Life Insurance

Life insurance is a legal contract between you and your insurer in which your insurer guarantees payment of a death benefit to your beneficiaries when you die. Most people get some form of life insurance. It is especially important if you have dependents — minor children and/or special-needs adult children, co-own property, are a stay-at-home spouse or married pensioner, or have cosigned loans or any other outstanding debts.

These policies exist to prevent financial difficulties for your loved ones after you die that may result from loss of your income, funeral and burial expenses, and unpaid medical or other debt. There is a Life Insurance Glossary that will help you understand some of the jargon.

Life insurance scams and fraud are more common than with other types of insurance and you should be on the lookout for them.

  • Do a little research to make sure the company and broker are legitimate, especially if you are buying online.
  • Avoid any life insurance policy that will be owned by another person who is not family, overstates your net worth, promises an income stream for retirees, or doesn’t require regular premium payments.
  • You should be especially wary of anyone who will offer you low premium life insurance when you have a terminal illness.

Unlike most types of insurance that you may never use or use multiple times, whole life insurance will always be used and the death benefit will be paid only once. On the other hand, it is not uncommon for people to outlive their term life insurance policy and never use it.

Life insurance policies were initially intended to help pay for funeral and burial expenses after your death, but some whole life and universal life insurance policies have evolved to include an investment component that can provide your family with more significant financial support and may build up a cash value. However, life insurance is far from the best choice for transferring your wealth to beneficiaries tax free unless you’ve maxed out all other investment options.

Most insurance companies will ask health questions before issuing a life insurance policy and some require a medical exam.

Many insurance companies will check your weight, blood pressure, blood sugar, and cholesterol.

  • Other tests to determine your overall health may include blood work, saliva and/or urine sample, electrocardiogram (EKG), and/or cognitive and mobility testing.
  • Screenings include those for immune disorders, liver and kidney disease, diabetes, cocaine and other illegal drugs, prostate cancer, nicotine and cannabis use, and early signs of Alzheimer’s or other memory impairments.

Even if medical exams are not required, questions about medical problems, health habits, family history, driving record, current medications, hobbies and activities, etc. will be asked.

The result of this medical assessment is used to put you into risk categories. Sometimes the benefit of a more detailed assessment is that you will be put into a lower risk category and may qualify for higher insurance coverage with lower premiums than you would have if only questions were asked.

These categories determine the cost of insurance, although rarely affect the coverage limit.

  • Life insurance premiums are lower the younger you are when the policy is purchased. In whole life insurance policies, the cost of insurance components increases with age. It usually stays the same for term insurance policies, but will be much higher when you renew or convert them.
  • Poor health, obesity, smoking, excess alcohol use, and other unhealthy habits can result in rejection, higher premiums, and/or limit the amount you can be insured for. You could consider delaying the purchase of your policy until you can quit the habits or otherwise get yourself more healthy. Risky jobs and/or hobbies can also result in rejection, higher premiums, and/or limit death benefits.
  • For whole life policies with investment potential, the cost of insurance portion of the premium is all that is needed to keep the policy active.
  • The risk categories do not affect the amount of premium that goes into savings or cash value. You can choose the amount

While some companies may provide life insurance with no medical screening, the premiums can be very expensive and you may worry if the company is legitimate.

There are disqualifications that can result in your family not receiving any death benefit that you must avoid.

  • The insurance can nullify your policy if you did not accurately disclose your past and current health conditions and/or high-risk activities.
  • Your insurance policy will not remain active if you did not pay the premiums.
  • There is always the risk that your insurance company may not be financially able to pay or remain in business by the time you die.

When it comes to death benefits, you can choose a levelized death benefit or an increasing death benefit type of policy. Term life insurance is a levelized death benefit type and whole life insurance can be either.

  • Levelized death benefit insurance may be best for people on a limited budget and/or few expenses.
  • Increasing death benefit insurance may be best for young people who will need more coverage as their earnings increase over time or anyone trying to start/grow a business.
  • If you have a universal life policy, most insurance companies will let you switch back and forth between the two types of policy as your life circumstances change.

Any cash value remaining in your whole life policy after your death will not automatically be paid out to your beneficiaries unless you include a specific rider or get a specific type of policy.

Life insurance can be customized with riders to include additional benefits or payoffs if specific circumstances happen. For example, a life insurance policy could pay more if you die in an accident, before a certain age, or of a specific condition.

The more the payout and/or number of riders, the higher the premiums.

Life insurance policies can be used while you are alive. Depending on the type of insurance and terms of your policy you will have different options. In many situations, these options will not be pointed out and you will have to specifically ask about and request them.

If you have a policy that accumulates cash value, you can use it for expenses.

You can obtain money for medical or other costs from any form of life insurance if you have a terminal illness. Options may include:

  • Getting a portion of the death benefit with an accelerated death benefits, chronic illness, critical-illness, or long-term care rider; 
  • Selling your life insurance policy for cash with a viatical settlement or a life settlement; and/or
  • With some riders, you can receive an income if you are disabled or pay for long-term care.

For details see Collecting From Life Insurance Before Death.