile it costs more.
Accident Protection Insurance: This policy is purpose specific type of insurance and only allows beneficiaries to receive a lump sum when the insured dies in a car accident. Death by natural causes is not covered
What Can you Do With Life Insurance?
In New York, life insurance policies can be used for various purposes, depending on the insured’s intentions when signing up for a policy. Some the things you can do with life insurance in New York are:
Paying off debts/replacing income: Life insurance policies can pay any debt left behind by insureds, relieving their loved ones of undue burden. If an insured is also the breadwinner in a home, life insurance can help cushion the loss and replace the deceased income for use as daily family expenses.
Charitable contributions: An insured who believes in a charitable cause may add a charitable organization as a beneficiary of their policy. The insurer will pay out death benefit to such an organization after the insured’s death.
Pay fewer taxes: Life insurance can help an insured to save toward their retirement if their policy has a cash value component. They can borrow against the ‘savings’ that have been accumulated under such a policy and avoid paying high taxes. This is a form of living benefit.
Provide for loved ones or dependants: Some life insurance policies can provide funds for tuition and daily expenses to ease the burden as though the insured were still alive.
What is a Premium in Life Insurance?
Premiums in life insurance are fees paid to insurance companies in exchange for life coverage. In New York, premiums could be paid under different options. These include:
Annually: Under this option, the total cost of coverage for one year is paid at an agreed date within the year
Semi-annually: These payments are made twice a year
Quarterly premium payment: These are paid four times a year at the turn of each quarter.
Insurance companies consider health status, age, habits, claims history, and occupation to determine the cost of premiums for life insurance policies on a case-by-case basis.
What is a Death Benefit in Life Insurance?
A death benefit in life insurance is a payout received on account of the death of an insured person. In term life insurance, a death benefit will not be paid where an insured outlives the tenure of the policy). Pure death benefits in New York are not subject to taxation.
When is Death Benefit Payable?
A death benefit is paid out after the death of an insured. Insureds are advised to share their life insurance policy information with the named beneficiaries to aid seamless claims filing after death. In New York, beneficiaries who are responsible for the death of an insured cannot claim death benefits.
What is a Living Benefit in Life Insurance?
A living benefit in life insurance allows an insured to access a portion of the funds accumulated by their life policy for other purposes while still alive. It is an optional rider that can be used to customize a life insurance policy to fit the insured’s needs. Any sum paid out as a living benefit will be deducted from the overall death benefit sum to be paid out following the insured’s death. Typically, most insurance companies place a limit of 25% of the death benefit as accessible as a living benefit. However, persons with severe medical conditions that need extra medical care may also be able to go beyond the 25% limit accessible as a living benefit.
What is MEC in Life insurance policy?
An MEC in a New York life insurance policy refers to an overfunded insurance policy exceeding the legally permitted tax limits. A Modified Endowment Contract (MEC) refers to cash value policies where the total amount of premiums paid exceeds what the law permits. In the 70s, insurers took advantage of the tax-free growth wave of cash value life insurance policies, offering up insurance products with unrestricted growth features. The insured could then access this cash value as a tax-free loan through the principals and interests. To address this loophole in the tax system, the federal government introduced MEC.
When a life insurance plan has been tagged as an MEC by the Internal Revenue Service (IRS), an insured would be prevented from having access to the cash value account tax-free because the sum would be considered ordinary income, hence taxable. The IRS created a seven-pay test to determine if a policy is overfunded and whether to designate it as an MEC. Under the MEC regulations, a policy would not be subject to the same taxable status where it is found that the policy had been purchased before June 20, 1988.
What is a Rider in Life Insurance?
Riders in life insurance policies are add-ons to the original policies that allow insureds to obtain extra coverage for specific events, in addition to the standard death benefit. These riders are typically optional and have additional cost implications. Some life insurance riders available in New York are:
Payor benefit rider
Children rider
Disability income
Guaranteed insurability
Accidental death benefit
Chronic care rider.
Why are Riders Important in Life Insurance?
Riders in life insurance fulfills specific needs not ordinarily covered by your basic life insurance policy. They could be purchased at any time, whether during the initial purchase or after.
Various types of life insurance riders are available in New York. You can consult with a NewYork-licensed life insurance agent to give recommendations on the options available based on your needs.
What are the Most Important Life Insurance Riders?
The 11 most important life insurance riders in New York are:
Payor benefit rider: The payor benefit rider is added to life insurance policies to cater to juveniles. If the payor of the premium dies or becomes disabled before the insured attains maturity, future premiums will be immediately waived. Where there is such an event that qualifies for a waiver, the insurance company automatically takes on the payor’s role
Children’s rider: This type of rider protects an insured’s children, including newborns and adopted children without increasing the policyholder/insured’s financial exposure. The rider also has a conversion option that allows the beneficiaries to convert to a permanent insurance plan, either after the death of the insured or prior to termination of the rider
Guaranteed insurability rider: The guaranteed insurability (GI) rider is a worthwhile addition that gives you the option to buy additional insurance up to a certain age, typically 40. Insured persons with this rider can purchase additional insurance policies irrespective of the state of health at the time of the purchase
Accidental death benefit rider: The accidental benefit rider provides coverage where death occurs as a result of an accident,vehicular or otherwise,before a certain age, usually 65. It pays out debt benefits two to three times more than the original value of the parent policy, depending on the kind of accident, although there are certain exceptions, such as sickness
Chronic care rider: This rider eases financial exposure on an insured by providing tax-free access to the original policy’s living benefit when the insured becomes chronically ill and needs money to pay for medical bills. It must be purchased at the inception of the parent policy
Cost of living rider: The cost of living rider allows an insured to purchase additional insurance policies each year to cover contingent needs. It is usually available at low rates. An insured will not be required to tender evidence of insurability when looking to purchase this rider
Spouse rider: This rider provides term life coverage for an insured’s spouse. In most cases, after the death of the insured, their spouse can convert the term life policy to a permanent life policy
Disability waiver of premium rider: This rider typically waives premium payments where the insured becomes disabled
Critical Care Illness rider: Covers the insured’s medical treatment using part of the death benefit if the insured is diagnosed with a qualifying covered health issue
Terminal Illness (a.k.a. Accelerated Death Benefit): Covers the insured’s terminal illness expenses using their policy’s death benefit.
Long-Term Care rider (ak.a. Activities of Daily Living rider): The insured can use the death benefit to cover some costs of long term care.
Is There a Deductible in Life Insurance?
There are no deductibles in New York life insurance policies. Deductibles in other types of insurance (property and health) are payments made as part of the cost of offsetting an event where a claim is made. It must be paid before the insurance coverage can kick in after a covered incident. The deductible is not applicable to life insurance.
How Do Life Insurance Companies Operate?
Life insurance companies in New York, like others in the United States, offer protection against certain life-changing events and occurrences in return for premiums. Life insurance is sometimes offered at higher premiums to individuals regarded as high-risk persons due to the nature of their jobs, health status, or lifestyles. After an insured is pronounced dead, any named beneficiary can file a claim with the insurance company. Before the claim is paid, the beneficiary will need to prove their identity and right of claim by providing the appropriate documents. Life insurance companies spread their risks by gathering funds (premiums) from different insured persons which is then concentrated into a singular pool. Money from this pool is used to pay claims while investments are also made to ensure returns.
Mutual vs. Stock Life Insurance Companies
In New York, mutual life insurance companies are owned mainly by the policyholders, while stock insurance companies are owned by their shareholders as a public or private enterprise. The priority for stock insurance companies is the need to make a profit for its shareholders, but policyholders do not get to share in the profits or losses of the company. To operate as one, a company must have a minimum threshold of capital and surplus to be approved.
Mutual insurance companies on the other hand, appear to be the oldest form of insurance company dating back to the 1600’s. They range from small providers to international insurers and are set up to cater to specific needs or purposes such as health, life or property insurance companies. Mutual insurance companies are owned by the policyholders who are “contractual creditors” having the right to vote on the board of directors. At the end of the calendar year, the board will determine the sum distributed as dividends to the policyholders.
How Can Life Insurance Companies Afford to Pay Out the Claims?
Life insurance companies in New York operate like any other company, with some distinctions. They can afford to pay out insurance claims due to the larger sum of premiums paid by a group of customers. Three of the 10 largest life insurance companies in the United States are based in the State of New York. The three of them account for over $122 billion in premiums.
Life insurance companies also generate revenues by purchasing investment shares in other companies or signing up for financial products such as government-issued bonds. In other cases, lapsed policies and expired term policies are other options, because an insurance company is not obligated to pay out claims where the policy lapses. These profits are used for paying insurance claims whenever the needs arise.
How Do Life Insurance Companies Make Money if Everyone Dies?
Whether or not everyone dies is not a concern for life insurance companies offering coverage in New York because the business model is one where there is a steady cash flow through premium payments. Besides, the possibility of insureds defaulting on insurance premium payments strips them of access to their living or death benefits. These untapped benefits are a revenue source for most life insurance companies. Additionally, life insurance companies make money by investing customers’ premiums in profitable ventures in other businesses. For instance, nationwide between 2020 and 2021, life insurance and annuity invested assets amounted to $4.9 trillion.
What Does Life Insurance Cover in New York?
Life insurance in New York covers most causes of death with a few exceptions. Insurers usually state such exceptions in policy contract documents. Generally, the payouts from life insurance can cover certain expenses after the death of an insured. These expenses include daily living expenses, college tuition for the insured’s children, and end-of-life expenses, including final medical bills and funeral costs. Also, life insurance in New York can cover any outstanding loans left behind by the insured, such as mortgage, car loans, and unpaid credit card balances.
Who Should Buy Life Insurance?
Having life insurance is important for everyone. Generally, people are advised to sign up for life insurance policies at some point in their lives. The younger you are when you get it, the better the costs that you can lock in for the life of the policy. People who should buy life insurance policies in New York are:
Business owners - A business owner needs life insurance to protect the company and ensure its continuity after their death. Depending on the policy type, a business owner can also access some living benefits to pay up debts or to support family
Spouses - Purchasing life insurance is a good way to ensure that your spouse is not left with a heavy financial burden and is a useful way of providing financial stability to the surviving loved one
Seniors - Purchasing life insurance as a senior is a useful way to generate tax-free retirement income, cover your funeral expenses, medical expenses and also loss of earnings
Parents - As a parent, particularly one with dependents with functional needs, purchasing life insurance is a good way to ensure that your children are still catered for after death. The death benefit can be used for paying college fees, medical bills or taking care of daily living expenses.
Can I Buy a Life Insurance Policy on Anyone?
Yes. In New York, you can buy a life insurance policy on anyone if you can prove to the insurer that you would suffer from hardship if the person dies. You must also show that you have an insurable interest. Insurers would not allow an individual to purchase life insurance policies on behalf of another adult without the person’s consent. Normally, a policyholder/payor can purchase life insurance policies for their children, spouse, business partner, or parents. However, the payor/policyholder will have to prove that the individual is dependent on them and would suffer in the event of death.
Who Can you Not Buy Life Insurance on?
In New York, you cannot buy life insurance on any adult who has not given consent or in whom you do not have an insurable interest.
Who is the Owner of a Life Insurance Policy in New York?
Life insurance policies in New York are usually owned by the policyholder, payor, or the insured. In some cases, the policyholder may not be the same as the insured. However in New York, minors under 14 years and six months are prohibited from owning life insurance policies.
How to Choose a Beneficiary for Life Insurance?
A beneficiary is an integral part of the insurance concept. When a person seeks to sign up for a life insurance policy in New York, there are a number of considerations regarding who or what organizations may be named as policy beneficiaries. In some cases choices may change due to circumstances such as divorce or child birth, and the policyholder would be required to update their policy beneficiaries. Below are some considerations when seeking to choose a beneficiary of a life insurance policy:
Who do you want to help? Child, Spouse, Business or charity organization
Avoid naming minors as beneficiaries in New York because of the presumption of an inability to be completely responsible.
Who is a Beneficiary in Life Insurance?
A beneficiary in New York life insurance can be an individual or an entity. Beneficiaries are of t.wo kinds, primary and contingent beneficiaries and include close and distant relatives, parents, children or their trustees, and charitable organizations. Where an insured fails to name a beneficiary before they pass away, the death benefit is transferred to the estate of the deceased and becomes taxable through probate. However, if the insured is murdered, the death benefits will not be paid to the beneficiaries if evidence shows that they were an accomplice to the murder. Note that if there are multiple beneficiaries and only one is found responsible for the murder, the innocent one would be the recipient of the death benefit.
Who Chooses the Beneficiary?
The policyholder/payor of a life insurance policy in New York has sole responsibility of choosing the beneficiary.
How to Change a Beneficiary?
In New York, only an insured can change the beneficiary of a life insurance policy, unless they have by a power of attorney or contract vested that right in another. There are revocable and irrevocable life insurance beneficiaries, and the ease with which they could be swapped depends on which of them the insured intends to change. To change a beneficiary on your New York life insurance policy, do the following:
Speak to a licensed insurance agent/broker or to your existing insurer’s captive agent
Request for a change of beneficiary form or fill the form out
Provide accurate beneficiary information like names, address(es), affiliation, and social security numbers
Submit the form
Confirm that the intended beneficiaries are properly listed on the newly printed and mailed hard copy of the policy.
Who Should I Name as my Life Insurance Beneficiary?
An insured must be attentive when designating their life insurance policy. They should aim to cater to their close family or dependents and should name responsible adults as recipients of death benefits. Remember that ultimately the beneficiary is the one who chooses the manner how they spend the death benefit. Mostly, beneficiaries will include children, spouse, parents, siblings, or charitable organizations. In the case of children under the age of 14 years and six months in New York, a trustee should be nominated until they are old enough to handle the proceeds responsibly.
Who you Should Never Name as your Beneficiary?
In New York, you should never designate any of the following as a beneficiary of your life insurance policy:
Minors are not suitable beneficiaries of life insurance policies because there is the presumption that they would not be responsible enough to manage the financial benefits. In New York, a minor who is under 14 years and six months of age cannot be a beneficiary of a life insurance policy
How Can Life Insurance Work as an Investment in New York?
Generally, life insurance in New York can be an investment. It can provide financial protection for your loved ones after you die. Another way in which life insurance can work as an investment for you is through the cash value component that is available under permanent life insurance policies. Cash value of life insurance is a savings plan that grows tax-deferred. The money accumulated in your cash value account can serve as a form of savings against which you can borrow for other investments. These sums are not taxed and also accumulate interest which grows up until the sum is withdrawn or paid out.
Is Life Insurance an Investment Vehicle?
While life insurance is not meant to be a pure investment tool, it can be an alternative investment vehicle in New York, depending on the policy type. Permanent life insurance policies, such as whole life and universal life insurance, include a cash value component that accumulates cash in a cash value account tax-free. As a beneficiary, you may decide to convert your life insurance after a couple years into a tax free immediate payout annuity. Alternatively, you can accumulate the funds in the tax deferred account and gain interest.
What is Credit Life Insurance?
A credit life insurance is a type of life insurance that can offset outstanding debts upon disability or death of the insured. Instead of paying the death benefit to the family members, the benefit goes to the creditor. This form of insurance may cost a lot more than other life insurance policies and may sometimes not cover the whole of the loan sum. In New York, the max payout for credit life insurance is capped at $55,000 for general loans and at $220,000 for mortgages. Hence, if an insured’s indebtedness exceeds that amount, credit life insurance would not be able to cover the excess.
What is a Life Insurance Assignment?
Assignment of life insurance happens when the owner of the policy transfers all or some of the ownership of the policy to another party. Most assignments happen as a security measure to protect the lender’s investment, to get access to the policy’s cash value, or as a gift. There are two general types of life insurance assignment: Absolute (total) and Collateral (partial):
Absolute assignment surrenders complete control of the life insurance policy and the decision of who gets the death benefits after the insured dies. Assignee becomes responsible for making the premium payments. Absolute assignment is irrevocable and only the assignee can choose to do another transfer. In absolute assignment, the assignee gets the full death benefit.
Collateral assignment is a conditional and partial transfer. It typically happens when a borrower assigns their life insurance policy to the lender, which in case of death of the borrower can use the death benefit to repay the debt. Whatever portion of the death benefit does not get used by the collateral assignee to repay the debt, is paid out to the listed beneficiaries.
When Does Life Insurance Mature?
Life insurance policies in New York mature once the event insured against (death) occurs or when the tenure of the policy expires. In other cases, there are specific milestones like attaining a particular age, for example 95. However, when this milestone occurs, a maturity extension rider (MER) can keep a policy in force past the maturity date.
Does Life Insurance Cover Suicide in New York State?
Generally, suicides are covered by life insurance policies after a 2-year waiting period. If the insured individual dies from suicide during the first 2 years of coverage, most New York-licensed insurers will refund the paid in premiums but will not pay the face value of the death benefit.
Cryonics and Life Insurance
Cryonics are procedures that involve freezing deceased persons to liquid nitrogen temperatures to preserve the bodies indefinitely. Life insurance companies do not partake in cryonics insurance (CI). However, insureds may nominate cryonics institutions as beneficiaries of death benefits, thereby paying for the procedures at the death of the insured, for the possibility of getting a second chance at life.
Is Life Insurance a Good Investment?
Life insurance in New York is a good investment into the safety and financial protection for the loved ones. It can protect beneficiaries from the hardship that your death might occasion. Some life insurance policies have cash value components that offer saving incentives. However, you should not make it your biggest financial planning strategy.
In any case, it is important to employ the services of a New York-licensed life insurance agent/broker who will analyze various policy options that align with your specific needs when purchasing a life insurance policy.
