Buying life insurance can be confusing. There are all these different types. Whole life, participating whole life, simplified issue, term life, universal life, variable universal life, indexed universal life, single premium life, guaranteed universal life, level, graded, modified, guaranteed issue, non med, fully underwritten, premium financed, second to die; enough to make your head explode.
Let’s simplify things by stating that all life insurance is term life. Every plan has an ending. It is when the term ends. If the insured dies the term is over. If the policy lapses, over. If it is dropped or replaced, same. So understanding life insurance is really not as complex you might think once you get your head around that.
From there it is all about guarantees and risk.
Risk is free. Guarantees cost money. The insurer decides how much risk it wants to take by assigning a value (aka premium) to the guarantee. A guaranteed term of one year is cheap and if you renew the insurer changes the value. If you get a ten year term that you payout to the end and do not die (or otherwise cash the plan through other options – more on that later) again in order to renew a new value must be assigned. There is no bearing on what you have already paid in or credit attached.
So, What Are the Truths of Life Insurance That We Can Live By?
1. The longer the term, the higher the payment. Pretty obvious common sense.
2. The cost of insuring what might happen is less than insuring what will happen. This goes hand in hand with #1 but let’s drill down into it. There are two ways to die. Accidentally, this would also include misfortune at the hands of another (a botched surgery for example) and the other manner of dying of course is by way of illness. Aging and natural causes are illnesses as defined by a contract.
Far fewer people die in accidents therefore the cost of insurance is significantly cheaper. Also accidental circumstances do not discriminate by age meaning a sixty year old woman would as likely die as a twenty year old man when hit by a beer truck. In fact although it is financially beneficial to the older insured, the irony is that the younger insured stands to have a greater need. In that case to keep costs down, a simple inexpensive option doubles the payout in the event of an accident where available.
3. Sometimes “non-medical” life insurance is the best choice. Let’s back up the bus. First you must understand that life insurance was traditionally rated for payment based on health and that is determined by a medical exam known as a paramed. It verifies the risk of mortality although false results can occur (see our Guidelines for a successful examination and interview if this is part of what you are considering).
Lately companies have gone to non-medical underwriting; underwriting defined as determination of risk based on probability of the timing or mortality and assigning a value to that risk. Non-medical means no paramed exam. For someone that is healthy (no prescription meds, no major ailments, good family history) full underwriting will produce the lowest rate in a clean exam.
If you have some “issues” as most of us do and expecially if have not seen a doctor in a while (years) it may be the best way to avoid a decline and for those who may be rated as “Standard” the cost should be about the same as fully underwritten plans. For those who simply don’t have the time or inclination to be examined it’s an option.
Non Med is more expensive (Guarantees cost money, Risk is free remember?) but it issues quickly and can be converted or changed down the road. A decline due to a failed exam is on record and makes going for any coverage nearly impossible in the near term.
4. Be clear with yourself for the reasons for getting life insurance. This sounds elementary but it’s surprisingly true that many people have not gotten this clear. A big part of the reason is unawareness of the options, especially when the motive is to leave a legacy.
For example, an unhealthy 50 year old may get insured at a costly rate especially if they want “no lapse” guaranteed coverage. The idea is to leave something behind for younger generations but at that point are there not better options? Assuming that person lives for another 25 years, a 20 year term is useless. Maybe the goal is to use the money to build wealth for the generations while one is still alive – Is giving from warm hands better than from cold ones? These are things to consider and planning is essential.
A traditional term life plan measure is ten times income for those looking to hedge a risk over the term. That said, budget first, then shop.
5. Cashing in while you are still alive. Lately given the aging of the baby boomers, attention has been paid to creating solutions in life insurance that will payout for certain medical events not resulting in death. These are commonly referred to as living benefits. In the event of certain medical conditions a portion of the policy may be cashed in. These plans can insure to age 85 where the likelihood of a serious illness is great. The balance remains as a death benefit and the premium is adjusted.
6. Spend you premium dollars wisely. Insure your need reasonably. Although it can feed the ego to profess holding millions in insurance if the term is insufficient to hedge the risk you are almost certain to lose in most cases. The cost of insurance rises quickly as we age. Proper coverage that satisfies the need is always less costly than being driven to dollars that might not transfer to your beneficiary due to lapse or term.
Also in some cases like mortgage protection, the risk of loss decreases as the loan is paid down. Certain strategies like laddering may reduce cost adequately over the period of time while saving money.
Find your niche. Insurance companies have preferences.
Whether you are a bellwether of good health, or have strong concerns regarding your health history, it is of great importance to apply with the insurer most likely to issue your policy and at the lowest rate. Contrary to popular belief, for those who have health concerns the “shotgun” approach to applying by submitting to numerous companies simply does not work.
The reasoning behind this is that companies and the underwriting staff are all in know and the records that are used (MIB medical, DMV, Credit) are universal sources that all companies rely on. Paramed exam results are usually valid for six months. Knowing where to place the application is the single most important part of the process. That means being objective and candid about your health and working with a knowledgeable independent agent.
Especially in high risk (Substandard) cases, assembling and presenting an effective argument to an underwriter, much like an attorney is key to the most positive outcome for you. Having an effective advocate to guide you at no risk or cost to you is what we do.