Other Aspects of Life Insurance

In this section you will find an explanation of some basic life insurance concepts as well as some information on more advanced concepts.

Understanding Beneficiary Designations

Beneficiaries are the people or entities named to receive all or a portion of the death benefit proceeds from a life insurance policy. The policy owner may name one beneficiary or multiple beneficiaries, and generally may change the beneficiaries anytime prior to the insured person's death.

There are two types of beneficiaries: primary and contingent. A primary beneficiary(s) will receive the proceeds of the life insurance policy should the insured person die. There may be one or more than one primary beneficiary and the proceeds do not have to be shared equally. The policy's owner may also name one or more contingent beneficiaries. A contingent beneficiary will receive the death proceeds should the primary beneficiary(s) die prior to the death of the insured. Many individuals name their spouse as the primary beneficiary and their children as the contingent beneficiaries. You should consult with an attorney prior to naming a minor child a beneficiary of a life insurance policy. Naming your estate as the beneficiary of your insurance policy may cause an increased estate tax liability and may cause the proceeds to be probated. 1 Consult with an estate-planning specialist prior to doing so.

Understanding Settlement Options

The life insurance policy's owner may state that a specific settlement option be used to pay the beneficiary(s) upon the insured’s death. If the policy owner does not choose a specific option, the beneficiary(s) generally will be given the opportunity to choose one of the following:

  • Lump Sum Payment: The proceeds of a life insurance policy are paid to the beneficiary(s) in one lump-sum payment.
  • Installment Option, Fixed Period: The proceeds of a life insurance policy are paid to the beneficiary(s) as a series of payments for a fixed period of time. The policy proceeds are made in equal installments over a specified period of time. The amount of each installment may vary based on the amount of proceeds, interest rate, and length of the period.
  • Life Income with 10 or 20 Years Certain: With a life income option, the proceeds of the life policy are used as a single net premium to purchase an annuity. The annuity provides income payments payable to the beneficiary for a specified period of time (i.e. 10 or 20 years). The payments continue for the duration of the period specified even if the beneficiary dies during that time.
  • Life Annuity Option, Single: The proceeds of a life insurance policy are used to purchase a life annuity. The annuity then pays level benefit payments to the beneficiary for the life of the beneficiary.
  • Life Annuity Option, Joint: The policy proceeds are used to purchase a joint and survivor annuity that provides benefits to two or more individuals and continues until both or all die.
  • Interest Only Option: The proceeds of a life insurance policy remain with the insurance company and the company pays the beneficiary interest payments. The beneficiary can request a lump sum distribution at any time.
  • Installment Option, Fixed Amount: The proceeds of a life insurance policy are paid to the beneficiary(s) in fixed dollar amount installments until all proceeds and interest are fully paid.

How Often You Should Review Your Life Insurance Needs

You may already have life insurance, but changes in your life may mean your needs have changed. We recommend reviewing your life insurance needs at least every two years. Here are some of the reasons that should prompt you to recalculate your life insurance needs.

  • A child has been born or adopted.
  • You have recently married or divorced.
  • Your spouse's health has deteriorated.
  • A child requires assistance or long-term care.
  • You have begun to provide care or financial assistance to a parent.
  • You have recently purchased a new home.
  • You are planning for your children's education.
  • You or your spouse is concerned about retirement income.
  • You or your spouse has received an inheritance.
  • You or your spouse has been promoted recently.
  • You have refinanced your home mortgage.

AAA Membership and Purchasing Products From AAA Life Insurance Company

You do not need to be a member of AAA to buy an individual life insurance policy with AAA Life Insurance Company. However, membership is required to purchase our travel accident insurance products and our group issued term life insurance which is distributed by mail. If you are not a member, we suggest you visit your AAA Auto Club to see why over 45 million Americans are members of AAA.

Understanding the Tax Treatment of Life Insurance Death Benefit Proceeds

Life insurance death benefit proceeds generally are not subject to income taxation2 The value of a life insurance policy or its death benefit may be included in the policy owner's estate for estate tax purposes if the insured person is also the owner.1 For more information on estate and inheritance taxes, consult with an estate-planning specialist.

Whether to Purchase Life Insurance on Your Spouse

If your spouse contributes to the family's income then life insurance protection may be needed to replace his or her income should he or she die. If your spouse does not have an income, then life insurance may be needed to cover final expenses and replace his or her contribution to the family. Use our life insurance needs calculator for help in estimating the amount of life insurance your spouse needs.

1 AAA Life Insurance Company and its agents do not provide legal or tax advice. You may wish to consult independent legal, tax or financial advice prior to the purchase of any policy.

2 Under current tax law. Beneficiaries without an insurable interest in insured’s life may be subject to income tax. This may occur in situations where the policy has been sold to an unrelated third party.