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How Recent Laws Have Changed Some Types Of Life Insurance Policies

2011-07-30

Life insurance laws determine which types of policies can be legally offered by insurance providers, the terms of payouts and how payouts and premiums are taxed. As a result, life insurance regulations are important in determining the value of various types of policies. Before purchasing life insurance, it's helpful to know how laws determine the specifics of a policy and which types of life insurance are likely to keep their value with recent changes in state and federal laws.

State laws vary, but generally they're less restrictive than federal laws and protect the rights of consumers. Many states have recently passed "free look" life insurance laws which allow a policy to be cancelled for a full return of premiums within a certain period at the beginning of a policy. Usually, the "free look" period is about two weeks--it's rare for a state to mandate more time, as this could lead to costly consequences for a life insurance company. Nevertheless, free look laws in states like Illinois give consumers more freedom to shop around, even in the days after a policy has been purchased. Free look laws are a great resource for policy holders, although they're not available in all states; policy buyers should look into their own state insurance laws to see if these types of life insurance regulations apply to their plans.

Federal life insurance regulations have the most effect on life insurance policies, as states usually don't take too much control over the life insurance industry (other than laws that control how claims are paid out and processed). Tax law is important in establishing the value of various types of life insurance. For instance, a recent revision of the Direct Tax Code allows life insurance payouts to be taxed if the premiums in a given year exceed 5 percent of the policy's coverage. This mainly effects whole life and universal life insurance policies where payouts are common. Standard term life insurance policies aren't typically affected because coverage limits greatly exceed the cost of annual premiums for a policy. However, this law has made term life insurance an arguably better buy as a long-term financial investment, especially for individuals who purchase whole and universal life insurance for the potential investment without taxation.

There are several major types of life insurance and dozens of sub-types designed for different policy holders. Life insurance laws can change the value of policies, but in most instances, they're favorable to consumers who have already purchased their policies. When buying life insurance, it pays to understand state and federal regulations for each policy type, as this allows for a much better investment opportunity.

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