Ideas, tips and news about life insurance and the uses of life insurance

When you apply for life insurance, the insurance company wants to know what the risk is of you dying during the period of your policy. The underwriter will take into account various health and lifestyle factors to determine your health class, which will determine the premiums you have to pay for your insurance.

The risk classes for non-tobacco users are (different insurance companies may use different terms) Preferred Plus, Preferred, Standard Plus, Standard and Sub-Standard levels. Each insurance carrier uses actuarial tables to determine your risk and it’s fairly cut and dry. If the cholesterol level for Preferred Plus is 220 and your cholesterol is 222, they would probably place you in the Preferred class. There are times when we can debate something like this with an underwriter (if everything else is perfect), but for the most part, the underwriter will stick to their underwriting rules.

I have had many clients who have experienced the cholesterol example above, or had close calls with other risk factors (weight, blood pressure, liver function tests, etc.). In most cases, they have been bumped to the next lower health class. Not many people are happy about being demoted from perfect health and I am usually the first to hear about such displeasure.

When this happens, I often hear comments, such as “my doctor says I am perfectly healthy.” That may very well be true, but understand that the insurance underwriter is basically looking at how you fit into the insurance company’s well-defined risk matrix. You might, as your physician told you, be extremely healthy overall, but if you don’t fit exactly into this matrix, you might not be approved at the health class you thought you deserved. In such a case, the underwriter and your physician might both be right.

How often do you disregard your doctor’s advice? Go for this test, get this prescription filled, you should have that looked at, etc. I have to admit that there are several times I have ignored my physician’s advice, rightly or wrongly. So far the dice have rolled in my favor and I haven’t suffered any consequences.

If your physician recommends tests or treatments and you don’t follow the doctor’s orders, you may escape future medical problems, but you may pay the price if you apply for life insurance. We have seen it often in our office where an insurance company declines coverage for an applicant because a prescribed test/treatment wasn’t followed up on (it will show in the physician’s records). Just today a client was declined because his physician suggested he should get an EKG, but the client never received the treatment. The insurance company refused to offer coverage until the test was complete.

The moral of the story is, if your physician has suggested treatment for you, follow through with it before you apply for life insurance.

If you’re like most people, reading an insurance policy can be downright confusing. It’s not the easiest read in the world for me and I’m in the business. Fortunately, all policies include definitions of the terms. Unfortunately, the definitions are often written in “insurance speak,” so now you are left with terms and definitions you don’t understand.

In an effort to assist you in understanding your policy, I offer the following simple definitions:

• Death Benefit – The amount payable to your beneficiary upon your death.
• Beneficiary – the person or persons who will receive the death benefit upon your death. You can name primary and secondary (or contingent) beneficiaries.
• Secondary Beneficiary – the person who receives the death benefit if the primary beneficiary is no longer alive.
• Premiums – the amount of money payable to the insurance company on a regular basis.
• Lapse – the cancellation of your policy when premiums have not been paid.
• Term Insurance – insurance for a specified period of time.
• Permanent Insurance -“ insurance that is as guaranteed to pay a claim as death is to happen.
• Health Class – a classification system used by insurance companies to determine the risk you present to the company.- The better the health, the lesser the risk.
• Insured Person – the person whose life the policy covers.
• Policy Owner – the person who owns the policy.- The owner and the insured are not always the same person.

I hope this helps.

According to the Life and Health Insurance Foundation for Education (LIFE), life insurance should be considered at every stage of life – single, young family, established family and pre-retiree/retiree. Here is what they recommend for each stage of life:

• Single people – the rule of thumb here is, if there are those who depend on you financially, such as aging parents you might help support, life insurance would certainly be appropriate protection for that financial assistance in the event of your death. Another good reason for life insurance would be if you had substantial debt you didn’t want to burden your family members with in the event of your death.
• Young families – if you, as the breadwinner, were to die, would your assets be enough for your family to maintain the style of living they have become accustomed to? If the answer is no, life insurance proceeds should be enough to allow your family to continue the lifestyle you have provided them with. It can also help with longer term needs, such as college education for the children and retirement funds for the surviving spouse.
• Established families – my clients often tell me they won’t need life insurance after the children are grown and out of the house and assets have grown to the point where they can be self-insured. While many find out that accumulating enough assets to be self-insured is a much larger task than they had expected, even with an accumulation large enough, they find the needs for life insurance shift from the purpose of income protection to that of asset protection. Most realize that it would be difficult for their heirs to liquidate the assets comfortably and, therefore choose to keep life insurance for that purpose.
• Pre-retirees/retirees – at this stage, there are many reasons to have life insurance. If you are fortunate enough to have accumulated a large estate, life insurance can be used as a vehicle to ensure a smooth transition of assets to the next generation, without burdening them with estate taxes. If you don’t have a need for this type of protection, perhaps you can use life insurance to pay off your mortgage or bills or to cover final expenses.

At each stage, you should work with a financial professional who can help you select the right product to ensure the proper protection for your family.

Most people buy life insurance because they care deeply about another person or people and they want to make sure the loved ones left behind are taken care of financially. When you die, there will be an emotional loss felt by loved ones. An economic loss on top of the emotional loss is an unbearable combination and one that families should not have to experience.

When you purchase life insurance, you are preventing the financial loss others would occur upon your death. I’m not claiming that the following story is the reason I have chosen life insurance sales as an occupation, but it is a perfect anecdote for this topic.

When I was thirteen years old, my father passed away from a sudden heart attack. He was survived by myself, my two brothers (ages 8 and 16) and my mother. Naturally, the emotional loss was devastating to us as a family. The emotional loss was compounded by the financial loss caused by an inadequate life insurance policy. My father, who loved us dearly, only had a policy that barely paid the funeral expenses.

My mother, who had been a stay-at-home mom for sixteen years, now had to somehow support three young sons. To say life was difficult would be a gross understatement. If my father had purchased a sufficient amount of life insurance, the emotional loss would have been the same but we would have been able to properly mourn the loss of a loved one without having to deal with the prospect of financial ruin.

I hope this story inspires you to purchase an adequate amount of life insurance to protect your family from potential financial loss.

If you have shopped for or own a term life insurance policy, you might have heard the term Conversion Policy. Simply put, most term policies have a provision whereby, during the term of the policy, you can convert from a term policy to a permanent policy (universal or whole life).

Understanding the Benefits

• Permanent life insurance policies offer premiums that remain the same throughout your lifetime (as opposed to term insurance, which increases at the end of each term).
• A permanent life insurance policy may also build cash value, which may be withdrawn or borrowed against during your lifetime.
• By converting a term policy to a permanent policy, you can lock in your health class for the rest of your life while you are healthy.
• The conversion policy will be underwritten at your age at the time of conversion, so the earlier you convert, the less expensive the premiums will be.

While I don’t believe conversion is an option for all term policy owners, it is definitely something many should be reviewing with their life insurance advisor from time to time.