Before diving in and purchasing life insurance, it is vital to understand exactly what features to look for when comparing the best life insurance companies. There are various types of life insurance that are designed to fit a wide variety of needs. Moreover, some providers offer customizable policies with added provisions known as “riders,” which can add valuable benefits.
What Life Insurance Companies Offer
Life insurance policies are designed to grant beneficiaries or loved ones a sum of money in the event of your death. This can also extend to cases that require intensive medical care, or scenarios in which an individual is unable to provide for themselves or their family due to disability. Insurers have different processes for approving applications, but will generally consider health, lifestyle, and related factors when determining the right level of coverage to offer. Life insurance is an excellent way to guarantee that loved ones will be able to maintain their standard of living and cover basic needs even if you’re not there to provide for them.
Life Insurance Basics
Before diving in and purchasing life insurance, it is vital to understand exactly what features to look for when comparing the best life insurance companies. There are various life insurance options that are designed to fit a wide variety of needs. Moreover, some providers offer customizable policies with added provisions known as “riders,” which can add valuable benefits. While the vast majority of applications are approved, the application process helps the insurer to determine the amount of coverage and the rates—so do take the process seriously.
What Are the Types of Life Insurance
There are many kinds of life insurance policies, and each offers its own unique benefits. Here are some of the most common options:
- Term life insurance: This type of policy is not permanent, but rather covers a specific term, as the name implies. Companies will offer different terms, ranging from 5 to 30 years, but these policies will only provide coverage for the specified period. These are ideal if you’re looking for an affordable and easy-to-understand alternative. Some life insurance companies take it a step further by offering an alternative known as a convertible term insurance, which can be turned into a whole life insurance policy once the original term expires.
- Whole life insurance: This life insurance policy covers an entire lifetime, and will provide the benefits to beneficiaries after passing, no matter when it occurs. These policies also accumulate value over time. Generally, whole life policies have higher premiums, which can be paid over the course of a lifetime, or during set terms. These policies also tend to pay out annual dividends which can be a great benefit, but they are more expensive than other options, and therefore not ideal for everyone.
- Universal life insurance: This type of coverage is like whole life insurance, but allows greater flexibility in that you can adjust premiums and the death benefit, and also use the cash value that the policy accrues over time. Premiums will be adjusted accordingly. This type of life insurance is more complex than whole life, and the cash value accrual is based on the insurer’s investment strategy. These policies are a good choice if you want to maintain permanent coverage even if your income is less during your retirement, especially due to the attractive ability to borrow against the cash value of the policy.
- Variable life insurance: Although similar to whole life insurance policies, variable life insurance sets a minimum death benefit and fixed premiums. One of its most attractive benefits is the ability to improve the rate of cash value returns based on your investment portfolio. Part of the regular premium payments go toward funding this portfolio.
Don’t Just Rely on Group or Employer Life Insurance
But what about life insurance provided by an employer? If your company offers free life insurance, then sign up for this free benefit—but don't stop there. Many companies offer their employees a certain amount of insurance for free, but this is usually not enough.
Usually, you can purchase supplemental insurance through your company's benefits, but this insurance does not travel with you if you move jobs—unless your company allows you to pay an expensive premium price to take your policy with you. So, if you want to fill in any gaps in coverage and make sure you can take that coverage with you if you change jobs, an individual term life policy might be worth checking out.
How Much Life Insurance Coverage Do I Need?
It can be daunting to figure this out but evaluate your current financial situation today, and what foreseeable expenses will need to be covered 10 to 20 years down the road.
When deciding how much coverage to purchase, ask yourself these questions:
- How long do I need coverage? If you just got married and are starting a family, you will need at least 20 years of coverage to ensure that your children are provided for until graduation.
- How much can I afford? Find the balance between buying enough coverage and having a monthly premium that fits in your budget. The more coverage you purchase, the more expensive your premium (the amount you pay) will be.
- What will my family need if I pass away today? If something were to happen to you today, there would be a lot of financial expenses placed on your family's shoulders.
Whether you choose term or whole life insurance depends on your current and future financial needs. Either one is essential to have, especially if you have loved ones who rely on you for financial stability.
How to Check Your Insurer’s Financial Strength Rating
While it’s good to know the state guaranty association has your back, you should still look to purchase your policy from a financially stable insurer. If your insurer becomes insolvent, there are limits to how much your state guaranty fund will cover. Moreover, state guaranty funds typically take more time to pay out than the insurers themselves – and waiting times have been known to reach two to three years.
When shopping for insurance, most consumers compare providers by monthly premium, excess, and perhaps customer service. We recommend also checking the insurer’s financial strength rating–freely available on the websites of 4 major credit rating agencies and a handful of smaller agencies.
- A.M. Best. The only one of the rating agencies dedicated specifically to rating the insurance industry.
- Standard & Poor’s. Also known as S&P, this is one of the two major U.S.-based credit-rating agencies.
- Moody’s. The other major U.S. based-credit-rating agency.
- Fitch. The smallest member of the “big three” rating agencies, Fitch is dual-headquartered in New York and London.
Life insurance is regulated on a state-by-state basis across the United States. Most states do not regulate policies from the outset when coverage is first initiated like they normally do with vehicle or health insurance. This means that rules generally apply to the claim period, when beneficiaries are awarded the payout. Because the regulatory environment varies by state, it is essential to be familiar with local laws when applying for coverage.
Underwriting and Getting Approved
Underwriting is the process by which life insurance companies, and other financial institutions, determine how risky it is to offer potential policyholders their services. Financial providers have advanced and specific formulas that help them determine a person’s risk level. For life insurance, these formulas include health history, current status, and even information regarding driving history along with past and present medication use. Although it might appear invasive, these factors must be evaluated to offer a policy that matches a your needs, while also taking care of life insurance provider.
Before getting started, it's important to make sure you are prepared for a process that could potentially take more than a few weeks to complete. This is simply because of the amount of information needed, and the time it takes to analyze some of the more detailed documents insurers generally request for submission.
The First Step: The Application
The information you submit during the application process has a significant impact on whether your request will be approved or not. At this step, a life insurance provider is concerned with familiarizing themselves with a potential policyholder while finding out the basic details that will form the basis of the underwriting process. Insurance companies use an application to review basic vital statistics including age, weight, height, and gender. However, this section also includes some questions regarding lifestyle activities, such as participation in extreme activities, exercise habits, and other similar questions, as well as a basic overview of your medical history. While these might seem intrusive, they are designed to help expedite the underwriting process.
This part of the underwriting process might seem intimidating, but is generally quick, and in many cases, can be skipped altogether. After submitting an application for review, most life insurance companies will request a quick paramedical exam, which is usually free. This exam generally takes less than an hour and is just a simple check up to ensure what was written in the application is accurate. This includes a checking blood pressure and pulse, verifying weight and height, and taking blood and urine samples. This process should not take long, although in some cases, some insurers will ask you to provide a document known as an Attending Physician Statement, or APS. This will be requested if a provider feels they need more information, but is generally not required as it can be expensive and can be time consuming.
The Review Process
Once these steps have been completed, an insurer will move forward with the review of the materials provided. Additionally, a life insurance company will also request and examine a few other public records to properly assess risk levels. This includes reviewing your motor vehicle report, which includes a history of prior car accidents, citations, crimes, and even DUI reports going back 5 to 7 years. An insurer will also review the corresponding Medical Information Bureau (MIB) report. The MIB is a trade group that tracks customers’ history of life insurance and medical reports submitted during applications. This report is used to help prevent fraud, as insurers can examine previous applications and compare with the current one to make sure all the information lines up.
A Brief Interview
This part of the underwriting process is a small informal phone call with one of an insurer’s agents. This is not required by all life insurance providers, and in many cases, can be skipped to go directly to the approval stage. During this conversation, the provider will review answers provided during the application. Agents might ask about lifestyle habits—if you enjoy dangerous activities, work out, smoke, and more—as well as corroborate information provided regarding medical status. Be prepared to provide truthful and detailed answers as the best way to guarantee the most favorable outcome during the approval process. Overall, this process only takes a few minutes, outside of scheduling a time to speak with an insurance agent.
After an application and all required documentation have been thoroughly analyzed, a life insurance provider will proceed to the approval stage. As opposed to other financial services, life insurance policy approval is highly likely. Only roughly 4% of applicants for life insurance policies get rejected outright. However, approval is not a simple yes or no answer, and all the pertinent information delivered during the application will be used to determine the premium, amount of coverage, and other policy specifics. Life insurance providers will generally give a rating for the approval based on the application as well as a series of tables, including mortality, body mass, and a “credit” table that can offset negative factors with positive attributes such as healthy lifestyle choices. Approval ratings will generally be within one of these five categories:
- Approved Standard: This is the most common rating received, and translates into receiving standard rates and premiums, including the quotes initially offered. Approved standard also means that premiums will remain locked in for the duration of a policy’s term, as these rates cannot be changed later due to lifestyle risks and other factors.
- Approved Preferred Rates: If an application shows the insurer that you lead a healthy and less risky life, they may approve the policy and offer a significantly discounted rate. This discount can in some cases reach as high as 30% and translate into thousands in savings down the line. Oftentimes, insurers will give the opportunity to change the amount of coverage and keep the premium the same, or leave coverage unchanged and receive a lower premium.
- Approved Substandard: If an insurer decides that there are numerous risks in your application, they may choose to offer approval at much higher rates compared to the Approved standard status. This may drive premiums as high as 500% of the average rate and can be influenced by lifestyle choices such as smoking, unhealthy eating habits, and a history of dangerous behaviors. Unlike standard approval, however, rates can improve over time if an insurance provider is shown evidence that the factors that led to your substandard approval have been corrected.
- Postponed: This does not mean that an application was rejected, but rather that the insurance company discovered a risk factor or condition that may become more prominent down the road. While this is not an outright rejection, it may leave an applicant uninsured for some time as the insurance provider is unlikely to immediately reevaluate the application. In these cases, it makes sense to look at other alternatives in case the original insurer choice takes too long to review the outstanding case.
- Rejected: While this is undoubtedly a negative outcome, it doesn't mean that you can't be insured. If rejected, the first step is to request the rationale behind the denial directly from the insurance company. However, it must be noted that when working through an insurance broker, the broker is not authorized to receive that information. Additionally, the decision can be appealed and overturned in certain cases. If the appeal process is unsuccessful, it may be worthwhile to attempt to apply with a different insurance provider.
Your Family's Future Is In Your Hands
Getting the right life insurance policy can give you and your family peace of mind should your circumstances take a turn for the worse. As this is a very important decision that could affect the future of your family, it’s important to compare all the best life insurance companies available and choose the one that best suits your needs.