Life Events

How do insurance companies classify individuals for rate purposes?

Insurance companies categorize individuals into four risk groups: preferred, standard, substandard, or uninsurable. The classification directly impacts the premium rates:

• Preferred: Individuals in good health with no risky behaviors or occupations typically fall into this group, enjoying the lowest premiums.
• Standard: People with average health and no significant risk factors.
• Substandard: Includes individuals with chronic illnesses or high-risk jobs or hobbies. They pay higher premiums due to increased risk.
• Uninsurable: Those with terminal illnesses at the time of application fall into this category, making them ineligible for coverage.

Each insurance company has its own criteria for classification, so it’s beneficial to shop around, as different companies may assess your risk differently.

What questions should I ask my life insurance agent?

When evaluating life insurance policies, consider asking these questions:

1. How do cash values accumulate? Understanding the growth rate and accumulation speed is crucial. Early, rapid accumulation is generally more favorable.
2. How has the policy’s cash value performed in the past? Compare the actual performance with the insurer’s projections and those of other companies.
3. Are any special features beneficial to me? Distinguish between necessary benefits and added features that may not provide actual value.
4. What is the insurer’s financial stability? Check the company’s rating with organizations like A.M. Best, Standard & Poor’s, and Moody’s to ensure its reliability and stability.

What should I watch out for when buying life insurance?

When purchasing life insurance, be mindful of:

• Complex policy provisions: Some policies combine investment and insurance, making them hard to compare. Understand what you’re buying to avoid unexpected costs.
• High commissions: Be aware that up to 80% of your first-year premium might go to the agent. Ensure that the cost aligns with your financial goals.
• Safety of investment: Verify the insurer’s financial health. A company’s poor financial status could jeopardize your investment and coverage.

How do I compare the cost of several insurance policies?

Use cost indexes to evaluate policies:

• Net Payment Index: Measures the cost of keeping your policy over 10-20 years. Lower numbers indicate a less expensive policy.
• Surrender Cost Index: Focuses on the policy’s cash value for those who prioritize investment. A lower index suggests better value.

For universal life policies, consider both cash value growth and cash surrender value. Typically, the policy with a higher cash surrender value is more advantageous.

Do I really need life insurance?

The necessity of life insurance depends on your circumstances:

• Families or single parents with dependents: Need substantial coverage to replace income and support dependents.
• Adults without dependents: May need less coverage, primarily to cover debts and burial expenses.
• Single adults: Typically require minimal coverage unless used for estate planning.
• Retirees: Might have reduced needs unless used for specific purposes like covering estate taxes or providing for a spouse.

How much life insurance should I buy?

Calculate the amount of insurance by assessing your annual expenses, assets, debts, and other income sources. Consider a coverage amount that allows dependents to maintain their standard of living by investing the principal without depletion. Avoid using generic rules like “five times your salary” without conducting a detailed needs analysis.

What type of life insurance should I buy?

After determining coverage needs, choose between term and cash value insurance:

• Term Insurance: Provides coverage for a specified period, with no cash value component. Ideal for those under 40, as premiums are lower than whole life policies.
• Cash Value Insurance: Includes whole life, universal life, and other policies that combine insurance with an investment component. Offers lifelong coverage with a cash value that grows over time.

Types of Term Insurance:

1. Renewable: Automatically renews without a medical exam but at a higher premium.
2. Re-entry: Requires a medical exam upon renewal.
3. Level: Premium remains the same for a set period.
4. Decreasing: Face amount decreases over time, useful for mortgage protection.

Types of Cash Value Insurance:

1. Whole Life: Offers a death benefit, fixed premiums, and guaranteed cash value growth.
2. Universal Life: Flexible premium payments and cash value growth, but requires careful monitoring to prevent lapse.
3. Variable Universal Life: Offers investment choices with potential for higher returns but includes risk.
4. Variable Whole Life: Cash value and death benefit depend on investment fund performance.

Should children have life insurance?

Children typically need only enough coverage for burial expenses and medical debts. However, 25% of cash-value policies cover children under 18. Alternatives to consider include self-insuring or adding a rider to a parent’s policy.

How do I balance life insurance with my other investments?

• For new policies: Opt for term life insurance and invest savings in tax-deferred retirement accounts like IRAs and 401(k)s.
• For existing cash-value policies: Retain them as they provide conservative, long-term investment growth. Balance with higher-yield investments like stock funds for better returns.