7 biggest life insurance questions, answered

Wondering about life insurance? Maria Ferrante-Schepis knows the subject from top to bottom. She’s president of the innovation agency Maddock Douglas, author of Flirting With The Uninterested: Innovating In A 'Sold, Not Bought' Category, and an advisor to several life insurance companies. Here, she answers your most pressing questions, on everything from the different types of life insurance to when you should reassess your policy.

The two major types of life insurance are term insurance and permanent insurance. There are variations within each type. The most common variations of term insurance are 10-, 20-, and 30-year-level term insurance. The most common types of permanent life insurance are whole life insurance and universal life insurance. Two things explain the main differences between them:

How long it lasts: Term is temporary, and permanent can last until you die, as long as you keep paying your premiums (in other words, the payments you make for the policy on a monthly, quarterly, or yearly basis).
 
What it’s for: Term insurance has just one purpose: to pay money to your beneficiary or beneficiaries after you die. Permanent insurance has the same purpose, but it also has a second use: Because the money is invested, it allows you to accumulate money (similar to the yield on a savings account, or earnings on a mutual fund) that you can tap into while you are still living, usually without having to pay taxes on the earnings. This is the reason why term insurance costs less and permanent insurance costs more.

You should buy life insurance either from a professional you trust or an insurance company you trust. Some people choose to go online to start their application process and can talk to a professional either on the phone or using online chat if needed. This is typically most appropriate for people without complicated health issues who want to buy basic term life insurance.

For buying permanent insurance, it is usually easier to talk with an agent. If someone you personally know and trust is licensed to sell insurance, that would be a good starting point. You can also go to just about any insurance carrier’s website and it will usually have a section to find an agent or broker in your area. If you have a financial advisor, that person might also be licensed to sell insurance. If not, they are sure to know someone who is.

You don’t always have to meet face-to-face with an agent or broker. They may want you to, and you may prefer that as well. But if you don’t, they may be willing to work with you over the phone or on a video chat.

Also, if your employer offers life insurance, this is a benefit you should take advantage of. While it’s not usually enough to cover all your needs and it’s not usually permanent insurance, it is typically inexpensive and your employer may bear some of the cost, so why not?

A beneficiary is the person you want to receive the payout from your life insurance policy after you pass away. When you fill out your life insurance application, you’ll be asked to choose a beneficiary and include the person’s name, date of birth, and social security number so there is no confusion about who gets the money when the time comes. You can change the beneficiary as often as you wish after you buy the policy. The beneficiary doesn’t even need to be a person—you could include your church or a charity if you like. If no beneficiary is chosen, then the policy benefits will be paid to your estate after your death. You should make sure your beneficiary is aware there is a policy because they will need to file a claim form to receive the payout from the policy. If your beneficiary is a minor, be sure to let another adult know about the policy. This should obviously be someone you trust with confidential information.

The only restriction on who you choose as a beneficiary is that if you choose a person, he or she must have what’s called an “insurable interest.” This means your beneficiary either depends on you financially in some way, or there is some specific purpose for the funds, such as paying funeral expenses or estate taxes. Typical beneficiaries (you can choose more than one) considered to have an insurable interest are your spouse, your children, a business partner, someone you owe money to, or someone with whom you own property. Keep in mind that insurable interest only must be present at the time that the policy is purchased. If a dependent child is the beneficiary of their parent’s life insurance, they can remain the beneficiary even after they become independent without any questions or concerns.

Whether you need a medical exam depends mostly on the amount of life insurance you want to purchase. At the very least, you will likely need to answer medical questions on an application, including those related to health history. For higher amounts, usually over $100,000, there are typically in-person exams that include blood pressure testing, urine testing and/or blood drawing, and height and weight measurement. Blood and urine tests are designed to check for things like smoking/tobacco use, blood sugar levels, cholesterol, liver enzymes, HIV, and illegal drug use. Prices are higher when the tests reveal that you have a medical condition that has the potential to shorten your life. For issues that would shorten your life expectancy significantly, the insurance company may decline to give you a life insurance policy.

While medical questions and testing can be annoying and time consuming, ultimately they help insurance companies set the right prices for life insurance and collect enough money from each person to ensure the benefit is there when their family might need it. Additionally, medical exams for life insurance are free to you. The insurance company pays for them. And the results will be made available to you if you want them. There have been many people who have used the findings of their life insurance medical exam to start some great new habits, and even stop a few bad ones, creating a better, healthier outcome in the long run.

You can get life insurance if you are older, are healthy, and meet the insurance company’s medical guidelines. There are some companies that will offer life insurance to people as old as 90 if they are in great shape. However, it is important to keep in mind that life insurance is much less expensive for younger people than older people. In addition, if you develop some kind of medical condition later in life, you may not qualify for life insurance at all. So it is much better to buy life insurance when you are younger if possible.

While the cost of life insurance goes up annually, most modern life insurance policies are structured to keep premiums at the same level for the life of the policy, if you keep it that long. If you buy level term insurance or whole life insurance, your premiums will stay at the same level for the entire length of the policy. If you buy universal life insurance, premiums are somewhat flexible, but you can specify a premium level that won’t change over the life of the policy if you want. The way this is accomplished is that the carrier charges you more in the early years and less in the later years so that the premium can stay at the same level and you can budget better over time.

However, if you intend to switch around every few years, don’t expect to pay the same premium amounts; expect to pay more. The reason is that premium levels are based upon the age you are when the policy is taken out. Say a 35-year-old male and a 39-year-old male of excellent health apply for $500,000 of 20-year term life insurance. The 35-year-old would pay approximately $265 per year for 20 years, and the 39-year-old would pay approximately $350 per year for 20 years. But if the 35-year-old drops his policy at the age of 37 and then buys it again at 39, he will have to go through underwriting again. And assuming he is still in the same state of health and the same term life insurance product is still available, he would pay $350 per year for 20 more years.

The only time switching policies would result in a lower premium is if you had a medical condition that has dramatically improved or you’ve recovered from it completely. Or, if you have quit smoking for at least a year, sometimes two, you can reapply for a nonsmoking rate.

You should reassess your policy right before or right after any major change in your life. These changes include, but are not limited to: getting married, getting divorced, buying a home, getting a substantial increase (or decrease) in pay, having a child, taking on debt, starting a business, or becoming responsible for taking care of someone. When you reassess, you should be looking at both the amount of insurance and the type. It is also important to make sure your designated beneficiary is up to date. As an example, if you get married or divorced and don’t change your beneficiary, the policy payout could end up in the wrong hands, and it will leave your intended beneficiary in a bad situation. Since you can’t predict when you will die, you must be certain to keep your policy up to date. This is your responsibility primarily, but a good insurance agent or broker will check in with you at least annually to ask if anything has changed. If it has, your agent or broker will help you make the necessary adjustments.