Life Insurance: Who Qualifies And Why?

Life insurance is an essential part of financial planning, offering peace of mind and security for you and your family. There are several types of life insurance policies, and understanding the differences between them is crucial for making informed decisions about your future. The two primary categories are term life and permanent life insurance, with the former offering coverage for a fixed period and the latter providing lifelong protection. Within these broad categories, there are various options, such as whole life, universal life, and variable life, each with unique features and benefits. Life insurance companies use several factors to determine policy rates, and it is important to be aware of the legal and illegal bases for discrimination in insurance.

Term life insurance

There are a few types of term life insurance: fixed term, increasing term, decreasing term, and annual renewable. Fixed term is the most popular choice. It is the most basic version and lasts 10, 20, or 30 years. The premiums remain static in this plan. Increasing term allows you to scale up the value of your death benefit throughout the term, but your premiums will slightly increase over time. Decreasing term reduces the premium payments over time, which can result in a smaller death benefit. Annual renewable provides coverage on a yearly basis and must be renewed by the policy end date to continue coverage. The premiums usually increase each time the plan is renewed, and this option is best for those in need of short-term coverage.

Permanent life insurance

Whole life insurance is a common type of permanent life insurance. It covers the policyholder for their whole life, and premiums remain the same even as age and health change. It also includes a cash value component that grows over time. Universal life insurance is another type of permanent life insurance, which differs from whole life insurance in the amount of flexibility offered. Premium payments can be adjusted over time, and the savings component, or cash value, grows based on the investment methods chosen by the policyholder. Variable universal life insurance offers even more flexibility, allowing policyholders to invest their cash value in sub-accounts tied to the market. However, this also means that the value of the cash can decline.

Whole life insurance

One of the main advantages of whole life insurance is that it provides permanent coverage that lasts your entire life. This means that, unlike term life insurance, you don't have to worry about the policy expiring or renewing it periodically. As long as you keep paying the premiums, your coverage will remain in force. Additionally, whole life insurance offers a guaranteed death benefit, ensuring that your loved ones will receive a payout regardless of when you pass away.

While whole life insurance offers comprehensive benefits, it tends to be more expensive than term life insurance. The premiums are generally higher, reflecting the long-term nature of the coverage and the guaranteed death benefit. When considering whole life insurance, it's essential to weigh the costs and benefits against your financial goals and long-term planning.

Universal life insurance

There are several types of universal life insurance policies, including variable universal life insurance, indexed universal life insurance, and guaranteed universal life insurance. Variable universal life insurance allows policyholders to invest their cash value in sub-accounts of their choosing, similar to a brokerage account. This option provides more investment choices but also assumes more risk, as the cash value could decline if investments do not perform well. Indexed universal life insurance ties the cash value to a stock market index, such as the S&P 500 or NASDAQ, allowing growth based on the index's performance. Guaranteed universal life insurance has minimal cash value growth and lower premiums, providing less flexibility than other universal life insurance plans.

Discrimination laws

Life insurance companies are legally allowed to discriminate based on age when setting policy rates. This is because premiums are set at actuarially fair levels, which means that the amount paid by an individual reflects their risk group. For example, older people often have higher premiums due to their higher expected healthcare costs.

However, it is illegal for life insurance companies to discriminate based on race, disability, or gender. Such practices violate various laws intended to promote equality and fairness, such as the Civil Rights Act of 1964 and the Americans with Disabilities Act.

Historically, the insurance industry has used race-based premiums, redlining, and other biased practices to discriminate against protected classes. For example, in 1940, the NAIC published a study that examined mortality rates by race, which insurers then used to set race-based premiums. This resulted in Black individuals being offered more expensive policies that covered less, with premiums up to 30% higher. Beginning in 2000, the insurance industry paid out $556 million in restitution and fines for lawsuits related to race-based policies sold in the 20th century. Race-based premiums were finally banned in 1964 with the passage of the Civil Rights Act.

Today, insurance companies use underwriting guidelines to set rates and determine eligibility. While companies claim that these guidelines are based on actuarially sound criteria, consumer advocates argue that rates should be determined by factors that individuals can control. In addition to age, some of the factors considered during the underwriting process include height, weight, blood pressure, and family medical history.

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