The Basics of Life Insurance.

Life Insurance is a complicated subject. There are lots of opinions around this type of coverage, and even worse, conflicting information regarding it. Much like managing our money, life insurance is not something we were taught in school. Most of us wake up one morning as adults and suddenly have more responsibility than we could have previously imagined. These are the facts on life insurance – you can decide for yourself what you think and if you need it.

What is life insurance?

Life insurance is a policy that insures a human life (or two). In the event an insured person dies, the claim can be made and eventually paid-out to the designated beneficiary (or estate). The death benefit (or payout) is the amount of coverage you agreed to when you placed the policy. The benefit is paid by the insurer as a tax-free, lump-sum payment.

Who can be insured?

Anyone that is older than 14 days can be eligible for coverage. It is important to note that although you may be quoted on a certain policy, it does not mean you are eligible for it. Life insurance requires underwriting each individual case, and in a lot of instances, it will require a medical examination to be completed prior to approval. Usually, anything under 500k in coverage is streamlined without the need for further investigation.

Who can own the policy and who can be the beneficiary?

It is commonplace to have an owner who is not the insured person. Examples of this might be: parents insuring their children’s lives, children insuring their parent’s lives, companies insuring key-personnel, business partners insuring each other – the possibilities and reasons for this are endless. Although this is common, most policies are owned by the life insured. Beneficiaries are the same in that they can be anyone of your choosing: a spouse, a child, an organization, etc. In fact, in 2007, Leona Helmsley (a Real Estate Billionaire) left her Maltese a twelve-million-dollar inheritance when she passed away! Lucky dog.

Does everyone get their own policy?

Life insurance can be placed on one individual life, or on two lives. If you decide to put two lives on the policy, then you will need to decide between joint-first-to-die, or joint-last-to-die. If you choose the first, then the coverage will end upon the first death, and the benefit will be paid out (safe to assume you want the surviving spouse to receive the benefit). If the latter is chosen, then the death benefit will only be paid out upon the last death (normally chosen for surviving members like children). Joint policies become ineffective if the couple get divorced, therefore, you often see individual policies sold to couples despite the possible savings of joining the lives together.

What factors play a role in premium pricing and underwriting?

A lot of things! The cheapest life insurance client is a young and healthy woman who does not smoke (and has no family history of health issues), but unfortunately, most of us are less ideal candidates. Age, sex, gender, family medical history, personal medical history, smoking status and drinking habits are just a few categories that affect premium and acceptance. Like I said before, you can always be quoted, but given the amount of information the underwriter needs, it makes sense that the premium can change – after all, you could pay one months premium and, if you passed away the next day, the insurer could owe you millions of dollars!

Are there different types of policies?

Yes! And this is where people’s opinions usually become louder. Good thing we are only focused on the facts today! Life coverage comes in two forms: term and permanent. I could write an entire book on permanent, so let’s stick with the basic notes:

·        Term insurance provides coverage for a set number of years for a set premium. It is a no-frills insurance policy. The term, or years of coverage, offered by insurers is usually 10 or 20 years; however, some carriers are now offering anything from 10 years to 40 years, and any number in between. Term insurance is often used to indemnify a party from risk for a set number of years. For example, if someone has a 20-year mortgage for $1M dollars, then they might consider a 20-year term life insurance policy for $1M (in case the income earner in the family passes away).

·        Permanent insurance also comes in various forms, and that is because it also acts as an investment vehicle, in addition to providing life coverage. Permanent insurance is also known as PAR, participating whole life, whole life, universal life, T100…yes, the list goes on and on. It does not act the same as a term policy wherein the coverage ends on a certain date – once approved you are covered for life. By starting a permanent insurance policy, you are investing a portion of your premium dollars into the various funds available by the respective insurance company. These policies are often used to grow retirement funds, pass wealth to future generations and diversify portfolios.

Who typically buys life insurance?

There are many different reasons for purchasing life insurance. Some of the more popular reasons are listed below:

·        Debt – You never want to pass debt down to survivors, so this is one of the main reasons people get coverage. In addition, banks often mandate coverage when purchasing a new home.

·        Tax – If your assets get passed down (not laterally to the spouse) then they can be subject to significant tax implications. Life coverage can take care of the tax payments necessary to keep all the assets that are passed down.

·        Income – If you are the sole (or higher) income earner for the household, then you might want to cover a few years of gross earnings so the survivors can maintain their current lifestyle.

·        Inheritance – Some people choose to live their life to the fullest and spend their hard-earned dollars, therefore they use life coverage to pass down an inheritance instead of putting something aside while they are alive.

·        Charity – Some organizations are very close to people’s hearts and often receive a benefit upon the passing of their members or supporters.

What is the process for getting life insurance?

While the age of insuretech continues to grow and make coverage more conveniently accessible for purchasing online, the fact remains that life insurance can be a gruesome process for most. After going through all the options available to you, you will need to apply. The application process will be a thirty-minute meeting with your advisor where they will collect all personal and medical information from you. After that, you will be contacted by a third-party medical examination company, so a nurse can come visit you and do an exam (if applicable). Normally, if there is no exam necessary, then the insurer will reach out to you via phone for a tele-medical interview. Once the medical part is completed, all documentation is submitted to underwriting for a decision. The underwriter will examine your medical records through the MIB (medical information bureau) and might request an APS (attending physician statement – a fancy term for report on your health) if they want more info from your family doctor. Overall, you can expect a 3 to 6 week turnaround time from applying to approval.

What riders can I add?

Almost all insurance carriers offer endorsements to life insurance policies, which makes them more customizable. As an example, you can add a child term rider, which provides a tax-free payout if one of your children were to pass away. There are endorsements that relieve you from paying premiums if you become disabled or seriously ill. Different companies will offer different riders to their policy holders – it’s important you ask your advisor which ones are available to you.

In conclusion, as previously stated, life insurance is a complex product and has many moving pieces. Hopefully, the above facts help in your decision-making process.

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- Written by Joshua Krenus, CEO, Alteri Insurance