Life insurance can help ensure that your dependents have the resources they need to replace your income after you die. But how do you go about purchasing coverage? And what can you do to get the best possible rate? Understanding the process for obtaining life insurance can provide you with options for getting the coverage you need at a price you can afford.
Determining Your Policy and Coverage
There are two main categories of life insurance - permanent life insurance (which provides coverage for your entire life) and term life insurance (which provides coverage for a set period of time). You can learn more about life insurance options by contacting a local insurance broker (look in your phone book under "insurance agents") and by getting information from reputable insurance websites such as Insure.com, Accuquote.com and InsWeb.com. (Learn more about your options in Buying Life Insurance: Term Versus Permanent and Five Life Insurance Questions You Should Ask.)
One you have decided to purchase life insurance, you'll need to determine your coverage amount - how much your beneficiaries will need after you die. Selecting coverage depends on several factors, including the age of your dependents, your spouse's financial ability and your combined financial resources. (How Much Life Insurance Should You Carry? can help you determine coverage.)
Tips for the Application Process
You will need to complete an application to purchase life insurance. The application will ask for basic information, such as your name, address and employer.
It will also ask for the following personal information:
- date of birth
- lifestyle habits (i.e., smoking, drinking, exercise)
- financial information, including your annual income and net worth
While it may be tempting to lie about your weight or other health issues, it's important to tell the truth. If the company discovers that you lied about a health condition or lifestyle, it can increase your premium, cancel your policy and/or deny a beneficiary's claim to the death benefit.
Some insurance companies will accept your answers to health-related questions on the application. However, most companies require an in-person medical exam. A life insurance agent will arrange for a paramedical (a licensed healthcare professional contracted by the insurance company) to meet you at your home, office or a clinic selected by the insurance company.
During the exam, the paramedical will likely:
- take your medical history (including medical conditions, surgeries and any prescription medications)
- ask about your immediate family's medical history
- take your blood pressure
- listen to your heartbeat
- check your height and weight
- draw a blood sample
- get a urine sample
- ask about lifestyle habits that could affect your health (such as exercise, smoking, drinking, recreational drug use, frequent travel or high-risk hobbies)
There may be additional tests you need to undergo depending on your age, the type of policy you want and the amount of coverage you're applying for. Additional tests could include an EKG, a chest X-ray, and/or a treadmill test.
Next, an underwriter at the insurance company will review your application and medical exam results. He or she may order medical records from your physician to learn more about any medical conditions you may have and any treatment received. This information helps them determine what risk you represent to the company financially and how much to charge you for coverage. If you lie about a medical condition, the insurance company may not only deny you coverage but may also "red-flag" you, meaning that other insurers will know you were denied coverage because you lied.
Once your application and medical exam have been reviewed, the company will either approve or deny your request to purchase coverage. That process can take days or weeks, depending on if you have submitted a complete application, how long it takes to receive lab results, if the company requests information from your physician, and so on. (Once you're approved, learn how to understand the key parts of your policy by reading Life Insurance Clauses Determine Your Coverage.)
Ways to Reduce Your Life Insurance Premium
While you can't do anything about two of the three main factors affecting your insurance premium (age and family medical history), there are steps you can take regarding the third - lifestyle. You could lower your insurance premium if you:
Quit smoking. As a non-smoker you are likely to live longer, meaning the life insurance company will have more years to collect your premium payments before having to possibly pay out on the policy when you die.
Lose weight. Weight loss often means lower cholesterol levels, lower blood pressure and lower risk of developing chronic diseases like diabetes. All of these improvements to your health can make you a better insurance risk.
Reduce or eliminate your alcohol intake. Drinking can pose a potential health risk. Life insurance companies will check your application, driving record and your medical exam to get a grasp of your drinking habits. Drinking less alcohol - or stopping entirely - makes you less of a risk for the company and therefore you'll likely be rewarded with a lower premium.
- Improve your driving. Insurance companies can hike your premium if you have multiple moving violations.
Other non-lifestyle-related ways to reduce your premium include the following:
Switching from permanent to term life insurance. Depending on your age and how long you expect to need life insurance coverage, you may want to consider switching to a term policy. Check the cancellation policy on your current coverage before making a change.
Switching insurers. You may be able to get similar or better coverage for less money.
Eliminating riders. Riders are optional policy provisions that pay additional money to your beneficiaries. Types of riders include these five:
- accidental benefit rider - pays your beneficiaries if your death was the result of an accident
- children's term life insurance rider - pays if a child covered under your life insurance policy dies
- waiver of premium rider - pays your policy premium if you become permanently and totally disabled
- living benefits rider - pays a portion of your death benefit payment in advance if you are diagnosed with a terminal illness or if you require long-term care or nursing-home services
payor rider - waives premiums if you die or become disabled before a covered dependent child reaches a certain age (Find out how riders can help you customize your policy in Let Life Insurance Riders Drive Your Coverage.)
Looking for "no-load" or "low-load" policies. These policies are often less expensive because insurance agents charge a flat fee rather than a steep commission.
Asking about payment discounts. You may get a discount for paying your bill in full annually rather than paying monthly. Insurers may also give a discount for having your payment automatically withdrawn from your checking account.
Reviewing your credit report. Insurance companies can review your credit report when determining your premium. Paying your bills on time (which is noted on your report) assures the company that you are likely to pay your premium on time and in full.
Choosing a company that has experience covering people with your condition. If you have a medical condition, a broker can help find a company that is likely to work with you and may provide a better rate class.
- Reviewing your Medical Information Bureau file. Insurers share information on applicants' medical conditions through the Medical Information Bureau (MIB). Request a free copy of your file from the MIB's website and review it; incorrect information could negatively affect your premium.
Take the time to educate yourself about your life insurance options. A good insurance broker can help walk you through the process and find the policy that provides the coverage you need at a price you can afford.