Frequently Asked Questions
Premiums vary among insurance companies so it’s a good idea to comparison shop in order to get the best premium. It’s also helpful to understand how premiums are calculated by insurers. Here’s a quick look at how this works.
Insurance companies place individuals into four risk groups: preferred, standard, substandard, or uninsurable. A terminal illness at the time you apply for insurance will render you uninsurable. Having some type of chronic illness will place you in the substandard category. People with conditions such as diabetes or heart disease can be insured, but will pay higher premiums.
If you have a high-risk job or hobby, you will be considered substandard, a high risk.
The premiums charged will be commensurate with the category you are placed in. Thus, a standard risk will pay an average premium for similarly situated insurers.
One company’s category for you may not be the same as another company’s category, so it still pays to shop for insurance with other companies even though one may have labeled you “substandard.”
Once an insurance company approves you for coverage, you cannot be dropped unless you stop paying your premium.
What questions should I ask my life insurance agent?
Here are some questions to ask about policies:
- How do cash values accumulate? An early, rapid build-up is generally preferable.
- How has the policy’s cash value performed in the past? You can get this information from a publication called Best’s Review, Life-Health Insurance Edition. Determine how the policy performed in comparison with the company’s projection and with other insurers.
- Are any special features merely bells and whistles, or do they add value for you?
- What is the company’s rating with A.M. Best, Standard & Poor’s, and Moody’s? You can find these publications in public libraries or online. The rankings should be in the top three to ensure that a company has financial stability.
What should I watch out for when buying life insurance?
Policy provisions that are hard to understand and compare. Many insurance company products contain investment features as well as insurance elements. Because these insurance products are very complex and have many variations, most clients cannot understand them. As a result, rates cannot easily be compared.
Pushing inappropriate policies. Make sure your agent carefully identifies your needs and explains why the policy is suitable for you. You may want to have your accountant or financial planner review any recommended policies before you make any purchases.
High commissions. Make sure you review the costs of any recommended policy carefully. As much as 80 percent of your first-year premium might go into the pocket of the insurance agent.
Due to administrative costs and commissions paid to agents the expected rate of return on insurance policies is generally low. If you want both insurance and investment returns, unbundle your needs. Get your life insurance from the insurance company (at the lower premium for pure, term insurance) and put the premium savings (the investment element) into a more profitable investment vehicle, where your return at age 65 will be substantially higher than through the insurance company’s annuity.
Safety of investment. Check an insurer’s rating before purchasing a policy. Even venerable companies such as Lloyd’s of London can be wiped out by unexpectedly high claims and the insured’s investment (as well as life insurance proceeds) can be lost.
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