Everything you Need to Know About Life Insurance

• Life Insurance

You ensure your car, home, and health, so it only makes sense that you would insure your life. The difference is that you’re rarely the one benefiting from this insurance, as the money goes to your loved ones when you’re no longer around to support them. 

With life insurance, your death will be less of a burden. In many ways, it’s the last gift that you can give them, and while it will never replace their emotional loss, it can help to ease the burden of any debt, mortgages, and responsibilities left behind.

What is Life Insurance?

A life insurance contract is an agreement between an insurance company and the policyholder. The latter pays monthly insurance premiums for a predetermined period of time and in the event of their death, the former agrees to pay their beneficiaries a lump sum. 

Life insurance policies are often acquired for the benefit of the policyholder’s children or spouse, allowing them to cover debts, repay the mortgage, cover funeral expenses or just live comfortably after their death.

The history of life insurance dates back as far as 100 B.C. A Roman general named Gaius Marius created a member’s club for his soldiers. They all paid money into the club and when one of the members died, that money would be used to pay for their funeral. This was important to the Romans as they believed a soul would be lost and left to wander aimlessly if not given a proper burial.

Centuries later, the concept would be used by insurers in the United Kingdom and the first modern life insurance policies were sold sometime in the 18th century, at least as far as we know. Today, it is estimated that as many as 59% of Americans have a life insurance policy.

When to Get Life Insurance

Everyone can buy life insurance but not everyone will benefit from it. If you’re 18, living with your parents, have no dependents, and no debt, you don’t need life insurance. A life insurance salesperson might try to convince you otherwise, but that’s how they make their money and you really don’t need it.

If you fit in any of the following boxes, you should consider life insurance:

• The Main Breadwinner: Your children and/or spouse rely on you to pay the bills and put food on the table. You don’t have to be the sole earner; you just need to be in a position whereby your family would be seriously out of pocket in the event of your demise.
• A Single Parent: You are the only provider for your children and want to make sure they will have money and support.
• Married with a Mortgage: You have a sizeable mortgage and need a life insurance policy for your surviving spouse to repay this mortgage.
• Married with Debt: You will leave your loved ones with little more than debt. If you reside in a Community Property State, this debt may be passed onto your spouse. If not, it may mean they get nothing from your estate, which means a life insurance payout could be the only funds they receive.
• High Net Worth: You have a high net worth and a substantial inheritance to leave your loved ones but want to cover the taxes and other costs they may incur upon your death.
• You Want to Provide for Your Kids: You simply want to provide a better life for your children in the event that you die before your time.
• You Own a Business: You want to keep the business going and provide for your children, ensuring they have the money to live comfortably, to pay for their education, housing or healthcare.
• You Want to Cover Funeral Expenses: Finally, a life insurance policy can simply ensure that your funeral expenses are paid for, which means you won’t leave your family with this costly burden, even if you don’t have any cash or assets to leave them in your estate.

How Much Do You Need?

To calculate how much you need, simply answer a few basic questions:

1. How much will your dependents need to live comfortably?
2. Do you need to cover a large expense?
3. How much remains on the mortgage?
4. How much inheritable debt do you have?
5. How many years will they need to be covered for?

For example, let’s suppose that you’re a 50-year-old male with a 50-year-old wife and an 18-year-old son. Your wife will continue to work after you pass and can sustain herself and your child. However, there’s a chance she will inherit your debt and you also want to make sure she can pay the mortgage, cover your son’s college education, and provide a financial buffer.

In that case, your answers may look like this:

1. How much will your dependents need to live comfortably? ($20,000 a year)
2. Do you need to cover a large expense? ($40,000 for college)
3. How much remains on the mortgage? ($100,000)
4. How much inheritable debt do you have? ($10,000)
5. How many years will they need to be covered for? (5 years)

In this case, $250,000 would be the bare minimum, but you can increase this to $300,000 or more to ensure they have complete coverage. You could even bump it up to $500,000 to provide your son with a fund and give your partner a chance to take a prolonged break from work.

After all, it’s not just about the money. If it was, you could assume that your spouse would just go straight back to work and your kids would continue as normal. But after losing their partner and their father, there’s a good chance their normal regime will be severely interrupted.

Who Gets the Payout?

To ensure that your loved ones get the payout upon your death, you need to add them as a beneficiary. This will ensure they get the payout without issue and without delay, making the process easier for them and avoiding the drama that could ensue if you don’t have a beneficiary.

Should this be the case, the money will go straight into your estate. When this happens, it may be used to pay bills as creditors will seek to get what they are owed. To avoid this, and to ensure the process runs smoothly, make sure you add multiple beneficiaries. That way, if any of them die before you do, the money will pass to the next in line and won’t be passed into your estate.

Types of Life Insurance

Life insurance comes in many forms, from basic policies designed with a specific purpose to ones designed to last for decades and provide substantial reimbursement to your loved ones.

Term Life Insurance

Term life insurance is the most popular type of life insurance as it’s also one of the simplest and the cheapest. You pay insurance premiums every month for between 10 and 30 years and if anything happens in that time your loved ones will be given a cash sum.

You choose the term, set the amount and pay the money. The longer the term and the greater the amount, the more you will pay. These costs also increase with age and after taking your medical history and smoking status into account. Of course, if you outlive the term of the policy then it will end, no payout will be received, and you’ll need to purchase another policy to receive the same benefits.

Permanent Life Insurance

Permanent life insurance is a little more complicated than the option discussed above. It’s both an investment account and a life insurance policy. On the one hand, it will payout in the event that you meet an untimely end, on the other hand, it offers something known as “cash value”, which allows you to treat it as an investment and cash it out when enough money has accumulated.

Also, unlike a term life insurance policy, permanent life insurance lasts for the policyholder’s entire life, unless they cash it out early.

Universal Life Insurance

A universal life insurance policy works in a similar way to permanent life insurance in that you have both a death benefit and a cash value. The difference is that the insurance premiums are adjustable—you can use the accumulated cash value to reduce the premiums and make the policy more affordable.

Final Expense Life Insurance

Also known as “funeral insurance” or “burial insurance”, this option is designed to help you cover funeral expenses after you’re gone. It rarely offers a payout higher than $20,000 and is tailored towards seniors who are too old to get an affordable term life insurance plan. The good news is that the premiums are also very low and it’s a great way to ensure your loved ones don’t need to pay for you when you’re no longer around.

Accident Insurance

Accident insurance, also known as accidental death and dismemberment insurance, pays you a substantial sum of money if you die or lose a limb during an accident. The premiums are low, but there are many restrictions and it won’t payout if you die from a medical condition, negligence, suicide, overdose, and a host of other issues.

Joint and Survivorship Life Insurance

Joint life insurance policies are taken by two people and designed to pay one of them when the other dies. There are also joint policies designed to pay to the children of a couple when both of them die.

However, these policies are very strict, not very cheap, and often redundant. It nearly always makes more sense for the two policyholders to get separate policies and then make each other a beneficiary, along with their children. This will cover all bases and it will do so with a larger death benefit.

If the relationship breaks down, separate policies allow the policyholders to switch beneficiaries, thus keeping the policies active and saving a lot of money.

What do Life Insurance Companies Consider?

Life insurance is built on statistical probability. If the insurance company provides multiple $500,000 policies for $50,000 each per term, it means they’re offering a 10 to 1 payout, but it’s only because they may expect the actual payout to be closer to 15 to 1 or 20 to 1, which means they walk away with more money.

Casinos operate in the same way. A play can walk in with $10 and walk out with $100. But the casino will still profit from the next 20 people who walk in with $10 and leave with nothing. Life may seem chaotic and unpredictable, but to an insurance company, it’s something that can be predicted pretty accurately. 

As morbid as it sounds, the greater your risk of dying during the term, the more expensive the premiums will be and the less favorable the offer will be. A healthy, 20-year-old non-smoker can be expected to outlive a 30-year term roughly 95% of the time. But if you add medical conditions, smoking, alcohol abuse, and a dangerous lifestyle to the mix those numbers drop considerably, and the insurance company needs to adjust the data to account for them.

Generally, a life insurance company will look at the following key data points to get an idea of your health status and the likelihood that you will die within the term:

Age

Age is the biggest and most obvious factor in determining your mortality risk. Some of the most extensive data life insurance companies have at their disposal concerns age and its impact on your mortality and their bottom line.

They know, for instance, that a 20-year-old woman has just a 3.38% chance of dying before the end of a 30-year term, a number that rises to above 5% for men (more on that below) and drops to less than 1.5% for a 20-year term. However, a 52-year-old man has a nearly 1 in 2 chance of dying before the end of a 30-year term and when they reach 59 those odds increase to over 75%.

This is why life insurance for seniors is so difficult to find and why the terms are often very short and the premiums very expensive when you do find it.

Gender

Gender plays a surprisingly big role in shaping the probabilities and it’s something that all life insurance companies will consider when creating your policy.

The science says that women outlive men by nearly 5 years. Men are more likely to die from heart disease, accidents, and suicide, among other things. What’s more, if you’re a man with a family history of ovarian and female breast cancer, few alarm bells will ring, but if you’re a woman, that family history will impact your premiums heavily.

Smoking Status, Drug/Alcohol Use

Smokers die roughly 10 years before their non-smoking counterparts. They are also at risk for many more health conditions, ranging from heart disease to cancer and chronic lung problems. If you smoke, your premiums will skyrocket and if you’re above the age of 50 and seeking an extended term, you may be refused.

Drug and alcohol use are treated in much the same way and if you have a history of abuse, you may see those premiums increase

Height and Weight

Life insurance companies use charts to determine your risk based on your height and weight. These charts essentially tell them whether you are classified as overweight, obese or morbidly obese, which is important when you consider that obesity can be as much of a risk factor as smoking.

Family History

Your mortality risk increases or decreases based on your genetic makeup. If you have a fatal genetic disorder in your family or several of your family members died from a specific form of cancer, you may struggle to get favorable terms on your life insurance policy. 

This isn’t always a big deal if those deaths occurred after the age of 60, as the rate of cancer and heart disease increases naturally for the general population, but if they died young it becomes a big issue.

In theory, you shouldn’t have an issue if there was a single, sporadic case of an inheritable disease, especially if it’s clear that your family member had the non-inherited form. However, in practice, it’s a different story and this will still scare many life insurance companies away.

Dangerous Hobbies, Job or Lifestyle

You are more than twice as likely to die from bungee jumping than skiing and close to twelve times more likely to die from skydiving than snowboarding. If these activities are part of your daily lifestyle, you may see your premiums increase. The same applies if you work with heavy machinery, drive all day or regularly take part in any other activity that increases your mortality risk.

Other Factors

Life insurance questionnaires are long and grueling, and they take many factors into consideration. The salesperson will seek to determine whether or not you have a history of dangerous or reckless driving; are a suicide risk; are planning to travel to high-risk countries. It all helps to build a detailed analysis of your risk factors, which in turn allows them to set your premiums.

Do You Need a Medical Exam?

Life insurance companies have the right to request a medical exam and may exercise that right if they deem necessary. However, if they can get all the information they need elsewhere and you are relatively young and healthy, it’s rare for them to do so.

Medical exams are more common in older and obese individuals as insurance companies seek to protect their money. There are companies and policies that market themselves as being free of medical exams, but these are often more expensive to make up for the increased risk.

The Payout Process

Between 2% and 3% of life insurance policies will payout. However, that doesn’t mean life insurance companies refuse the other 97% or 98%. It simply means that the vast majority will end without a claim or lapse because of a cash out or a missed payment. 

Many actual claims will result in a payout and only a small percentage of these are refused, and often with very valid reason.

Contestability Period

In the middle of the 20th century, life insurance companies got into a habit of refusing claims based on the simplest of mistakes. They hired entire teams of individuals whose job it was to contest claims by looking for misrepresentation, mistakes, and other issues. If, for instance, you had a minor and otherwise insignificant hospital visit very loosely related to your eventual death, your claim may have been refused and your family could have been left with nothing.

Lawmakers eventually stopped this practice and introduced something known as a contestability period. This period begins as soon as the policy does and it lasts for between 1 and 2 years, depending on the state in which you reside. If you die during this period, the life insurance company has the right to investigate your claim and look at all aspects of it.

If you lied on your form, they can, and likely will, deny your claim. This is true even if the lie was minor and had nothing to do with your eventual death. Many individuals continue to lie on their forms in the hope that they will survive this period and that the life insurance company won’t be able to contest anything. However, not only is there a risk of death during the contestability period, lying is a fraudulent act and if it’s discovered then the claim can still be contested and refused further down the line.

There is also something known as a suicide clause and this exists on many life insurance policies. It states that the money will be paid in the event of a suicide, but only if that suicide doesn’t occur within the first two years. If it does, the claim will be denied outright.

What Happens if You Die During the Contestability Period?

It’s important to be truthful when applying for life insurance because you never know what will happen in the next couple of years or in the years that follow. It might cost you a few extra dollars a month, but it could save your loved ones a lot of stress after you die.

However, even if you were honest, if you die during the contestability period there will still be a delay. The life insurance company will spend more time looking at your case and making sure everything is above board.

Can this Period Begin Again?

What few policyholders realize is that it is possible for a new contestability period and a new suicide clause to commence. This can occur if your payments lapse and you sign a new agreement to start repaying them again. It may feel like you’re simply picking up where you left off, but to the insurer, it’s a whole new policy and will be treated as such.

What Happens if I Lied on my Policy?

Mistakes can happen. People forget. If you’ve lived a long, full, and troubled life, it’s not easy to remember every illness, hospital visit, and condition that you’ve ever had. In the event that you forget something, you should contact your life insurance provider and discuss it with them. 

They may evaluate your case, increase your premiums or discuss alternatives, but if the policy is new then none of that will matter much and at least you can rest assured that you have an honest policy.

If the contestability period has passed, discussing such an issue may trigger another contestability period and cause a host of problems. It may even be revoked altogether.

Why Would an Insurance Company Contest a Life Insurance Claim?

A life insurance company contests a policy simply because they can. The contestability period allows them to reduce their expenses by refusing payouts based on fraud, technicalities, and other issues. 

If they deem that the policyholder falsely represented themselves, intentionally or not, one of two things will happen:

1. The payout will be refused.
2. The payout will be reduced.

In the second instance, they may adjust the payout based on what the policyholder would have paid if the truth had been revealed during the application process. However, this generally only applies when a small oversight or mistake occurs and not when a blatant lie was told.

For instance, if the policyholder dies of cancer or heart disease and smoked until their dying days, even though they claimed they were a non-smoker, the payout will likely be refused. The same is true if they had previously been treated for or warned about these conditions but didn’t provide the underwriter with that information.

However, if they gave up smoking 8 years ago and told the underwriter that it was 10 or 11 years, it’s unlikely to have a significant effect. 

The same applies to weight and height, although this is trickier for them to check without an initial medical exam. If you claim that you’re 200 pounds now but you’re 280 pounds a year later when you die, it’s quite a significant lie, but one that they can’t really prove. Unless your weight was taken and recorded at the time during a medical exam, they have no way of knowing. Because even if they record your weight at a later date, who’s to say that you didn’t just gain a lot of weight in that period?

Problems when Applying for Life Insurance

Insurance underwriters are very careful with regards to who they accept, how much they charge and how big their payouts are. All of this is carefully calculated based on statistical analysis and probability. 

If, therefore, you’re an overweight, smoker with many family conditions and a preexisting medical condition, there’s a good chance you’ll be refused. And even if you are accepted, it’s likely that the premiums will be high, and both the term and the payout will be low.

Even if you have just one of these issues, you may still face expensive premiums and reduced benefits. However, there are a few ways around these issues and a few exceptions to consider.

Can You Get Life Insurance if You’re Overweight?

Obesity is a huge red flag for underwriters but if it’s the only issue, you need to be very overweight for them to refuse you. The average person would need to add an additional 100 to 150 pounds to reach a point where they would become uninsurable. 

However, it would prevent you from getting the preferred rates, known as “preferred plus”, and leave you scraping the barrel in terms of premiums and payouts.

Can You Get Life Insurance if You Smoke?

You can get life insurance if you smoke, it just isn’t cheap, and if you’re in poor health you will be limited to very low payouts. It’s important to be honest about your smoking status, and this is also true for chewing tobacco, vaping, and snuff. 

They won’t judge you solely based on your smoking status and will consider how often you smoke and how long you have smoked. So, don’t worry if you only have a couple cigars a week, you won’t be given the same harsh judgments as someone who smokes 20 cigarettes a day. 

Life Insurance with Previous Medical Conditions

Not all preexisting health conditions will have a seriously negative impact on your life insurance claim. However, if that condition increases your mortality risk, it will increase your premiums, and the most common of these conditions are:

• Diabetes
• Heart disease
• Cancer
• High blood pressure
• High cholesterol

Life Insurance as a Senior

The older you are, the greater your risk of dying before the end of the term. Senior life insurance is a very specific and tailored life insurance policy that typically provides a maximum term of 20 years (for those aged 60 or less) and offers maximum payouts of $20,000. 

However, the younger you are, the more options you will have and if you’re below the age of 65 and in good health, it’s still possible to get a sizeable payout with a respectable premium.

Summary: Life Insurance is for Everyone

Life insurance is for everyone, or rather, everyone who wants it. There are options regardless of your age and your goal—you can even take life insurance policies out on your children. It doesn’t make much of a difference to the insurers, if they can calculate the probabilities and weigh them against their liabilities, they’ll underwrite the policy.

And if you’re refused for health reasons, simply work on fixing what you can (lose weight, stop smoking, take fewer risks) and try again.

Source: pocketyourdollars.com