Life Insurance FAQs
Life Insurance Types
When it comes to life insurance, we’ve encountered a wide range of questions over the last 18 years. To help select the right financial path for you, we’ll share the most common questions we hear.
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Q: How much life insurance should I purchase?
A: This is a very popular question for my clients. In my opinion, it’s hard to have too much life insurance. As a general rule of thumb, insurance companies allow individuals to purchase 25-30 times your income. To decide how much life insurance you need, start by calculating your total debt. Add up unpaid expenses, combining your mortgage, student loans, future children’s college expenses, car loans and any other major costs. Then, consider your pay check. Your family will need to replace your income and pay off your debts if you were to die prematurely. For families with children, I like to tell clients to make sure their life insurance coverage extends to the youngest child’s mid-20’s.
Q: How long should I have a life insurance policy for?
A: The length of your insurance policy depends on why you are purchasing a life insurance policy in the first place. Each person’s need for life insurance is all dependent on their unique financial or personal needs for loved ones, business purposes or estate taxes.
If you have children and you want to make sure their college is paid for, you should have life insurance until they finish college. If you have younger children, you would want to have a lot of life insurance until your youngest child is in their mid-20’s. Some can argue as long as you have a mortgage you should own life insurance. If you want life insurance to leave to your children or a charity, you should have permanent life insurance that will last at least until your 100 years of age.
Q: Where should you buy your life insurance from?
A: There are many options available today to buy life insurance. Most people buy directly from their life insurance agent, but some purchase life insurance online or through the mail. I would advise you to buy insurance from an independent insurance agent. This way, your family will work with a trusted individual instead of calling a 1-800 number when you pass away. Whether you use an agent or an online quoting web site to purchase your life insurance, the insurance premiums will be the same.
Q: How are insurance rates calculated?
A: Insurance rates are calculated by actuaries that work for insurance companies. Each insurance company is different and all of them will have different insurance rates. These rates are determined by your health and lifestyle. Insurance companies will look at what you do for a living, your driving record, if you use tobacco or marijuana, and if you participate in dangerous activities such are motorcycle racing, race car driving, parachuting, mountain climbing, mixed martial arts, etc. All of these factors need to be assessed in order to receive a rating for your life insurance policy.
Q: What kind of medical exam do I need to purchase a life insurance policy?
A: Each insurance company usually requires their own exam to be done to purchase life insurance. This exam is usually done my and independent lab company. A nurse will either come out to your house or work and ask you medical questions, check your height, weight, blood pressure, take a urine specimen and sometimes do an EKG depending on the death benefit you requested. Exams typically take around 30 minutes to complete.
Some insurance carriers offer insurance policies with no medical exams. These plans are fast to complete, but tend to cost more than the average life insurance policy.
Every insurance company has different underwriting requirements based on the amount of life insurance coverage you purchase.
Q: Should I buy term or permanent life insurance?
A: If you’re more concerned about protecting your family with the right amount of coverage, for a specific timeframe, then term life insurance policy will be the most affordable option. On the other hand, a permanent insurance policy provides life-long coverage. While the cost of permanent insurance is much more than term, you can access your cash in your permanent insurance policy and use it during your lifetime.
Q: What is the return of premium term life insurance?
A: The return of premium life insurance is a lot more expensive than regular term insurance. For example, if you have a 20-year term plan, and you outlive your plan, you will receive a return of all your premiums for the last 20 years. Usually, your return of premium term is double the cost of a regular term plan, in order to get your money back in 20 years. If you decide to cancel your policy in 10 years out of a 20-year return of premium term plan, you will most likely not receive a premium refund. Usually, when you decide to cancel your 20-year return of premium term insurance plan in the 15th year, you will receive about 50% of the premium you have paid into your term plan over the last 15 years. These percentages will vary by insurance companies.
Q: Can I buy life insurance for a child?
A: Yes. You can purchase permanent life insurance for a child under the age of 18. Since children are usually in great health, the cost of your insurance premium will be less than an adult.
Q: How can you check ratings on your life insurance company?
A: When you’re deciding what carrier to purchase your life insurance from, it’s best to know if they have a solid rating. You can visit websites like Moody’s or AM BEST to find the ratings of the life insurance companies and check their standings with creditors. You want to work with an independent insurance agency that works with big, strong, safe insurance companies.
Q: What does it mean when a life insurance policy lapses?
A: When a life insurance policy lapses, this usually means the owner has not paid the premium on their life insurance. Most insurance companies give a 30-day grace period for premium payment before a policy is considered lapsed.
Q: When is it a good time to purchase more life insurance?
A: Most people think they have enough life insurance, until a new life event happens. Some events that may cause you to purchase more life insurance include marriage, child birth, salary increases, tax planning, charitable giving, etc. It’s recommended that you speak to an independent life insurance agent when considering purchasing more life insurance.
Q: I am in the military. Can I purchase life insurance?
A: This depends if you are on active duty and what you do for the military. Each insurance company has their own underwriting qualifications when it comes to active military status.
Q: Can I take out a life insurance policy on someone?
A: You must have some common reason to purchase life insurance on another person. Some common reasons include: sharing a child, sharing a business interest with someone (key employee, partners, buy/sell agreements), owing someone money, donating to a charity. The insured has to sign off on any policy that someone else owns on them.
Q: What information is needed by insurance companies when I apply for life insurance?
A: When applying for life insurance, it is important for the insurance company to obtain as much information as possible about you prior to taking you on as an insured. Basic information needed includes:
Date of birth
Social security number
Driver’s license number
Height and weight
Name of family doctor
Notes of hazardous activities
Future travel information
Q: What is a guaranteed insurance life insurance policy?
A: This is an insurance policy that guarantees benefits regardless of your health. The policy issued is usually $25,000 or less in death benefits.
Q: Am I covered for my life insurance policy when I complete my application?
A: Most life insurance carriers will cover you up to $1 million with your premium submitted with your life insurance policy. If your policy is issued and you sign and submit your premiums to the insurance carrier, you are covered for the death benefit you purchased.
Q: What do I have to do to receive a life insurance policy?
A: You will have to be fully underwritten by an insurance carrier. The insurance company requires your medical records. You’ll also need to complete a medical exam. A nurse comes to your house for blood work, a urine sample and to ask medical questions. Depending on how much coverage and your age, you may also have to do a resting EKG.
Q: Can I purchase life insurance if I partake in risky activities?
A: Yes, but some insurance carriers may require you to pay more for your life insurance than the average person. Some risky activities include mixed martial arts, motorcycle racing, car rating, mountain climbing, scuba diving, sky diving etc.
Q: Can I own multiple insurance policies on myself?
A: Yes, you can own multiple life insurance policies on yourself. The insurance company usually allows a person to own up to 25-30 times their income on themselves. These limits can be spread across multiple polices through multiple carriers.
Q: What is a life insurance premium?
A: This is the cost to purchase life insurance coverage.
Q: Who can be a beneficiary of my life insurance policy?
A: The beneficiaries of your life insurance policy can be anyone who is a family member, someone who you owe money too, someone that has a business interest with you, a legal guardian of your children, a trust, a charity, etc.
Q: Can I change my life insurance beneficiary after my policy is issued?
A: Yes, you can change your life insurance beneficiary at any time. All you have to do is complete a change of beneficiary form.
Q: Why should I buy life insurance young?
A: When you purchase health insurance at a young age, you are able to lock in your health rating for the duration of the policy. The premiums of your life insurance are less expensive when you are younger. The older you are, the more expensive a life insurance policy will cost. Also, the money in your permanent insurance plan will compound over many more years if you purchase a plan when you are younger.
Q: Can I convert my term insurance coverage to a permanent life insurance policy?
A: This depends on what type of term insurance you purchase. Some term insurance plans do not offer conversion options. The ability to convert your term insurance, allows you the insured to guarantee your insurability before your term period expires at the health rating you originally received when you purchased your term insurance plan.
For example, say you purchase a plan at 30 years old and received a Preferred nonsmoker rating, then develop cancer at the age of 49. Since you purchased a fully convertible term insurance policy at age 30 and received a Preferred rating then, you can convert your term with no medical exam at age 49 with a Preferred nonsmoker rating.
Q: What are some riders I can add to my life insurance policy?
A: Riders available for life insurance policies include paid up life insurance, waiver of premium guaranteed issue option, children’s term and chronic illness.
Q: What is paid up insurance?
A: Paid up insurance is available with permanent life insurance, whole life. It allows the policy owner to increase their death benefit and policy’s cash value in their insurance policy. This paid up insurance earns dividends and the value continues to compound indefinitely over time.
Q: What is a waiver of premium?
A: If you qualify for a disability based on the life insurance carrier, they will continue to pay your life insurance policy until either your term period expires, or until death, if you purchased a permanent life insurance policy. If you purchase term insurance at some companies, once your term coverage expires and you are still disabled, some insurance companies will automatically convert your term insurance to permanent life insurance.
Q: What is a guaranteed issue option?
A: This gives the insured the ability to purchase more life insurance without a medical exam sometime in the future. The insurance company guarantees life insurance coverage regardless of your future health.
Q: What is children’s term insurance?
A: Children’s term insurance pays a benefit usually around $10,000 for the death of your biological or adopted child up to age 18.
Q: What is chronic illness?
A: The chronic illness rider policy a benefit to the owner if the insured is unable to perform at least two of the Activities of Daily Living (eating, bathing, getting dressed, toileting, transferring and continence) for at least 90 days. Each insurance company will have different variation of how much they will pay out for this rider. It is usually a percentage of the death benefit.
Q: Can I purchase life insurance without a health exam?
A: There are a few insurance companies that will allow you to purchase life insurance up to $2 million without a medical exam.
Some carriers have simplified issued life insurance plans that require you to answer some medial questions, but they don’t require a medical exam.
Guaranteed issue policies require no medical exam or medical questions, but you will pay significantly more in premiums than you would with an underwritten policy, even if you've had some health issues.
Q: What is permanent life insurance?
A: This is life insurance that remains in force for the entire life of the insured as long as the premiums are paid on time. Usually, permanent life insurance builds up cash over time, which the owner can use while they are still alive.
Q: Are life insurance companies regulated by the federal government or states?
A: Life insurance carriers are regulated by each individual state’s insurance department.
Q: Are life insurance companies stock companies or mutual companies?
A: They can be either a stock company or mutual company. The stock companies are owned by the shareholders and the mutual companies are owned by the policyholders of the insurance company.
Q: Can I get life insurance if I am a smoker/tobacco user?
A: Yes, but your life insurance rate will be more expensive than a nonsmoker.
Q: What if I quit smoking or using tobacco, can I receive a nonsmoker rating?
A: Most insurance companies want you to be one-year tobacco free in order to be considered a nonsmoker.
Q: If I lose 30 pounds in 3 months, can I receive better life insurance rates?
A: Most insurance companies will only credit you ½ or your weight loss over 10 pounds in a single year. Insurance companies want to see a steady weight loss that is maintained over a one-year period.
Q: What is an underwriter?
A: An underwriter works for the insurance carrier. This person works to decide how risky a person is to insure. They look at your medical records, your medical exam results and your motor vehicle report.
Q: What do insurance companies test for in a paramedical exam?
A: Insurance companies test for glucose, cholesterol and high blood pressure and are also looking for your body mass index (BMI)
Q: Can I use my doctor’s medical exam and blood work for my life insurance?
A: No, insurance carriers use a third-party company to perform their paramedical exams.
Q: What is term life insurance?
A: Term life insurance is temporary life insurance for a short period to cover a mortgage, student loans or other debts. This type of life insurance is most affordable when you are young. You can buy a contract with a locked in premium for 10, 15, 20 or 30 years. You have to die during the term period you selected in order for your beneficiary to receive your death benefit.
Q: What is a death benefit?
A: A death benefit is paid to your beneficiary in a single lump sum, tax-free benefit when you die. Sometimes this is also called the face amount of the policy.
Q: What happens if I lie to the insurance company’s underwriter?
A: The insurance carrier can cancel your coverage or, worst-case scenario, your death benefit won’t get paid out.
Q: What is key person life insurance?
A: This is a unique way for a business to insure a key employee in order to protect the business from a loss of revenue following their death. A key employee is anyone that is pivotal to business sales and operations.
Q: How does my group life insurance work?
A: Group life insurance is provided by an employer. Sometimes the employer will cover the premiums, which means the death benefit is taxed to the beneficiary, if the group life insurance is paid by the employee, the death benefits are tax free to the beneficiaries.
Group life insurance can be very inexpensive, but it does have some drawbacks. If you leave your place of employment, your group life insurance will be terminated. Also, the premiums are not guaranteed, which means they can increase yearly, every three years or every five years. Sometimes the premiums are age banded.
Another drawback with group life insurance is you usually don’t get to pick what type of plan you would like. The most common type of group life insurance is term life insurance.
Q: Do I need individual life insurance if I have employer group life insurance?
A: It is recommended that you also purchase individual life insurance. Group life insurance provided by your employer is usually not adequate for your family’s protection if you were to pass away.
Q: What is a buy-sell life insurance for my business?
A: Buy-sell life insurance is intended to provide buyout protection for partners in a business if one of the partners were to pass away.
Q: What are the two kinds of buy-sell agreements you can purchase as a business owner?
A: There are two types of buy-sell agreements you can choose from as business owners. A cross-purchase approach is when individuals purchase life insurance policies on the lives of all other business owners. This generally works best when there are three or fewer business owners of relatively equal age and health status. This option also provides the most favorable tax basis for the purchasing owners.
With an entity purchase approach, the business purchases policies insuring the lives of each business owner. This strategy is simpler for businesses with greater than three owners and it equalizes premium paid for individuals of varying ages and health classes. Premiums are not tax deductible to the business and the death proceeds are received income tax-free, assuming IRS guidelines are met.
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