What You Need to Know About Life Insurance
A life insurance policy is simply a contract between a life insurance provider and an individual to provide a lump-sum payment, called a death benefit, in exchange for making premium payments to the provider. The lump-sum payment is paid to the person or person(s) designated by the policy holder. They are known as beneficiaries.
Types of life insurance
There are several kinds of life insurance, but the two most common are term life insurance and whole life insurance.
Term life insurance provides financial coverage for a pre-determined and fixed amount of time. Generally, this term will be in any one of a number of five-year increments, such as 10, 20 or 30 years. The amount of premium you pay stays the same throughout the term. At the end of the term, the agreement between the insurance provider and the individual simply expires and there are no more obligations on either side.
It is common for life insurance providers to offer new coverage to an individual when the term expires, but because the individual is going to be 10, 20 or more years older than when they took out their first policy, their corresponding premium for a new policy is going to be significantly higher.
Whole life insurance is a permanent type of insurance that stays in effect until a person passes away, as long as premium payments are kept current. Because whole life has a time frame that can stretch much longer that term life insurance, premiums are often higher. But those premium payments are fixed in terms of cost for the life of the policy.
One of the biggest differences between whole life and term life insurance is that with whole life, a portion of your premium has a cash value and is put into an account where it slowly builds and earns tax-deferred interest along the way. Think of it as a forced savings program.
Other types of life insurance. While term and whole life are the two most common forms of life insurance, there are other types as well. Some of them include:
- Decreasing Term Life Insurance – also known as mortgage life insurance, payouts typically decrease over the term length which can range up to 30 years.
- Annual Renewable Term insurance (ART) – term life insurance that is renewed and paid every year based on one year contracts.
- Mortgage Life Insurance – an insurance policy specifically issued to pay off mortgage debt in the event the policy holder dies.
- Credit Life Insurance – a policy to pay off a policy holder’s debt in the event they die.
- Key Person Insurance – a life insurance policy that is purchased on behalf of a key executive in a business. The company is the beneficiary of the policy and pays the policy premiums.
How premiums are determined
Most everyone who applies for life insurance is ultimately placed in a class to determine the cost of providing coverage.
The class is determined by a number of factors. In most cases, that class rating determination will begin with the applicant undergoing a physical exam. The exam will consist of a number of things, including a blood and urine sample test, thorough research into the applicant’s medical history and an examination of risk factors.
From the exam and the information you put on a life insurance application, the most important things a life insurance company will look at include:
Age – The bottom line is, with everything else being equal, the younger you are, the lower your premium will be.
Occupation – If you have a risky occupation, such as a race car driver, police officer, fire fighter, airline pilot or a number of jobs that an insurance company considers dangerous, your rates will be adjusted accordingly, or you may even be denied by some companies.
Family history – if you have several members in your family who have had major illnesses such as heart disease or cancer that can be traced to heredity, you could be dinged for higher premiums.
Gender – It’s a fact that women live longer than men. So, in general, women will pay less premiums than men.
Credit history – Insurance companies want to know you are financially responsible and that you will be able to make premium payments.
Driving record – Believe it or not, insurance companies do look at your driving record to see how safe you are on the road. That’s because more than 30,000 people die from traffic accidents each year, and millions more are injured. If you’ve got several violations, especially within the past five years, you may find your premiums a bit higher than what you thought they might be.
Drinking and smoking habits – If you consume large amounts of alcohol or smoke heavily, both can take a major toll on your health. The good news is that if you get these vices under control, you may be able to convince a life insurance company to reduce your premiums in the future.
High Risk Conditions – Very few people are in optimal health, and while many people may be a little overweight or have other minor nagging health issues, there are also many others who suffer from major health challenges. This may discourage them from seeking life insurance.
However, despite these high-risk conditions, some specialized life insurance companies will still consider insuring individuals. Some of these high-risk conditions include:
- Alzheimer’s disease
- Back pain
- Blindness/Visual impairment
- Blood Clots
- Cardiovascular disease
- Chronic obstructive pulmonary disease
- High Blood Pressure
- High Cholesterol
- Kidney Disease
- Sleep apnea
- Smoking marijuana
After a thorough vetting process, many applicants will be placed into a classification, although not everyone will fit into one. This usually happens when an applicant has a medical condition that makes them a higher risk than those applicants who do meet the guidelines to be included in a classification.
If they qualify, an applicant may be placed in one of the following classifications:
Preferred Select – Only about 5 percent of people qualify under this category which is defined by someone who has excellent health, normal weight and height and has no other risk factors that might make them an increased health risk. A risk factor might include a family history of cancer, or heart disease in several family members that strikes at an early age. People in this category typically don’t engage in risky work or dangerous sports or hobbies. This classification is sometimes also referred to as preferred elite, super preferred or preferred plus.
Preferred – This category is also associated with excellent health, although there may be a few issues that knocked an applicant out of the preferred select category, such as elevated blood pressure or cholesterol. Premium rates are still relatively inexpensive in this category.
Standard Plus – People placed in this category still have very good health, but may have a few more factors that keep them from being placed in a preferred category.
Standard – This category is for people with average health as well as a normal life expectancy. Some health issues may be present, such as being overweight or factors in a person’s health history, such as the premature death of a parent, perhaps due to something like heart disease.
Preferred Smoker – This category is for a person who would normally fall into one of the non-smoker categories, but occasionally uses nicotine products, such as smoking a cigar from time to time.
Standard Smoker – Some insurance companies do not differentiate between a preferred smoker and a standard smoker, but for those who do, a standard smoker is someone who is in normal health but uses nicotine products on a regular basis.
Once you are placed in a classification, there’s little that you can do to move from one to another. The one exception may be if you successfully lose a large amount of weight. It is also important to note that applicants placed in one of the smoker categories may experience a premium bump of double that of a person who does not use nicotine products.
Due to health or lifestyle issues, sometimes a person does not fall into a classification. Instead they are rated according to these risks and given what is known as a table rating. Table ratings are usually designated by a letter or a number and depending on what that rating is, the applicant will have to pay an additional premium if they are approved by the life insurance company.
Many of the high risk conditions noted above will place a person into a table rating, and will result in a bump up from a standard rate. Table ratings run from 1 to 16 and each table rating adds about 25% to a standard rate. For example, if a person is given a 2 or a B rating, they can expect a 50% increase over the premium they would normally pay. If a person is given a 6 or an F rating, they can expect to pay 150% more than a standard premium. A table rating of 16 would yield a 400% increase.
While these bumps can impact a family’s finances, the important thing to remember is that despite having a serious health condition, table rated policies will allow an applicant and their families to have coverage, which may be a very important issue in many instances.
It’s also worth noting that some insurance companies are willing to negotiate when it comes to table ratings. The best thing to do if you are not satisfied with the table rating and premium cost you are quoted is to talk with the company, or get another quote from a different company.
Also, some insurance companies will remove a table rating if an applicant is willing to switch from a term life insurance policy to a whole life insurance policy. It pays to ask.
Guaranteed issue life insurance
In some instances, a person’s health may prevent them from buying a life insurance policy through the traditional means of making contact with a life insurance company, going through a physical, getting a classification and being issued a policy. Many times, these people have been turned down but still want and need life insurance protection to secure the financial needs of their family members.
If this is the case, many people then turn to guaranteed issue life insurance. With a guaranteed issue policy, there is no medical exam or extensive questionnaires. The only requirement to be issued a policy is that you pay your premiums.
There are trade-offs however.
First, premiums are substantially higher than what a person would pay for a term life insurance policy for the same dollar amount, if it were to be issued.
Second, insurance companies will only issue a premium for a relatively low pay-out. In many instances this dollar limit is $25,000. For someone who has a life threatening condition, they are still provided coverage which can help with funeral and other end of life expenses, but it will not provide heirs with a windfall amount of money.
Third, there is no death benefit that is paid out during the first two years after a policy is issued. If a policy holder dies during this initial period, the life insurance provider typically just issues a refund on the premiums that have been paid to that point. This keeps insurance companies from being on the hook for making sizable payouts for people who are close to dying, just so their family members can receive a financial benefit.
How Can PolicyZip Help?
If you are turned down for coverage from one insurance company, or are unsatisfied with the proposed premium, you may still qualify for coverage from another company due to the highly competitive nature of the insurance industry.
One of the best ways to expedite this process is to find an experienced and knowledgeable life insurance agent who understands the nature of application factors, classifications, rating tables, and which companies are most likely to agree to insure someone with your particular profile.
That’s where PolicyZip can help. We have access to the leading life insurance companies and can take the guesswork and much of the legwork out of obtaining the proper coverage for your needs. To see if we can help you, fill out the form to the right or call us at (844) 627-7700.