If you’re in the market for life insurance or think you might be, you probably have some questions. And, let’s face it, talking about life insurance isn’t exactly the most exciting thing in the world. However, it’s a big financial decision which does require some time and effort in order to fully understand how it works. Basically, you’re going to have some life insurance questions.
And to help you with this, I’ve compiled a list of the most common life insurance questions with some straightforward answers. I want to help you make a sound decision in choosing the best life insurance for you.
What is Life Insurance?
It’s a contract that provides a death benefit (money) to your beneficiaries by the insurance company if you were to pass away. You make payments for the premiums during the course of the coverage or contract. Typically, term and permanent are the two types of life insurance from which to choose from. But, more on that later.
Why do I need Life Insurance?
Some of the most popular reasons include:
- You’re the primary breadwinner for the family. Your wife and kids depend on you 100% financially. Should you die unexpectedly, they could be in great financial hardship.
- You have debt. It can range from car loans, student loans, mortgage, personal loans, and others.
- You are saving for your child’s education. Getting life insurance is one way of ensuring your child’s education will be paid for (or at least a portion of it) even when you’re gone.
- You want to build some form of an emergency fund. A life insurance will act as a financial safety net for your loved ones when you pass away.
- To provide financial support for your partner or spouse after your death.
- You have a special needs child who will need financial support for his/her care
- To provide liquidity for your family for paying estate taxes
- You have unpaid taxes and you don’t want your surviving family members to shoulder the burden
- To unburden your family with the cost of your funeral expenses
I’m young. Do I get life insurance now?
It depends. The main reason people get life insurance is to provide financial support for their dependents should they pass away. If you don’t have anyone relying on you financially right now, you probably don’t need life insurance.
However, you could consider getting a policy now while you’re young and healthy as the younger you are, the lower your premium. Again, this isn’t something I always recommend but it might be something to think about if you could be uninsurable later.
What is term life insurance?
It’s a type of life insurance that provides a death benefit to your beneficiaries if you die within the agreed upon term of coverage. It’s the simplest and most affordable type of life insurance available. In my opinion, it is recommended for by far the majority of people. A cheap term life insurance policy is all you need.
What is permanent life insurance?
It’s a type of life insurance that provides coverage for the whole lifetime of the policy and includes an investment component. The investment component is called “cash value” that can grow at a guaranteed rate or you may invest it within an index or sub-account.
You can take loans against the cash value. Some types of permanent life insurance are eligible for cash dividends which the policyholder can take in cash or use to pay for premium or additional coverage.
Also, know that permanent life insurance is typically much more expensive than term. Hence, the reason I typically recommend a cheap term policy for most folks.
What is universal life insurance?
It’s a type of permanent life insurance that offers flexible payment options for premiums. Since it has cash value, it can be used to adjust the amount of premium you pay annually (you’ll still need to pay the minimum policy premium though).
It can be a good choice for people looking for flexibility in adjusting premiums and coverage amounts and the ability to borrow from it in times of financial need.
What is Variable Life Insurance (VUL)?
It’s a type of permanent life insurance policy that has the same features of universal life–flexible payment options and the ability to adjust the death benefit. Where they differ is how the cash value in the insurance earns money.
VUL invests the cash value in “sub-accounts”. These sub-accounts function like mutual funds and are invested in the stock market. The gains or losses of the cash value in the insurance will depend on the performance of the sub-accounts. On the other hand, Universal Life Insurance earns money from the interest paid on the cash value.
What is a life insurance quote?
A life insurance quote is the insurer’s estimate of how much your policy might cost. Policyholders need to be assessed initially based on their health and their age (and if they smoke) in order for the insurer to have an estimate of how much you will pay.
Note that this is merely the initial rate and policyholders will have to go through the process of underwriting in order for the insurer to determine the actual policy cost.
How do I determine the amount of life insurance I need?
In all honesty, it truly depends on your own circumstances. However, here’s one of the most common formulas you’ll see for estimating how much life insurance you need:
Income (replacement) + Expenses – Assets = Amount of Life Insurance
Income = Amount needed to cover any costs (child care, groceries, rent, etc.) for your beneficiaries each year. Consider how long your dependents will need financial support in determining how much income you need to replace
Expenses = This includes funeral costs, any outstanding debts, mortgage, educational expenses, etc.
Assets = Refers to assets in your possession. Bank accounts, money market accounts, retirement savings, additional income sources, present life insurance, etc.
You can start by taking your annual income and determining figures based on each element in the formula. It can be anywhere between 5-10 times of your current salary and adjusting it accordingly based on each factor.
Note that needs will probably change in time so what you think might be sufficient today might not be enough, or too much, in a decade. That being said, it might be a good idea to choose a policy that you can afford and at the same time will be enough to cover future expenses.
It also might make sense to “ladder” different term policies over a different amount of years. In other words, it might make sense to have a 10-year, 20-year and 30-year policy. That way, you’ll have much more insurance up front and, as your assets grow, your term policies will expire as you will no longer need them.
What are life insurance calculators?
These are built-in functionalities on websites used to estimate how much life insurance you’ll need. They vary based on the type of data you want to estimate, some provide results to determine the income you need to replace (they’ll ask you to input annual earnings and number of years of income replacement) while others allow you to calculate your debts and use that information for determining how much coverage you need.
On our site, we provide a free “Instant Quote” calculator that shows you a list of quotes from different insurance companies so you can easily get an estimate for your monthly or annual premium payments based on the amount of coverage you need.
How do I choose the length of coverage?
It depends on your particular financial goal and situation. For example, if you have kids and want the financial safety net for education, it’s best to get a policy that will cover them adequately through college.
Usually, both your children’s and your wife’s age will be a factor in deciding on the length of coverage. If you are purchasing life insurance with debt as a consideration, it’s best to get a policy that will be enough to pay for everything including interest.
There are no fixed formulas in determining how much life insurance you actually need, that’s why it’s important to plan ahead before getting a policy.
How frequently do I need to pay my premiums?
You can choose from annual, semi-annual, quarterly or monthly. Like most payment plans, it’s usually cheaper if you make the payments on an annual basis versus quarterly or monthly.
Will the price on my quote be similar to the policy they will offer me?
Not always. The process of underwriting is used by insurers to determine the type of insurance that you will qualify for. Underwriting includes the medical exam, analyzing your records including your family’s history, current health, as well as your driving history. They can be very thorough when it comes to underwriting and it’s possible that your initial quote will be different simply because they found a red flag during the process.
I was requesting a quote online and was asked to pick my rating class. What is this for?
Think of them as a guideline for assessing your risk category. It’s a tool used by insurers to initially determine the cost of your policy based on your current group (people with the same characteristics).
The most common ones are Preferred Plus, Preferred, Standard Plus, Standard, and Substandard. Most online estimates will also ask if you smoke as that means greater risk which results in higher policy cost. There are also a number of other health issues that could result in higher cost.
Is the cost of my policy fixed for the rest of the coverage?
Yes, the rate should be locked in for a (level) term life insurance. The price structure can vary though if you get permanent life insurance or one of its subtypes. It is vital you clarify this with your agent or insurance company.
Am I allowed to change my coverage amount or term length any time I want?
Yes, but note that you will need to complete a new application and undergo another medical exam which means the premium could increase. This is to determine your level of insurability if you want to increase your coverage or the length of the policy.
If you want to decrease it, talk with your insurer as guidelines vary from one company to another. Some will allow you to do it at specific intervals (every two years, for example) while others will simply ask you to buy a new policy.
I have a term life insurance. What happens at the end of my policy?
At the end of the policy term, you have the option to renew it. However, the rate-guarantee will change which means it will be significantly more expensive compared to the original premium.
In most cases, people let their original policy lapse and then simply purchase a new one (health needs to be taken into consideration of course). If in case they find that your health has declined and you are no longer insurable, you can keep the policy running but you’ll need to pay using the updated rate. That rate will continue to increase until the term expires.
With all of this being the case, when most people’s term expires, they no longer need life insurance. So, make sure you and your agent structure a plan up front so additional life insurance isn’t needed after the term expires. Of course, unknowns can always happen.
Can I convert my term life to permanent life policy?
Most likely. Most term policies can be converted to whole/permanent life. Note though that the insurer will have age limits on when you can do it so be mindful of that. Also, you can’t always convert to any type of permanent policy so make sure to check the insurer’s guidelines.
Some policyholders are allowed to convert their term life policy without having to go through underwriting again. This is assuming they’re in good health and the insurer finds no to little risk of any medical issues.
Do life insurance company ratings mean anything?
Yes. In fact, most financial experts recommend that you take a look into the ratings of the insurance company to determine their financial strength prior to purchasing a policy. While these ratings will vary across each company, they give you a glimpse of an insurer’s ability to fulfill their obligations when policyholders are ready to make their benefit claims.
I’m a beneficiary. How do I make a life insurance claim?
- Contact the life insurance company. Provide the details of the policy so they can look up the contract information.
- Get a copy of the death certificate. You will be required to provide a copy to the insurer.
- Complete the paperwork for filing the claim. Most insurers will have this available on their website. You can give them a call too if you want them to send you a copy.
- Once you have all forms completed, send the form back to the insurance company.
- You should receive the money typically within 1-2 weeks from sending the paperwork.
Is it possible to get a life insurance without a health exam?
Yes, they are called “Guaranteed issue” insurance policies. However, they tend to be more expensive. This is because the insurer will be taking on greater risk (which they offset by requiring more expensive premiums) since they won’t have a full medical information.
What tests do they conduct in life insurance health exams?
In general, medical exams for life insurance involves getting your basic health information like weight, height, age, and gender. The actual tests will include checking your blood work, urine, blood pressure, etc.
What if my health improves while a current term life insurance policy is in effect? Can I request for reduced premiums?
Yes, that’s possible. Say you bought a term policy when you were 30 years old, a smoker, and 30 pounds overweight. After 5 years, you were able to kick the habit (nicotine-free for 2 years) and lost all the excess pounds. You can contact your agent or your insurance company to request to have your rates re-evaluated.
Any tips for preparing for a life insurance medical exam?
There’s no universal advice that applies when it comes to preparing for your life insurance medical exam. However, it might be a good idea to do the following steps simply because they increase your chances of getting good results.
- Relax before and during the exam.
- Be mindful of what you eat at least 8 hours prior to the exam.
- Don’t drink alcohol.
- Get plenty of sleep the night before the exam.
- Avoid salty and oily foods.
- Don’t hesitate to discuss any potential issues that may arise with your agent.
Are there any instances when life insurance claims are not granted?
Yes. If the policyholder gave false information. Say the policyholder denied being a smoker during the underwriting phase. If he or she dies of lung cancer within two years of beginning the insurance, the beneficiaries won’t be awarded the benefit.
It also applies if the policyholder committed suicide within 2 years of the policy. While full benefits will not be awarded to beneficiaries (for suicide cases), they will still receive back the premiums paid.
How are the death benefit payments made?
You can receive the money in two ways:
- Lump sum – The insurer may provide the money in one payment (check) or they can offer to set up a draft account that works like a normal checking account (allowing beneficiaries to withdraw money from it until its empty).
- Installments over time – There are plenty of ways to do it if you choose to receive the money via installments. They can pay you a fixed amount at fixed intervals, can convert the payout to an annuity, or guarantee to complete all payments within a specified period.
Are there any penalties for missed premium payments?
Yes, though you will be given a grace period for making the payment with no incurred interest. Should you still fail to pay within the grace period, the company can terminate your term policy.
If you own a permanent policy, the insurer can dip into the cash value and use that to pay premiums. Be sure to check your insurer’s guidelines especially if you have term life insurance. If you can, try to pay on an annual basis to lessen the chances of missed payments.
Will working with a financial advisor help me get the best policy?
While you can definitely go the DIY route in choosing a life insurance policy, working with a Certified Financial Planner® has its advantages. They can assess your needs and situation and recommend a policy that best suits you.
This is especially useful if you aren’t familiar with how life insurance works and can’t decide on what type of policy to purchase. Since a CFP® is a fiduciary, they will craft recommendations based on what’s in your best interest and not for them.