Life insurance is a topic few people willingly consider. Whether as an investment tool or to protect finances and property ownership in case of death, it is an important, serious consideration. The sheer number of life insurance policies available can make choosing a life insurance policy seem like a daunting task. Fortunately, it can be far simpler than believed once the prospective buyer outlines an evaluation and understands the purchase process. Some of these steps, such as step #1 require less effort than others (e.g. step #4), so please bookmark this page for easy reference later, should you need it.
Step 1: Policy Intent The buyer should ask why the policy is wanted. If the life insurance is intended to act as a long term investment tool, he or she should consider a whole life policy over a term life policy. If the life insurance will act as a financial safety net for a limited time period—either until young dependents are financially independent or reach adult age, at least or until the buyer’s retirement, a term life policy is probably the better choice.
Step 2: Coverage Amounts Determining how much the policy should offer in benefits depends on individual financial needs. Will there be enough to, for example, pay off a mortgage or credit cards and still provide a financial cushion? Does the policy allow only tiered coverage amounts, as in $10,000 increments only per premium amount, or can the buyer designate a specific amount?
When estimating minimum coverage benefits, be sure to allow additional funds that will help offset potential inflation. A coverage dollar today may not be worth the same dollar ten years from now. Allow a differential.
Step 3: Policy Duration Generally, the younger the buyer, the lower the premiums for lesser coverage. However, if a buyer opts for $100,000 of term life coverage with a term period to maturity of only ten years, premiums will be higher than if the term ran for twenty years,
Whole life insurance policies grant larger benefit amounts later in life, because as the policy ages, more of the premium dollar matures or becomes vested, much like a 401k fund. Whole life policies continue until the insured reaches a predetermined age, but premiums often increase, too. Ensure there is reasonable belief that escalating premiums still fit the buyer’s budget.
Determine for how long the coverage will be needed. Larger benefit amounts are generally more affordable if policies are purchase earlier in life.
Step 4: Policy Information Once the buyer determines the type of life insurance policy best fits outlined goals, has as a coverage amount calculated, and has a premium amount comfortably budgeted, it’s time to get viable policy information.
Because insurance companies pay their agents on primarily a commission basis, expect to receive mail, email, and even phone calls from local agents when you request information about life insurance policies. Take the opportunity to ask specific questions about the policy being evaluated. The prospective buyer should always write down any questions that come to mind and note the answers when given.
The more detailed the information in hand, the better the decision will eventually be; making the wrong decision not only can be devastating financially but also can present a quagmire of conditions to cancel the policy with minimal or no penalty.
General Policy Items to Consider:
All life insurance policies have restrictions, limitations, and allowances. Not all pertain to specific conditions or stipulations. A few generally common areas are noted below:
- Delayed Benefits: Some life insurance policies require full premium payment with either limited or totally delayed benefit payment. If present, what are the time periods and benefit limitations? Do they gradually disappear or is the policy fully payable after a set time period?
- Coverage Limitations: Are there causes of death that prevent any portion of benefits to be paid or deny payment outright?
- Beneficiary Eligibility: Does the policy allow minor-aged dependents or charity organizations, for example, as primary beneficiaries over a spouse or an ex-spouse? Is a signature of release required first? Can the buyer obtain that signature if it’s needed?
- Termination Penalties: What penalties exist, if any, for early policy termination? Might tax issues arise? Will there be reduced payment of any vested balance?
- Policy Loans: Does the policy allow loans against the coverage amount? What are the conditions involved: tax, repayment, interest, or other? Must they be repaid or are unpaid amounts simply deducted from the total benefit? Is interested deducted on those unpaid amounts, further reducing the maximum benefit amount?
- Premium Payment: If unable to pay the monthly premium, are premium amounts debited against the benefit amount? Are those automatic allotments against the policy considered policy loans? Does the policy allow additional payments that are higher than the minimum required? How is that money credited against the policy—is it inserted in an escrow type of fund against future premiums or is it included in the vested portion of the policy?
- Proof of Death: An extreme scenario, certainly, but what benefit payment roadblocks are erected if the insured is missing for an extended time period? Does the policy pay limited benefits until the seven-year period expires and the insured’s status changes to presumed dead? Does the policy hold all benefits in that extreme example?
- Other Benefit Payment Delays: Under what other conditions does the life insurance company justify withholding partial or full benefit payment? Are additional preparations in place to legally allow payment to another party?
Step 5: Coverage Limitations
Specific Limitations and Restrictions:
Some life insurance policies insure everyone, adjusting premiums, coverage limitations, and benefit caps by the individual’s circumstances. Some insurance companies issue policies to only certain age groups or always deny coverage for certain medical conditions. Some of those limitations and restrictions include:
- Age: While almost any insurance company will accept policies for senior citizens, many prospective purchasers find the high premiums unaffordable or the coverage and benefits too limited or delayed. Some life insurance policies cover only minor children or students up to a certain age, so long as they are fulltime students.
- AIDS: While there is no medically recognized cure for this heartbreaking condition, those few life insurance companies that accept people diagnosed with AIDS often charge exorbitant fees and elongated coverage waiting periods.
- Asthma: While the condition does not automatically cause a policy to be declined, the asthma sufferer will often find premiums are higher than for those who don’t suffer from the condition. Like other medical conditions, the more severe the asthma, the higher the premiums will be and/or the greater the coverage restrictions may be. Asthma sufferers should have readily available treatment history and responsiveness and the peak flow meter readings in addition to results of pulmonary function tests a physician usually performs annually. The insurance company is entitled to complete medical history related to the disease or a similar disease and may consider family history as well. Insurance companies may use the number, types, and dosages of medication to determine initial eligibility, but they often request and require additional medical information.
- Other Medical Conditions: Current or past heart conditions, cancer, and lung or blood conditions can vastly reduce or completely block acceptance of a standard life insurance policy. Be prepared to supply all required medical information and treatment history. Ensure medical providers have a limited authorization to send applicable records and treatment histories to the insurance company, delineating the types of conditions for which records can be sent.
Please note: Insurance companies are not automatically entitled to “blanket medical history” information simply because a prospective buyer completes a coverage application. They are not entitled to complete medical histories when evaluating policy qualification based on a specific condition. But they are entitled to complete treatment history records pertaining to a possibly disqualifying medical condition. The prospective buyer should ensure medical providers send only the condition-related records and not the entire medical file if other conditions or injuries are noted.
Possible Ways to Overcome Uninsurable Status:
Many insurance companies mark applicants as uninsurable by their standards, but all hope is not automatically lost. Given certain circumstances, the potential insured may still find coverage.
While none of the below are certain options, considering alternative modes of gaining coverage may gain a degree of peace of mind:
- Employer Life Insurance Coverage Increases: Some employers offer life insurance with optional coverage levels. Higher premiums boost coverage levels.
- Policy Type Transfer: Some group life insurance policies allow transfer of category from a group policy to individual policy, which maintains coverage as long as the premiums allow. The negative side to transferring a life insurance policy is that coverage can never be increased. If the maximum benefit was $100,000 as a group policy, the individual policy has a coverage maximum of $100,000. Please remember that a policy transfer is not COBRA, which pertains to no longer being employed by the plan sponsor and has a limited coverage time. Transferring the policy from group to individual status while employed makes the transferred policy a permanent one, so long as requirements are met, and premiums are paid.
- Survivorship Life Insurance Policy: Because this type of policy doesn’t pay until all insured people die, insurance companies often accept a policy insuring those who are otherwise difficult to insure.
- Guaranteed Issue Policy: Requiring no medical exam, a policy of this type assures acceptance with acceptable answers to a few medical questions. Higher premiums often trade for the convenience of a guaranteed issue policy which also commonly has limited benefits for at least two years and often tiered benefits for up to ten years. These policies also commonly offer low maximum benefits.
- Affinity Plan Policy: Occasionally, a professional organization or group, such as the Chamber of Commerce or the Bar Association, may offer simplified issue or guaranteed issue policy coverage to its members; occasionally, if the number of respondents from that group are sufficient, premiums may be slightly lower than if the individual purchased a similar policy alone.
- Simplified Issue Policy: Very similar to a guaranteed issue policy, only a few medical questions need an answer. Premiums are generally low, but so are benefit maximums. Those may be countered, however, by tiered benefits and premiums.
- Spouse-related Riders: Similar in concept to a survivorship policy, this policy rider grants coverage to an uninsurable spouse, and benefits are paid only after both insureds are dead. Family coverage premiums are higher than usual for this addition, however.
- Credit Life Insurance: Credit life policies cover major transactions purchased on credit, such as a house. A credit life insurance policy would pay the mortgage if the insured passed on, protecting the home of the insured’s loved ones.
- Guaranteed Purchase Options: While not specifically geared for the “uninsurable,” a GPO rider on a life insurance policy purchased on the life of a child allows unconditional continuation and benefit escalation by the insured—the child when an adult—regardless of medical condition, so long as the premiums are paid. For example, the parents purchase a life insurance policy insuring their newborn child. They pay the premiums on this policy through the life of the child until he or she graduates from college. The offspring assumes responsibility for premiums and determines that he or she wants additional coverage. Because the same policy is in force, regardless of the now-adult’s medical condition, increases in coverage must be honored by the insurance company. The only requirements are that the policy must include the option when first purchased, and the premiums are paid.
Step 6: Comparing Policies Once the buyer solidly identifies the reason for purchase, has chosen the type of life insurance, and has comprehensive information on applicable policies, it’s time to conduct a side-by-side investigation.
- Coverage Amounts: Which policies grant the level of coverage desired?
- Premiums: Which of those policies have premiums that are affordable now and later? If the premiums adjust, contact a reputable agent and get a payment table. Never purchase a policy without all premiums known in advance. If possible, double-check the information with another source.
- Limitations: Of those with affordable premiums, which have ambiguous or unacceptable limitations and restrictions?
- Premium Frequency: Do any of the remaining policies charge less or more for non-monthly installments? Some policies charge more for quarterly, semi-annual, or annual premium payments; some charge less. Are the payments allowed to be manual or are they automatically deducted from bank accounts or to credit cards? Is there a fee for automatic payments?
- Beneficiaries: Are you able to list the beneficiary or beneficiaries you wish to? Is additional documentation or other paperwork required in order to do that?
- Cancellation Clause: Is there a way out of the policy, either by law or clause, that allows quick cancellation of the policy if a mistake was made? What are the time limits for a no-penalty cancellation? What might be incurred after that deadline?
- Travel Restrictions: Does the policy have limitations or restrictions on areas or modes of travel? Do those restrictions apply or might they in the future?
- Other: What other questions haven’t been answered yet? What hesitations exist? Above all, do not purchase a life insurance policy that does not fully or extremely closely meet needs and desires and that is not fully understood. Do not allow personality to override prudence and common sense.
Step 7: Evaluating the Company Once a preferred policy is identified, dig a little deeper into the insurance company that underwrites the policy. Having a household name doesn’t guarantee financial stability. Purchasing a policy from a well-known insurance company and intending that policy to protect loved ones isn’t worth the paper the policy’s written on if the company has a poor financial platform.
The insurance companies generally don’t make their money based on just premium dollars paid on policies. They earn their money by investing your premiums and hope for a higher financial return, dollar for dollar, than what insureds pay.
For instance, Insurance Giant X receives $50 per month on a life insurance policy from 100 people, totaling $5000 per month. They invest that $5000 and hope that they will receive via dividends $5500, including the $5000 invested. It’s from that hoped-for $5500 that they pay benefits.
Financial statements from the current and past years, stock price history, and other financial tools and projects are available for the finding and the asking. If asked, the insurance companies are required to present full disclosure; do not allow glossing over information or avoidance of the issue. The financial stability of one’s family is at stake.
Step 8: Purchasing the Policy The hard part is finished. The buyer has every piece of information, projection, and budget entry required. He or she has narrowed down the available choices and has identified the correct policy with the right coverage, limitations, and duration for the right price. The underwriter is financially stable.
Now it’s time to actually purchase the policy:
- Complete the Application. Leave no entry blank; if no information pertains, mark with “NA” or “N/A” for “Not Applicable.” Ensure writing is legible and dark. If mailing a paper form, make a legible copy for yourself, including all attachments. Include a copy of the addressed envelope, as well. While it’s not necessary to copy each envelope thereafter, copying the first one and maintaining all copies in a dedicated folder is a wise precaution. If the application is electronic, download and print both the blank application and the completed application.
Be Honest: Eventually, insurance companies discover incongruities, contractions, and obfuscations. Many of these can be cause for immediate policy termination and loss of possible vested money.
- Make the Payment: If sending a personal check, make a copy of the check; if paid online, keep both an electronic copy of the payment and a printed version for inclusion in the hard copy file. Some people take one additional step and store important documents online by either emailing to oneself the electronic documents to a free, non-ISP email address or a storage site, such as Google Documents, is a fail-safe measure that makes the documents retrievable from any Internet-connected computer.
- Save Receipts: If the policy is purchased or premiums paid online, keep both electronic and hardcopy receipts. Printing the receipt to a paper document supplements the physical file, and printing to an electronic file and possibly storing online allows access if needed from anywhere in the world. If purchased or paid via personal check, keeping a copy on file in addition to entering the check information in a check registry presents the same fail-safe protection in case the insurance company doesn’t receive the payment.
Step 9: Updating Information Should any qualifying condition change, such as a disease entering a confirmed remission stage or even quitting smoking, do not hesitate to contact the insurance company and provide full medical documentation regarding the improvement.
Unfortunately, unfavorable changes may occur as well, and your life insurance policy conditions may be adjusted as well. If the insurance company requests supplemental insurance, do not hesitate to provide it, so long as it pertains to the reported condition.
The positive side to updating medical history reflected on a life insurance policy is possible reduced premiums and review of restrictions, which may lead to relaxed conditions in the policy. The negative side, of course, is the possibility of increased premiums or reduced benefits.
Ensure changes to beneficiaries, insured people, addresses, and other contact information is kept current.
Summary Choices abound for purchasing life insurance. Prospective buyers may feel overwhelmed by all the policy types and feel overloaded when trying to make a decision. Breaking the whole process into to small, bite-sized steps alleviates much of that anxiety, enabling not only an easier choice but a fully informed and satisfying one.
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