I don’t know anyone who likes buying life insurance, but it makes it easier when you know what to ask when buying it. Choosing the right life insurance can be a daunting task when you’re talking about insuring your eventual demise. The problem is, to most individuals that don’t know otherwise, the cost is usually the variable that people pay attention to the most.
Here is a list of questions that should be considered with your life insurance decision making criteria.
Cost of Life Insurance
When weighing the cost of life insurance, all the major insurance companies should be within ten percent of one another when looking at a 10-year term life insurance policy. If everything else was equal, it would be effortless to make a decision.
Sure, the cost will always be a consideration, but much of the important consideration lies below the surface.
What will life insurance be used for?
If you are newly married, have young children and have a considerable debt-load, your need for life insurance is considerably different than someone who is an empty-nester with no debt.
Term insurance will satisfy the need to pay off debt (mortgage, line of credit, loans and/or credit card debt), future expenses (kids’ schooling, retirement), day-to-day living expenses (food, utilities, clothing, childcare) and lost potential income. For the most part, term insurance is inexpensive depending upon your age, health and amount you require.
As your debt-load decreases, your need to have life insurance to pay off debt lessens. You may want life insurance as a cost-effective way to pay off capital gains from vacation properties, investment or commercial properties or investments. You may want to create a fund for your grandchildren’s university costs, help fund their business or help with the purchase of their home. These can all be funded through the purchase of permanent insurance.
Term vs Permanent Insurance?
Term insurance is for accidental and premature death. You can have varying length of term insurance, but Term 10 or Term 20 are the most common. Today, it’s not uncommon to see term policies for up to 40 years or more. T10 is the least expensive out of the gate. Still, every 10 years renews at the renewal rate (usually about 5 times more expensive than the original rate).
It’s not hard to understand that term insurance after a couple of renewals becomes unaffordable to many. Not only does term go up exponentially every renewal period but expires around the age of 85. That’s right, you could pay thousands of dollars into a term insurance policy, only to be rendered valueless after your 85th birthday.
Permanent insurance (Universal Life or Whole Life) is typically for expenses that will never go away, like final expenses or funeral expenses, or capital gains taxes on secondary properties and investments.
Permanent insurance is an investment.
The cash value continues to grow over time, and the death benefit (insurance payout) will always be intact provided you’ve fulfilled the insurance contract. Unlike term insurance, the cost of permanent insurance is the same throughout the course of the insurance contract (except in exceptional circumstances)
In short, term insurance is an expense, and permanent insurance is an asset in your investment portfolio.
Whether you have term insurance and one day elect to convert some or all of this insurance into a permanent policy, you want to know you have a variety of flexible options to choose from. Whether it be whole life, universal life or a hybrid between the two types, you want to ensure you have a choice. Flexible options could include expedited pay-off options, having the ability to take premium holidays, premium breaks if you become sick or disabled, high cash-yielding policies or higher insurance yielding policies. All of these have a place and a need in the marketplace, and it’s important to understand the options available.
Some insurance carriers take on more risky cases, and as a consequence, their premiums are higher. Some insurers take on limited risk cases, and this is a reflection of their rates being lower. Depending upon your health, family history, lifestyle choices and some other factors, you may or may not be a great candidate for a certain carrier.
Some applications ask a limited number of questions on the applications, whereas some are very comprehensive and in-depth. Obviously, the greater the number of questions asked on the application, the stricter the underwriting policy and harder to get approved.
Medical vs Non-Medical Underwriting (Quick issue insurance)
Similar to the number of questions on an application, some insurance companies offer non-medical life insurance, and base all underwriting upon questions within an application. Some applicants don’t want to have blood drawn or suffer from “white coat anxiety” when in the presence of nurse practitioners.
Non-medical policies are typically more expensive because they assume more risk for the insurance company. Provided you can answer the questions appropriately, the insurance can be issued quickly because of the limited underwriting.
Because there is limited underwriting, the amount of insurance available is limited as well.
How Much Life Insurance do I Need?
Generally speaking, the less the amount of insurance required, the less the life insurance underwriting requirements and the faster it can be issued. The more life insurance required, the more stringent the underwriting process tends to be and the longer it takes to get approval.
If You’ve Ever Had Insurance Declined, Postponed or Cancelled Before
If you’ve ever been declined or postponed on a life insurance application, some carriers will post this as a red flag on your application.
This may result in a longer underwriting period to get approved or result in a rated policy.
A rated policy is a surcharge on the standard rate. It’s not enough for the insurance company to decline but may result in an increase in the policy rate of 50-100% or more.
If you’ve ever been declined or postponed on an insurance policy, make your insurance advisor aware and ask for an insurance carrier that doesn’t ask this question on an application.
Life Insurance for Business Market vs Family Market
Some insurance carriers specialize in the family market, whereas some carriers specialize in the business market. The business market usually has even stricter underwriting and usually a requirement for more information. Because the beneficiary is the corporation, they will ask for Articles of Incorporation, Shareholder Agreements, Financial Statements and potentially other documents.
Underwriting can be long and involved. Depending upon the amount of life insurance in question, it can take as long as three months or more. The usual item that slows down the process the most is the Attending Physician’s Statement (APS) which is the insurance company requesting your health records from your doctor.
Issues with your Health, Family History or Lifestyle Concerns
If you have a history of serious health issues, a family history riddled with health issues or perhaps do high-risk activities or participate in regular heavy consumption of alcohol or drugs, you may want to opt for Quick Issue Life Insurance which doesn’t ask the same invasive questions that a normal issue application will ask. You may not qualify for as much insurance as you’d like, but you should be able to qualify for some life insurance. If you go the normal application route and are declined, it will be much more difficult to qualify for any life insurance, except high-risk insurance, which is very expensive and very limited.
Most term insurance policies have a guaranteed renewal in place.
This is why the renewal rate of your policy goes up as significantly as it does at renewal time. It’s not uncommon that rates will increase five times or more from one renewal period to the next. This isn’t the insurance company gauging you (ok, maybe a little bit). Still, instead, the insurance company is guaranteeing to insure you up to the age of 85 or whatever their termination age is defined at. So if you have a 10-year term insurance policy and in year 9, you’re diagnosed with terminal cancer, the insurance carrier is still obligated to renew your policy regardless of your state of health.
There are several different insurance companies in the insurance marketplace for a reason. All have carved out a specific niche in their space. Some are higher risk, some are lower risk. Some have very comprehensive underwriting, and some have fairly liberal requirements. Some will go through the application process, medical underwriting and order your health records from your family physician. In contrast, others may ask very few questions on an application. Some take on higher risk clients, but there’s a premium for not going through the stringent underwriting process.
As much as low cost is always a primary motivator, there are many other criteria that you may want to consider before deciding to go to the low-cost provider.