Want to learn more about life insurance but don’t know where to start gathering information? Check out this list of frequently asked questions to get you started.
Read the full blog post on All You Need to Know About Life Insurance.
General Questions
A premium is the amount of money your insurance company charges for the type of policy you’ve chosen. It’s generally paid monthly but can also fall at 3, 6, and 12-month intervals, depending on the payment options.
You must pay your premium installments to keep your coverage active. Insurance companies provide grace periods of up to 31 days. If you pay within the time, your policy will not lapse, and you won’t lose your coverage.
Though you’ll hear the terms broker and agents used interchangeably, there is a difference between the two. Both act as intermediaries between consumers and insurance companies but in varying capacities and with limitations on their operations.
Insurance brokers represent you, the consumer. They are independent insurance specialists without any set allegiance to a particular insurance company. Because of this, they can provide the broadest access to personalized insurance solutions.
Brokers offer comprehensive knowledge of all or most insurance products in the insurance market. They’ll know all the features, coverage levels, conditions, and limitations and will pinpoint the best solution for your specific needs. Once you’ve chosen which insurer you want to work with, they will prepare your application and submit it on your behalf.
Insurance agents represent one or more insurance companies. Restrictions limit them to selling only policies and services offered by the company or companies they represent. In other words, they can only sell the kind of policies stated in their contractual agreement. It limits the scope of options available to you.
Agents fall under two categories captive and independent. Captive agents work full-time for a single insurance company while an ‘independent agent’ sells multiple insurers’ policies. The latter gives you greater leverage, but again not as much as a broker would be able to provide.
Whether you choose a broker or an agent depends on your insurance needs.
If you are a business owner, you may want to go with a broker as brokers are legally obligated to assess your business risks. Knowing your business’s risks, a broker can recommend the best commercial solution. As a business owner, you won’t have the time to explore all of your options. In this instance, a broker could save you time from shopping around yourself.
If you’re a regular citizen looking to buy home insurance, you may want to work with an insurance agent. Though their insurance offering may be more limited, they provide more specialized knowledge of their policies. An agent can also expedite buying a policy from the company or companies they represent and offer exclusive products and discounts.
A beneficiary is the one who receives the proceeds of your life insurance policy at your passing. You can name multiple beneficiaries on your policy and designate the percentage assigned to each. For example, if you have a $100,000 individual life insurance policy, you can set an even split between your spouse and child. Each would receive $50,000 in death benefits.
Likewise, you could add your mother and younger sibling and split the money into four parts. Each beneficiary will receive $25,000 in death benefits or the designated percentage you assign.
A life insurance death benefit is the amount of money an insurance carrier pays listed beneficiaries at the insured’s passing. These payouts are only valid if the policy was in force at the time of the insured’s death. Lapsed policies do not qualify for payouts.
To keep your policy active, deposit all of your premium payments on time or within the grace period.
Check your policy for the allocation date of payouts. Some policies may not offer full compensation if you die within two years of the policy’s issue date.
I’m sure you’ve seen this in movies and television shows, and it’s perfectly legal. You can take out an insurance policy on someone if you have an “insurable interest” in them, which means that their death would affect you financially.
You can legally purchase a life insurance policy for your spouse, parents, business partner, and live-in companion. But you cannot complete the process without the insured’s knowledge and consent.
Insurance companies will still require a medical for the insured and signed consent to release any medical information. And even if you choose a policy that doesn’t require a medical, the insured’s signature is still needed.
Then there is a matter of proving “insurable interest.” Providing proof will require the other person to be involved in the process.
No, there is not. Insurance providers tailor their policies to keep competitive, and pricing is part of their selling point. Three insurance companies could offer the same life insurance products with the same terms, and they each quote a different price.
Your medical history, family history, and current lifestyle practices are some defining factors in setting your premium rate.
Underwriting is how a life insurance company assesses your risk based on your medical (if required) and the answers on your application form. The overall process takes anywhere between 3-8 weeks.
Upon completion of the underwriting process, the insurance company will review the underwriter’s report and determine if they should approve or deny your application, and the premium rate.
Policy Questions
It pays to be honest when filling out your life insurance policy form. Always answer questions and provide information to the best of your knowledge. Here’s why.
Most policies have a contestability period of two years. This clock starts ticking when you purchase the policy. If your insurer discovers discrepancies like misrepresentation or ommited important information during those two years, they can void your policy. If this happens, you will not receive a refund for the premiums you’ve already paid.
Term life insurance policies provide coverage for a specified number of years. If the insured dies during the term of the active policy (i.e., all premiums are up to date), beneficiaries will receive the death benefits.
Term insurance policies are less expensive than permanent insurance. Many offer fixed premiums for the policy’s duration, which could last for ten, twenty, or thirty years. Premiums are calculated based on your age, health, and life expectancy.
If you outlive the term of your policy, you can convert it to permanent insurance.
Permanent policies offer life-long protection and can also be used to accumulate tax-deferred cash value. Your money will grow faster because tax withdrawal isn’t reducing the amount each year. When you add in the interest, you’ll see an even higher rate of return.
Temporary life insurance grants you coverage during the application and underwriting process. Most insurers offer you the option of purchasing temporary coverage by paying your first month’s premium with your application.
This temporary coverage protects your loved one should you die before the issuing of the full policy. A full refund of your first premium payment is guaranteed if you apply for it within ten days of receiving your term life insurance policy. Purchasing temporary life insurance isn’t necessary, but it can offer you peace of mind.
Mortgage life insurance doesn’t pay out death benefits to your loved ones. This type of insurance only applies to the repayment of outstanding mortgage balances at the borrower’s untimely passing.
Mortgage life insurance is only a benefit if you die before paying off your mortgage. Otherwise, there’s no payout. If you complete repayment on your mortgage, you won’t see a penny of your deposited money. No refunds.
The whole point of this type of special insurance is to secure your lender’s interest.
- It offers you no flexibility in term arrangements.
- The premiums are higher than traditional life insurance.
- The premiums fluctuate with surprise increases after the first five years. Traditional term life insurance policies charge fixed premiums for 30 years.
- Companies that offer these policies lack transparency in their practices and quotes.
The short answer is probably not.
Companies offer basic, non-tailored options for their employees. It covers you for general protection, not factoring in your specific situations. Designing the most effective life insurance policy takes into consideration your lifestyle.
Noting these shortcomings is not to say you shouldn’t accept the life insurance provided by your company. It can come in handy as a supplement.
Purchasing another policy on your own also covers you in the event you leave the company. Once you go, you leave the employer policy behind and the benefits it offers.
Most life insurance policies come with a 31-day grace period to pay premiums. You shouldn’t see any penalties or interest added if you pay within that time. If you have a permanent life policy, you can grant your insurer permission to draw premiums from your policy’s accumulated cash value.
The same allowance is not available for term life policies. Your policy may be canceled if you miss a certain amount of payments and the grace period lapses.
An annuity is a long-term investment contract issued by financial institutions to help protect persons from the risk of outliving their income and savings.
It’s used primarily by retirees, paying them a fixed and guaranteed income stream. Annuity benefits become accessible upon annuitization when the holding company begins disbursing funds to the annuitant for the rest of their lives or a fixed period.
Annuity comes in various forms, each with its pros and cons. Check with a financial advisor which format would work best for you.
Buying a life insurance policy early in life can save you money on your monthly premiums because age is a consideration.
The older you are, the higher your chances of developing medical issues. The heightened risk increases your premium. And depending on how old you are, it can also disqualify you from receiving coverage.
Young, healthy applicants will always lock in a reasonable premium rate for the rest of their policy duration.
But besides your age and health history, shopping around and gathering life insurance quotes is another way of saving on your monthly premium. Life insurance carriers offer much of the same policy service options, but their prices will differ.
Application Questions
When you do a medical, your results give the insurance company a clearer idea of the risks their accepting.
Should you opt for an insurance policy that doesn’t require a medical, brace for high premiums. Without medical records, they cannot confirm that an insured won’t die soon. Insurers will sign you up for the highest possible rate they think will cover their potential losses.
So if you are in good health and looking to buy an individual life insurance policy, a medical is in your best interest.
Group policies provided by employers are also another example of where a medical isn’t required. These policies, however, offer minimal coverage.
Your regular doctor is not authorized to do an insurance medical. Insurers want to ensure there is no bias attached to your results. Because of this, insurance companies employ third-party nurses and paramedics to conduct your tests.
Prepare to answer questions about your health and family history. Medical tests include blood pressure, glucose checks, and height and weight. Depending on your age, insurers may also require urine and EKG tests.
Some illnesses run in the family, even if they jump a generation. Knowing your family’s medical history helps determine your risk of developing severe health conditions.
Being a smoker doesn’t affect your chances of approval as much as your premium. Smokers present a laundry list of possible health issues and a shorter lifespan than non-smokers. Insurance companies categorize smokers as insurance risks. These risks translate into higher premiums.
If you can drop the habit and clean up your health, some insurers will allow the revision of your policy to reflect this in lowered premiums.
