Breaking down the basics of life insurance, in less than 20 questions!Submitted by Foundation Private Wealth Management on May 28th, 2019
Applying for life insurance can feel like a daunting task and probably somewhat of an uncomfortable thing that you'd rather not think about anyway. The harsh reality, though, is that it’s one of those things where "it's better to be 10 years early than 10 minutes too late.”
So, to help with any questions you may have - because no question is too silly to ask - here is a quick review of some of the basics.
1. Is it possible that I already have life insurance provided by my employer?
It’s possible that you do. Here in Ottawa, many Federal Government employees have life insurance as a part of their group benefits package, usually amounting to two times their annual salary. Some larger companies will also offer similar plans to their employees through their group insurance as well, though it’s not always a function of salary.
There are two problems with assuming that this is all you need. First, it's often not enough to even cover off basic debts, like a mortgage, let alone provide some sort of a replacement income to your loved ones. Second, because these are group policies that are provided with no medical exam, if you leave your job or change employers for any other reason, you usually can't take that life insurance coverage with you, which can leave you unprotected during an already potentially unsettling time.
2. Do I have to take a medical exam to get a life insurance policy?
The short answer here is yes. If you're looking for the best coverage, with the lowest premiums, you're going to need to go through some form of medical exam.
3. Why is it important to take this medical exam?
The main reason is because the insurer wants to assess the risk of paying out the death benefit on your policy, which will determine how much you'll need to pay for coverage. As a rule of thumb, the younger and healthier you are, the less you pay because, to be blunt, the risk of a premature death is lower. It’s an uncomfortable thought, but that’s the reality that determines what you pay for your insurance.
4. What does this medical exam entail?
A typical medical exam includes a paramedical, where they ask you a few personal questions about your height, weight, lifestyle, and medical history, and they'll take your vitals. Sometimes additional tests, like a blood test, urine test, or EKG are required too.
In a few instances, assuming you have a fairly clean medical history, there are companies that offer their best rates even without a full medical exam, if you fall under a certain age and don't exceed a specific death benefit. For example, Manulife offers their term insurance with no medical exam if you meet some basic health criteria, are under the age of 40, and are applying for $1 million or less of insurance. And it can all be done electronically!
If you're concerned about the medical exam, due to your personal history or otherwise, there are options for non-medical or guaranteed issue insurance. Though these options are more expensive than the underwritten policies, there are typically options available that can fit most budgets.
The bottom line is, if you have any reservations about taking about the medical exam, it's best to speak to a licensed insurance broker, like us, who can talk about your history with you and come up with a plan to find the best solution for your situation.
5. So can I go book an appointment to see my regular Doctor?
Unfortunately, not. Though it's probably more comfortable to have someone you know take care of this for you, the insurer wants to make sure the person administering the test isn't biased or unqualified.
However, the companies that are hired to do these medical exams are third parties that aren't affiliated with the insurer, and they're constantly being monitored for their professionalism, effectiveness, and demeanor, to ensure your experience is a good one. And the best part is you have access to all of the info the insurer gets, so you get a nice little picture of your health to see where you're at!
6. What sorts of things are they testing for?
The big things they're looking at is whether your weight is under control, your blood pressure, blood sugars, and cholesterol aren't too high. They'll also test for nicotine and other substances in your blood.
7. So I should try to shape up and get my health in order before getting tested? (Lose some weight, quit smoking, etc.)
If you're planning on going keto or trying some other quick fix to drop some pounds, that's probably not going to help you when it comes to applying for insurance. One of the questions on the paramedical is whether your weight has changed (up or down) by 10 pounds or more in the past year, and why.
That said, if you're concerned about your weight, it's never a bad idea to take steps to get that better under control, as there are all kinds of other benefits, like lower blood pressure and things like that, that often accompany weight loss. So, the fact that you've recently gained or lost weight shouldn't stop you from applying, but just be prepared to provide a brief explanation for any significant weight changes.
Also, there are plenty of reasons why quitting smoking is a great idea, with lower insurance premiums just being a side benefit. That said, if you smoke cigarettes, you're going to be classified as a smoker, which means you’ll be paying rates that are quite higher than if you’re a non-smoker. If you only partake in the odd big cigar on special occasions, you're probably not going to get labeled a smoker, as most companies allow for 12 to 52 (yes, that's one per week) cigars per year without considering you a smoker.
However, if you're hoping to quit cold turkey and apply for insurance the next week, you're going to be disappointed as you’ll still be paying smoker rates for a little while. Most companies require you to have quit for 1 or 2 years before they'll consider you a "non-smoker." The good news is, if you are a smoker when you apply, and you do quit, you usually don't need to go through the whole medical exam process to reapply for a new policy. Most of the time you sign a form saying that you have quit smoking, get your doctor to sign it, and pass it on to the insurer for a reduction in premiums.
8. Will a prior history of unhealthy habits or illness drive up my insurance premium?
It could. Either way, it's really important to disclose it to the insurer.
Leaving the morality about lying aside, the real answer is because your insurer will probably find out about it anyway.
When you go through the medical exam process, the insurer is getting a pretty good picture of your overall health, through your medical history, paramedical results, statements from doctors who treated you (if required), prescriptions, etc. If things don't match up with what you're telling them, the underwriters will dig in further until they get the full story.
11. Who is an underwriter and what do they do?
The underwriter is the person in charge of figuring out where you fit on the risk scale, which in turn determines the premiums you will pay, kind of like what we touched on in question 3.
12. If I lie to the underwriter will they find out?
It typically depends on WHEN they find out. If they find out before the policy is written, then they'll possibly offer you a policy with a higher premium to factor in the stuff you didn't tell them about, or they'll flat out deny you coverage (which is very bad, because you will have to disclose that when applying for insurance for the rest of your life). If they find out you lied when your beneficiary is making a claim on the policy after you've passed away, they won't pay out the death benefit you've paid for, and they'll just refund your premiums.
13. What's a death benefit?
That's the amount of money your beneficiary (or beneficiaries) receives in the event of your death. It's not something any of us likes to think about. But yeah. That's what it is, and that's what we have life insurance for, so I guess that's what they call it.
14. Is that the only way life insurance is paid out?
Not exactly. Depending on the carrier and the type of policy you buy, there are a few options for accessing some of the value in your policy before you pass, like in the event of a terminal illness. There's also the option, in the case of a permanent insurance policy, of borrowing against the value of the policy (because the policy is paid for, and the death benefit is a guaranteed payment of the loan). This can be an effective financial planning tool for retirement income planning.
15. What is permanent insurance?
There are two types of life insurance - permanent and term. Permanent insurance is usually more of a financial planning tool than a life insurance policy, as it is usually purchased to preserve the value of one's estate by paying final taxes, passing on wealth to the next generation, or to build up value to borrow against for retirement income (as mentioned in question 14).
Term insurance is there to protect your family for a set time frame, in the event of a premature death. With a term policy, you know exactly what you’re going to pay over the defined term, which is great for both budgeting and peace of mind.
16. So which one is better, term or permanent?
For most people, term insurance is the best solution for what they need. It's the lower-cost option of the two, it's flexible, and it's simple.
As we've touched on, there are plenty of instances where a permanent policy is a great option, but we're always here to help identify those situations and propose those ideas to you when they make sense for you.
17. Who decides who my beneficiary is?
That's ultimately your decision and yours alone. Your spouse is often the most logical option, as you typically purchase a life insurance policy to protect your family in the event of your death. However, there are many other situations and reasons for naming a variety of different people as your beneficiary. If you're not sure who makes sense, don't be shy to ask. We're here to help.
18. How will the insurance company know I have died?
In short, they have to be told. Your beneficiary will need file a claim form and provide a death certificate to the insurer in order to receive the death benefit.
19. Last question: Now that you've given me all this info, why should I work with you and not just go directly to the insurer?
Apart from the obvious reasons; the dashing smile, quick-witted charm, and mediocre dad jokes, the real reason is because you get all of the expertise we have to offer - answering any and all questions, providing tips and ideas that you may not have gathered on your own, and building a solution that perfectly suits your situation - and you don't have to pay anything more for it. Yes, we are compensated by whatever company we use, but as insurance brokers we have the entire Canadian universe of companies to find you the best, most cost-effective solutions, and the price is the same whether you deal with us, directly with them, or through a third-party, online retailer. To book a no-obligation meeting to discuss your insurance situation, click below!
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