If you’re feeling intimidated by your life insurance options, you’re not the only one. A 2010 study by the National Association of Insurance Commissioners shows less than half of American consumers feel confident about making insurance decisions. It is normal to have life insurance questions.
Here are 10 important questions to ask about life insurance to make sure you’ve got the right coverage from a provider you can trust.
What can you tell me about your company?
Before getting into the major questions of how much life insurance you need or whether you want term or permanent insurance, do some homework on the company, says Allen McLellan, associate dean and assistant professor of insurance at The American College in Bryn Mawr, Pa.
“You need to know how long the company has been in business, the size of it (and) its ratings,” he says. “You also want to ask the agent, ‘What are your credentials for being a life insurance professional?’”
McLellan says consumers can research the financial strength of their life insurance company by checking out their fiscal ratings through organizations such as AM Best, Standard and Poor and Weiss. When it comes to the life insurance agent, McLellan says to look for designations such as Chartered Life Underwriter, Certified Financial Planner and Chartered Financial Consultant.
“These designations take up to 10 semester-long courses to acquire,” he says. “Those who come out of those courses are, at least knowledge-wise, going to be quite professional.”
Consumers will also want to know if their agent sells insurance from one particular insurance company or multiple firms.
How is my life insurance need determined?
One of the most common life insurance questions is “how much life insurance will I need?” The answer to this question involves two major factors: how much it will take to pay your debts off, including the mortgage, and how much your dependents will need to maintain the same lifestyle after you’re gone. Though all companies factor those two variables in, insurance providers frequently use different formulas for determining your specific insurance need, says Bradley Behrendt, a CFP with Tax & Financial Group based in Newport Beach, California.
“[Consumers need to ask] how did the adviser come up with the [appropriate] amount of insurance?” Behrendt says. “Was it a ballpark figure? Was it based on an analysis? If so, how deep was the analysis?”
Understanding how your need is determined is crucial, especially for families with unusual debts, such as high medical bills, that may not be considered in a rudimentary-needs formula. Once policy shoppers are sure their insurance agent is taking all of their current and future financial needs into consideration, they can purchase a policy that fits their family.
How much will this policy cost?
The cost of your life insurance policy will depend on a variety of important factors. Your life insurance agent will need to know your age, gender, lifestyle, the type of life insurance you need and your medical status, which may involve a required physical from a medical doctor.
Knowing these factors will help the life insurance company assess your risk level. The higher your risk level, the higher your life insurance premium will be.
“While your age, health, and smoking status play a huge role in how much you pay for life insurance, there are other important factors. Underwriters also consider your credit, occupation, hobbies, and driving record. The more dangerous your activities during work and leisure time–such as piloting airplanes, skydiving, or scuba diving–the higher your life insurance rate will be,” says insurance expert, Laura Adams.
Though the average cost of life insurance is $44 per month, your premium may be different from that depending on your current risk level.
If you run into a situation where you can’t pay the premium, knowing your options is invaluable. Butler says term policyholders who can’t pay their premiums typically have a 60- to 90-day grace period to come up with the money, but permanent policyholders have more options.
“(Permanent policyholders) can take an ‘automatic premium loan’ and borrow against the cash value of the policy to pay the premiums,” she says. “If you’re going to borrow against the cash value, you’ll want to ask what the loan rate is, and those are usually anywhere between five (percent) and eight percent.”
The added bonus of borrowing against your policy is you don’t have to pay it back, but you should understand how borrowing against a cash value policy could affect your future returns and death benefit.
Does the policy provide living benefits?
There is a common misconception that life insurance only provides death benefits. You may be surprised to learn that many life insurance policies also provide living benefits like the one we mentioned above where you may be able to borrow against the cash value of the policy.
Living benefits involve benefits you can use while you’re still living. These will vary by company and policy type and are definitely something you want to know.
These are some common living benefits that may be available under your life insurance policy:
- Early pay: This is a benefit for the insured who has been diagnosed with a terminal illness and helps cover medical costs and care. The percentage of the benefit is determined by your policy and company.
- Long-term care: If the insured becomes unable to provide their own basic care and will require assisted living, the long-term care benefit may allow them to use their life insurance policy to help pay for that care.
- Short-term care: If the insured is injured or has a temporary impairment, this benefit may help cover the short-term costs of care.
Talk with the insurance provider to see if these options are available if you’re interested in them.
If purchasing a permanent policy, consumers need to pay careful attention to their life insurance illustration, says McLellan.
“Another question (consumers should) ask is ‘What are the guarantees associated with this product?’” he says.
While life insurance illustrations frequently provide several projections on how your policy could pay out down the road, McLellan says the numbers that really count are the “guaranteed” figures, which show how much you’ll make regardless of fluctuations in the market or fiscal problems the insurance provider may encounter in years to come.
When can I expect returns?
This won’t be a question for term purchasers, but those eyeing permanent policies should be prepared to wait several years before their policy will start generating positive returns.
“Expect that 100 percent of your first-year premiums will go to issuing the policy,” says Behrendt, adding that most of it will be paid to the agent as commission.
He says permanent life insurance policies are designed as long-term savings vehicles and can take anywhere from five to 10 years to generate positive returns. New purchasers who see green in their immediate future could be sorely disappointed.
What if my health changes?
Unless you’re buying a guaranteed-issue policy or purchasing life insurance through your employer, you’ll probably have to endure a medical evaluation. The problem is that over the duration of your policy, your health could change for better or worse.
“If you don’t get the highest (health) classification when you apply for the policy, you need to ask if there is the ability to improve on that rating if your health increases,” says Behrendt.
Behrendt says people who have had health risks such as a heart attack, DUI, or smoking habit in the past can have between 10 percent and 20 percent knocked off of their life insurance premium if they undergo new medical underwriting after a certain period of time. Policyholders, especially those with term insurance, will also want to know what happens if their health decreases or if they become uninsurable.
What’s covered if I become disabled?
Even if you don’t purchase a disability rider or a separate disability insurance policy, some life insurance policies provide some benefits for policyholders who become disabled.
“Usually those benefits are a disability premium waiver,” says Adam Sherman, CEO of Firstrust Financial Resources life insurance advisory firm in Philadelphia. “For example, if you have a $5,000 (annual) premium and you were deemed to be disabled, the company would provide that $5,000 for that policy.”
Sherman is quick to point out that insurance companies have different definitions for “disabled.” While some providers define it as an inability to perform your specific occupation, others define it as an inability to perform any occupation at all. Being clear on what defines disability and whether your life insurance waives premiums in the event of catastrophe can help you find the right policy and determine your need for additional riders.
Will the death benefit adjust for inflation?
“If we’re talking about (a death benefit) that’s anywhere from 20 to 80 years away, we need to talk about having that death benefit increased (over time),” says Butler.
A $500,000 death benefit may seem enormous today, but 30 years down the road, it will only be worth approximately $200,500 after adjusting for inflation. With inflation increasing approximately 3 percent each year, time alone can severely erode your life insurance policy even if you never miss a payment. While some policies automatically adjust to keep pace with inflation, some companies sell that feature as an additional rider. Before signing onto a policy, Butler advises shoppers to ask their life insurance agent if the policy automatically factors in inflation and allows them to buy more insurance later on if necessary.
What happens to life insurance as I age?
Your fiscal needs will change as you age. The terms and conditions of your policy might as well. While most term policies will eventually allow you to convert to a permanent policy, Sherman says you may not want to do so.
“Usually you have to convert by age 70,” Sherman says. “For people in their later years, it’s very, very expensive. For example, if I’m a 45-year-old and I buy a term policy for $1 million, that could cost $1,300 (per year) today. If I wanted to convert that same policy at age 65, the premium could be $15,000 a year.”
To save thousands of dollars down the road, ask your life insurance agent about the future of your policy.
The bottom line
Understanding your life insurance policy and the provider is important. Life insurance needs will change over the years and so having a great relationship with your agent and knowing what life insurance questions to ask will help to ensure you are always adequately covered. As insurance expert, Laura Adams said,
“Remember that certain life events, such as getting married or divorced, or having a child, should prompt you to review your life insurance beneficiaries. Make sure the policy payment would go to the people or organizations you want. Also, consider if you still have the right amount of coverage. A company representative can review your situation and advise you about having enough life insurance to protect your loved ones.”