Life insurance can help ensure that your dependents have the resources they need to replace your income should 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 help you get the coverage you need at a price you can afford.
- Most life insurance policies will require that you answer medical questions and submit to a medical exam.
- "No-exam" policies exist, but they usually cost more and have a lower face value.
- It's important that you tell the truth during the application process, or your beneficiaries may be denied a death benefit.
Determining Your Life Insurance Coverage Needs
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. A local insurance broker can help you understand more about your options.
One you have decided to purchase life insurance, you'll need to determine your coverage amount by considering how much your beneficiaries will need after you die, and how much you already have covered through personal assets or group term insurance (such as a policy offered by your employer).
The amount of life insurance coverage you will need depends on several factors, including the age of your dependents, your spouse's earning ability, any debt you may have, and your combined financial resources.
Medical Questions on the Life Insurance Application
You will need to apply for 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 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, such as which medications you take or any surgeries you've had, on the application. These no-exam life insurance—such as guaranteed issue life insurance and simplified issue life insurance—are usually more expensive and have a lower face value than insurance that requires a medical exam.
The Life Insurance Medical Exam
Most companies and policies 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 (e.g. exercise, smoking, drinking, recreational drug use, frequent travel, 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. They 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 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 whether you submitted a complete application, how long it takes to receive lab results, if the company requests information from your physician, and so on.
If Your Coverage Is Denied
If you "fail" the medical exam and the insurance company declines to cover you—or if it offers to cover you at a higher rate due to the results of your exam—you have a few options. You can pursue group term life insurance through your employer, which often doesn't require a medical exam, ask your insurance broker if there is a company that will work with your medical status, or try for a no-exam policy. If you are offered a policy but aren't happy with the rate, you can purchase it for now and then ask to be re-evaluated at a future date (and aim to improve your health during that time). And, of course, you can enquire with more than one insurance company.
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 leads to lower cholesterol levels, lower blood pressure, and a 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 medical exam to get a picture 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:
- 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 you or your beneficiaries. Types of riders include:
- Accidental death 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
- 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 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.
- 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 website and review it; incorrect information could negatively affect your premium.