Don’t I have life insurance through my employer already?
Sure, assuming your employer offers coverage and you’ve signed up. But, odds are, that coverage is inadequate. And, even if your company offers the best plan ever, you’ll lose it once you stop working there. That doesn’t mean you should forego life insurance offered by your job. Coverage is coverage and, even if you already have life insurance, your employer’s plan can certainly serve as a supplement. Plus, it’s probably a guaranteed issue policy, meaning you won’t have to undergo a medical exam to get the coverage.
Wait … I have to take a medical exam to get a life insurance policy? Yes, a medical exam is almost always part of the traditional life insurance underwriting process. Throwing in the "almost always" because there are a few no-medical exam life insurance policies out there, but they typically tout lower coverage amounts and higher prices than comparable policies subjected to the full underwriting process.
Why am I taking this medical exam? Oh, yeah, right. Because your prospective insurance company wants to get an idea of how risky you are to insure — or, to put it bluntly, how likely you are to die during your policy’s term. They do this whole "classification" thing that ultimately determines your premiums.
OK, fair enough. What’s this medical exam entail? It’s comparable to a basic physical. The insurer’s testing company will take your vitals (pulse, height, weight, all that good stuff) and a blood sample. Sometimes they’ll ask for a urine sample, too, or administer an EKG.
The insurer’s testing company? I can’t go to my own doctor for this? Nope, sorry. Insurers don’t like potentially-biased third-party practitioners performing the exam. But here’s some good news: The insurance company pays for the exam (yay, free physical!). The technician will typically come to your house or office. And, perhaps more importantly, a third-party diagnostic company is testing you — not the insurance company itself. 6. What are these testing companies testing for exactly?
You can find a full explainer on your medical exam (or paramedical exam as it’s known in insurance-speak) here, but basically they’re testing for high blood pressure, glucose or cholesterol and the presence of nicotine. Oh! — they’ll also look at your body mass index (BMI).
So I should, like, lose weight before I apply for life insurance? A question our policy geniuses get all the time! OK, here’s the thing: A healthy BMI can qualify you for the highest (or best) classification and, by extension, lower premiums. But you can’t just go on some extreme diet, apply for life insurance and — viola — pay less. Insurers require applicants to disclose whether their weight has fluctuated more than 10 pounds (up or down) within the last year — and, if it has, you won’t get full credit, so to speak, for that weight loss. Some insurers let you take a new medical exam a few years after your policy goes into effect, though, so you can talk options with a broker if you’ve recently lost weight or plan to sometime in the near future.
Huh. What about smoking? Would quitting help? Your health — of course! Your life insurance premiums … well, it’s complicated. Quitting cold turkey right before a paramedical exam won’t help at all because signs of nicotine stay in your blood for over a week and in your urine for almost a month — and the testing company is taking samples of at least one of those things, remember? Now let’s say you quit and wait for all the nicotine to flush out of your system. A history of smoking can still cost you; how much exactly depends on the date of your last cig and how often you were smoking them. That’s not a go ahead to keep puffing away. Again, quitting is good for your health. But, also, smokers automatically receive a special Smoker classification — which generally doubles your premium.
OK, let’s go back for a sec. Can you explain all this classification stuff? Sure. The specifics vary by company, but broadly speaking, there are six major life insurance classifications, listed here from best to worst: Preferred Plus, Preferred, Standard Plus, Standard, Substandard and – you guessed it — Smoker. Where you fall depends on a whole bunch of health and lifestyle factors. You know: what’s your BMI? Do you drink regularly? Have you ever been treated for a serious illness? How often do you skydive?
Umm … so, will a, say, [insert prior history of unhealthy habit or illness here] also drive up my insurance premium? Maybe, but you shouldn’t keep that history a secret.
Why? Because lying is wrong … and, chances are, your prospective insurer is going to find out anyway.
How? From your paramedical exam results, attending physician statements, a look into your prescription history and other research conducted by the underwriter.
What’s an underwriter? An underwriter is the person doing the underwriting. An underwriter works for the insurance carrier and is basically tasked with figuring out how risky you are to ensure — or what classification you belong in. As we mentioned, they’ll look at your paramedical exam results, medical records and even your motor vehicle reports. You can find a step-by-step guide to the life insurance underwriting process here.
What happens if I lie to the underwriter and they find out? OK, let’s approach this one from a best- to worst-case scenario. In a best-case scenario, all of the quotes you’ve been using to comparison-shop will be straight-up wrong and you’ll get offered a higher premium. In a bad-case scenario, you’ll get denied coverage or, if the lie was discovered after the fact, the policy will get canceled. In a worst-case scenario, your death benefit won’t get paid out.
What’s a death benefit? Yeah, we don’t really want to think about it either. Basically, the death benefit is how much the life insurance policy pays to your beneficiary, untaxed and in a single lump sum, should you die. That amount is considered the "face value" of the policy. Before you ask, "face value" is a fancy way of saying how much your policy is worth. And, just in case, your beneficiary is the person you designate to receive the death benefit.
So that’s how a life insurance payouts? Traditionally, but there’s been some variation in recent years. Most notably, people can now add accelerated death benefit riders to their policies. These riders let you use your death benefit before you die, in certain cases of terminal illness. Also, some insurers let your beneficiary receive payments in installments, or annuities. So basically, they’ll get paid incrementally throughout their life, typically between five and forty years.
Oh! Is that what term life insurance is? No, no, no, no, no. Whoops, sorry for any confusion there. Term life insurance is a policy that covers you for a fixed period of time. So, if you die during the term, your beneficiary gets the death benefit. Permanent life insurance, on the hand, covers you permanently. Your beneficiary is still entitled to the death benefit when you die, but there’s also a cash value component you can borrow against or partially cash out after a period of time.
Which is better — term life insurance or permanent life insurance? We recommend term life insurance. Unless you’re super-rich, have a complicated estate situation or are closing in on retirement, it’s almost certainly better for you. That’s because the aim of life insurance is to cover your family during the years you’re working to provide for them. (They can take over from there. At least theoretically.) Plus, permanent life insurance is a lot more expensive. Having said all that, you can find more on term vs. permanent life insurance here.
Who should be my beneficiary? We can’t really tell you that. You’ll have to carefully consider all your options and decide what’s best for you and your family. We can tell you, though; that it’s possible to have multiple beneficiaries, so there’s no need to sweat picking between your children. Also, you can update your beneficiaries regularly. So if you name your new spouse and things don’t work out, you can leave the death benefit to your dog instead.
Last question: How does the insurance company know I died? Good question. Your beneficiary has to file a claim. They’ll need to fill out a claim form and send the insurer your death certificate and policy document. You can go here to find out where your beneficiary goes from there.