Life Insurance: What Insurers Offer And You Should Know

Life insurance is a contract between an insurance company and a policy owner, in which the insurer agrees to pay a sum of money to the policy's beneficiaries when the insured person dies. In exchange, the policyholder pays premiums to the insurer during their lifetime. There are two main types of life insurance: term life insurance and permanent life insurance. Term life insurance provides coverage for a certain period, such as 10, 15, or 20 years, while permanent life insurance provides coverage for the insured person's entire life as long as premium payments are maintained. Permanent life insurance often includes a cash value component, which can be accessed by the policyholder during their lifetime. When choosing a life insurance provider, it is important to consider factors such as financial strength, customer satisfaction, policy features, and cost.

Term life insurance: Temporary coverage for a set period, e.g. 10 or 20 years

Term life insurance is a temporary form of life insurance that provides coverage for a specified period, typically ranging from 10 to 30 years. It is a simple and pure form of life insurance where the policyholder pays a premium for a set term, and if they die during that period, a death benefit is paid to their beneficiaries. Term life insurance is usually more cost-effective than permanent life insurance, but it does not accumulate cash value and has no payout after the term expires. Most term policies are "level premium", meaning the monthly premium remains the same throughout the policy's duration.

When purchasing term life insurance, individuals must undergo an application process, which includes a medical exam to evaluate their health and determine their risk level. The cost of term life insurance is based on factors such as age, gender, health, lifestyle, and occupational hazards. The longer the term, the higher the monthly premium. Term life insurance is ideal for those who want substantial coverage at a low cost, especially young families with children or adults with special-needs dependents.

At the end of the term, policyholders have the option to renew the policy, convert it to permanent coverage, or let it lapse. Renewal typically results in higher premiums based on the policyholder's current age. Conversion to permanent coverage may be available, depending on the insurer and the specific term policy.

Whole life insurance: Permanent coverage with a savings component

Whole life insurance is a type of permanent life insurance that provides coverage for the full lifetime of the insured person. It is more expensive than term life insurance but offers a guaranteed death benefit and combines a death benefit with a savings component, which is similar to a tax-deferred savings account. The savings component, known as the cash value, can be borrowed or withdrawn from by the policyholder. Whole life insurance policies also have level premiums, meaning the amount paid every month stays the same.

Whole life insurance is one of the two primary types of permanent life insurance, the other being universal life insurance. Whole life insurance policies have a cash value that grows at a guaranteed rate, while universal life insurance features more flexible premium options and its earnings are based on market interest rates.

Whole life insurance policies are further distinguished as participating and non-participating plans. With a non-participating policy, any excess of premiums over payouts becomes profit for the insurer, while a participating policy redistributes any excess of premiums as a dividend to the insured.

Whole life insurance is not suitable for everyone due to its high costs. However, it can be a good investment for high net worth individuals who have maxed out their retirement accounts, parents with lifelong financial dependents, and those who want to help their family pay estate taxes.

Universal life insurance: Permanent coverage with flexible premiums and death benefits

Universal life insurance is a type of permanent life insurance that offers flexible premiums and death benefits. It is a lifelong policy that allows the policyholder to adjust their premium payments and death benefit within certain limits. This flexibility can be particularly useful for those with fluctuating incomes.

Universal life insurance policies also have a cash value component, which functions similarly to a savings account. The cash value earns interest at a rate set by the insurer, which can change frequently but usually has a guaranteed minimum. The policyholder can borrow against this cash value, often at a lower interest rate than a personal loan and without a credit check. However, any unpaid loans will be deducted from the death benefit. The policyholder can also make partial withdrawals from the cash value.

One significant advantage of universal life insurance is that it can be cheaper than whole life insurance because it does not offer the same guarantees. However, it requires careful monitoring to ensure the cash value does not drop too low, as this could result in large payment requirements or even cause the policy to lapse. Additionally, returns are not guaranteed, and some withdrawals may be taxed.

Overall, universal life insurance can be a good option for those seeking permanent coverage, flexible premiums, and the potential for cash value growth. However, it is important to weigh the pros and cons before purchasing this complex policy.

No-medical-exam life insurance: Coverage without a physical exam

No-medical-exam life insurance, also known as no-exam life insurance, is a type of life insurance policy that does not require the policyholder to undergo a medical examination as part of the application process. Instead, the policyholder may be required to fill out a health questionnaire or provide medical records. This type of policy is designed for individuals who may have trouble qualifying for traditional life insurance due to pre-existing health conditions or high-risk occupations.

Types of no-medical-exam life insurance

The most common types of no-medical-exam life insurance include:

• Simplified Issue life insurance: This is the most common form of no-medical-exam life insurance. It typically involves completing a short health questionnaire and may require the disclosure of medical and pharmaceutical records. Simplified Issue life insurance is best suited for young and healthy individuals who want coverage without a waiting period. However, the premium for this type of policy is typically higher than that of a traditional life insurance policy.
• Guaranteed Issue life insurance: This type of policy offers limited coverage amounts at a predictable premium. Guaranteed Issue life insurance is suitable for individuals with health issues who have been rejected by other life insurers. While it may not provide sufficient coverage for an entire family, it can help cover final expenses.
• Accident protection insurance: This type of policy provides a lump-sum payment to beneficiaries in the event of the policyholder's death due to an accident, such as a car crash, but does not cover death by natural causes.
• Employer-sponsored life insurance: This type of no-medical-exam life insurance is offered as part of an employer's benefits package and is typically highly affordable or even free. The coverage is usually set as a percentage of the employee's salary or 1-2 times their salary. However, it may only remain active while the employee is still employed with the company, and the coverage amounts are often limited.

Benefits and considerations of no-medical-exam life insurance

No-medical-exam life insurance offers several benefits, including:

• A hassle-free and quick way to obtain life insurance coverage without undergoing a medical examination.
• No waiting period, an easy application process, and easier qualification criteria.
• An option for individuals with pre-existing health conditions or high-risk occupations who may otherwise be unable to obtain traditional life insurance.

However, there are also some considerations to keep in mind:

• No-medical-exam life insurance may cost significantly more than traditional life insurance policies that require a medical exam. Insurers take on additional risk by not having full insight into the policyholder's health, and this is reflected in the higher premiums.
• The coverage amount for no-exam life insurance may be capped, and individuals seeking higher coverage amounts to ensure their family's financial stability may still need to undergo a medical exam.
• Most companies will still require the policyholder to answer health-related questions or provide medical records, even if a physical examination is not required.

Factors affecting the cost of no-medical-exam life insurance

The cost of no-medical-exam life insurance, like traditional life insurance, is influenced by various factors, including age, gender, health, lifestyle, and medical history. Additionally, the type of policy chosen, such as term or whole life insurance, will also impact the cost. It is important to shop around and compare quotes from different insurers to find the most suitable coverage at a competitive price.

Riders: Add-ons to customise coverage, e.g. accidental death benefit

Riders are add-ons that allow you to customise your life insurance coverage to better meet your needs. They are available from most insurance companies, although the specific riders on offer will vary depending on the provider. Some policies include certain riders in their base premium, while others will require you to pay an additional premium or fee to add a rider to your policy.

Accidental Death Benefit Rider

This provides additional life insurance coverage in the event that the insured person's death is accidental.

Waiver of Premium Rider

If the insured person becomes disabled and unable to work, this rider relieves the policyholder of the obligation to make premium payments.

Disability Income Rider

If the policyholder becomes unable to work for a certain period of time (usually several months) due to a serious illness or injury, this rider pays out a monthly income.

Accelerated Death Benefit Rider

Upon diagnosis of a terminal illness, this rider allows the insured person to collect a portion or all of the death benefit while they are still alive.

Long-Term Care Rider

This rider is a type of accelerated death benefit that can be used to pay for nursing home, assisted living, or in-home care when the insured person requires help with activities of daily living, such as bathing, eating, and using the toilet.

Guaranteed Insurability Rider

This rider allows the policyholder to buy additional insurance at a later date without undergoing a medical review.

Frequently asked questions