The Definitive Guide to Life Insurance Planning

Jerry C. Thomas, CFP®Life Insurance Planning

The Definitive Guide to Life Insurance Planning

The aim of this article is to help guide you through the life insurance planning process. We will take you through the steps from beginning to end. In addition, we have structured the information in the form of questions you may ask yourself while starting the planning process.

What is life insurance?

Life Insurance Policy Contract

Life insurance pays out a lump sum of money called the ‘death benefit’ to the beneficiary, or person designated to receive the money, upon the death of the insured (person insured by the policy).

As a result, the death benefit allows the beneficiary to meet any financial obligations left when the insured passes away.  

How does life insurance work?

Life insurance is a unilateral contract between the policy owner and the life insurance company.  Therefore, you pay a premium and in exchange the insurance company offers you a policy that pays a death benefit when you die.  The beneficiary can be a person(s), trust or business. Additionally, the death benefit is paid to the beneficiary income tax-free.

What does life insurance cover?

Family who is in need of life insurance planning

Most life insurance policies insure the life of one person. However, joint policies can insure two lives and pay the death benefit upon the second death.

What are the advantages of life insurance?

Life insurance can provide three main advantages:

  • Death Benefit (Income Tax-Free to Beneficiary)
  • Affordable Protection
  • Investment Value (Permanent Life Insurance)

Death Benefit (Income Tax-Free to Beneficiary)

A life insurance death benefit avoids income taxation. For instance, if you are insured for $1,000,000, when you die your beneficiary will receive the money without having to pay income taxes on it.

Affordable Protection

Life insurance is affordable. For example, a healthy 35-year-old male can purchase a $1,000,000, 10-Year Term policy for around $19 per month. 

Below is an example of pricing:

Compare the life insurance premiums of five companies for $1,000,000 of 10 year term life insurance for a healthy male age 35

Investment Value

Permanent life insurance can provide a savings feature called the cash value. The cash value is a savings account inside the policy that grows tax-free based on dividends or investment growth.  

Why should I buy life insurance?

There are two main reasons for buying life insurance:

  1. Family Protection
  2. Business Protection. 

Below are the different reasons why one would purchase coverage in each situation.

Life Insurance Planning for Families:

Family
Photo by Allen Taylor on Unsplash

Family Protection

If you have a family, life insurance is important. For example, if you are the main income earner, your family will need a way to replace your income and cover any debts when you pass away.

If you are a stay at home parent, your time spent parenting is a 24/7 job. Above all, your contributions to the household are important.

Salary.com estimates the average cost to replace a stay at home parent would be $178,201 per year. Thus, life insurance can cover the costs of childcare and other household needs in the event that a stay at home parent passes away.

Mortgage Protection

Life insurance can be used to pay off the remaining mortgage on your home. Therefore, your family can afford to pay off the mortgage and continue to life in their home.

Estate Planning

There is always need for cash at time of death. For example, your family will need to pay for a funeral, debts, income taxes, and attorneys or accountants to manage any trusts, wills, or assets. Life insurance can help cover these costs.

Protection from Economic Life-cycles

Stock Market Performance of 2008

Imagine if you passed away in 2008 when the average market loss was around 30%. Life insurance provides your beneficiary with cash eliminating the need to liquidate any investments during uncertain times.

Divorce

Many courts will require a life insurance policy as a form of alimony protection or child support protection.  As a result, some people choose a return of premium life insurance policy, which allows you to recoup the premium payments at the end of the obligation period (like a savings account).

Student Loans

Did your parents co-sign your loans? Will your spouse be responsible for your student loans if you pass away?  It depends on the property laws of your state whether or not they will be obligated to pay your debt.

Therefore, it is important to consider purchasing life insurance, which can protect your spouse or co-signers from creditors.   

Long-Term Care Planning

A long-term care rider allows you to use your death benefit to pay for long-term care. For example, the average cost of care for a private nursing home in the U.S is $7,698 per month, and in 20-years the cost will be closer to $15,383.  

Therefore, imagine having to liquidate your retirement savings at an additional $15,383 per month! Long-term care planning can help offset this expense.

The Wall Street Journal’s Video “Behind the Rising cost of Long-Term Care,” does a great job explaining this topic.  

Retirement Planning

The cash value inside a permanent life insurance policy grows tax-deferred. Therefore, the owner can take withdrawals or loans from the policy on a tax favorable basis. In addition, these policies can be structured to supplement retirement income.

Life Insurance Planning for Businesses:

Photo by Mike Petrucci on Unsplash

Businesses and companies often use life insurance to protect their business. Similarly, some businesses will also use life insurance as a benefit to help recruit, retain, and retire their employees. Below are some of the ways businesses use life insurance in their planning. 

Life Insurance for a Buy-Sell Agreement

Many businesses have multiple owners. Consequently, many owners ask one big question:

“What happens if one of my partners gets sick or passes away prematurely?”

– Business Owner

Life Insurance provides the liquidity (cash) needed to buy out a partner’s share in the business upon their death. In contrast, disability insurance provides the liquidity needed to buy out a partner due to a prolonged illness or disability.

Key-Employee Life Insurance

Key employee life insurance is used to protect a business in the event a key employee passes away. Key employees are, for instance, those with special relationships, skills, or knowledge of the business who may be difficult to replace. Hence, businesses can use the life insurance funds to cover the cost of hiring new talent or supplementing losses.

Life Insurance as an Employee Bonus

Life insurance policies for the benefit the employee and their family are considered a form of employee benefit.

Therefore, these policies help businesses recruit, reward, retain, and retire top talent. Below are examples of different arrangements:

  • Life insurance paid by the business for employees family
  • Non-Qualified Deferred Compensation NQDC
  • Corporate Owned Life Insurance COLI
  • 162-Bonus Planning 162-Bonus Planning

These topics go beyond the scope of this article, see the links for more information about life insurance planning for businesses.

What determines the price of a life insurance policy?  

  • Age of Insured
  • Death Benefit Amount
  • Rate Class
  • Type of Policy (Term vs. Permanent)
  • Riders (Additional Coverage)

Age of the Insured

Everything else being equal, the older the insured, the higher the cost of the insurance. In other words, the older you are, the lower your life expectancy, and the higher the price will be. For example, here is the most current life expectancy table from Social Security.

Death Benefit Amount

The higher the death benefit, the higher the price.  Insurance companies have pricing discounts called “banding” rates and most carriers discount the cost at every $250,000 increment. 

Rate Class

Your rate class is how an insurance company determines what to charge you. For example, the risker you are, the higher the price is for insurance. Above all, your risk factors are dictated by your current and past health, family health history, lifestyle, and avocations (extreme sports or hazardous activities).

Healthy

If you are super healthy, have great family health history, and don’t participate in hazardous activities, then you will qualify for the best rates. 

READ: 10 Questions: Buying Life Insurance During COVID-19 Pandemic:

Unhealthy

If you take multiple medications, have past hospitalizations, are overweight, use nicotine, or have any chronic illnesses, then you most likely will not qualify for the lowest rate. 

What are the different rate classes?

Photo by Quino Al on Unsplash

Below is a list of rate classes. Some insurance companies use different names to represent the same rate class.

  • Preferred Best Non-tobacco (Super Healthy Discount)
  • Preferred Non-tobacco (Healthy Discount)
  • Standard Plus Non-tobacco (Above Average Discount)
  • Standard Non-tobacco (Average Health)
  • Preferred Tobacco (Healthy + Tobacco Use)
  • Standard Tobacco (Average Health + Tobacco Use)
  • Table Rate (Below Average Health)

What is a Table Rating?

A “table rate” is an additional charge due to unfavorable risk. A table rate generally increases the price by 25%.  

Type of Policy

Compares the cost of different life insurance products comparing annual renewable term  vs. level premium term life insurance

Term life insurance provides coverage for a limited number of years. Therefore, the longer the term, the higher the cost.  Permanent life insurance provides lifetime coverage and will be more expensive than term insurance.  

Riders (Additional Features)

A rider is an additional policy feature, for example, a child rider or waiver of premium. As a result, the rider will increase the cost of the insurance.

Are life insurance rates locked in?

Term life insurance rates are locked in for the duration of the term period.

In contrast, permanent life insurance rates were originally designed to stay locked in for the life of the contract. However, since there are a lot of different types of products and designs, we recommend you double check the guaranteed provisions of your policy.

What are the different types of life insurance products?

Life insurance products can be broken down into two main groups:

  • Term
  • Permanent

Within these groups there are various types of products, some being much more common than others.

What is the best kind of life insurance?  

“The best kind of life insurance is the kind you have the day you die.”

Your financial goals will dictate which type of life insurance to use in your planning. In addition, your needs may change over time based on your health and financial goals, which means it’s important to continue to review your policy.   

Below is a list of the policies available in the market today.

  • Term Life Insurance Options
    • Traditional Term Life Insurance
    • Annual Renewable Term Life Insurance
    • Return of Premium Term Life Insurance
  • Permanent Life Insurance Options
    • Whole Life
    • Guaranteed Universal Life Insurance
    • Universal Life Insurance
    • Indexed Universal Life Insurance
    • Variable Universal Life Insurance
    • No-Load Life Insurance
    • Hybrid Life Insurance or Linked Benefit Life Insurance

For now, we are only going to focus on the most common types life insurance policies, which are highlighted above.

Term Life Insurance

Learn how term life insurance works

Term life insurance is the most commonly bought policy in the market. It is designed to provide coverage for a specific period or time, hence the name “term” insurance.

Furthermore, term life insurance is pure insurance like car insurance; it only pays a benefit if you die.

Term insurance is sold in 10, 15, 20 and 30-year increments, however, the most common policies are 10 and 20-year term.  

Below is an example of a term life insurance comparison quote for a healthy 35-year-old woman, for $1,000,000 of coverage:

Life insurance Quote comparison for Female age 35 for $1,000,000 of coverage

What happens at the end of a term life insurance policy?

Term life insurance rates are locked in for the duration of the given term period. When the term period ends, the policy will do one of the following things:

  1. The death benefit will remain the same and premium will increase annually.
  2. The premium will remain the same and the death benefit will decrease annually.

Here is why this could be important:

If you are terminally ill, then you would not want your policy’s death benefit to decrease. Therefore, you’d want to be able to keep the same coverage and pay a higher premium.

Return of Premium Term Life Insurance

If your are still living and no longer desire coverage at the end of the term period, then a return of premium (ROP) term life insurance policy returns all the payments you have made at the end of the term.  

Below is an example of a 20-year ROP term life insurance quote for a healthy 40-year-old male, for a $500,000 policy.

Graph comparing cost of $500,000 Return of Premium Life Insurance for Male age 40 for 20 year term life insurance

First of all, notice how in the 20th year of the policy, there is $28,800 available as a surrender value? If the client decides to cancel the policy at 20 years, then they will receive all their premium payments made back.

Permanent Life Insurance

There are two types of permanent life insurance: whole life and universal life.  There are many variations of universal life insurance, but guaranteed universal life is the most popular.

As a result, we will mainly focus on guaranteed universal life in this article. 

Whole Life Insurance

Whole life was the first life insurance product created and it provides coverage for the entire life of the insured. Furthermore, whole life insurance contains a savings component called the “cash value,” where savings grow tax-deferred.   

Whole life insurance offers the following features:

  • Lifelong Coverage
  • Guaranteed Level Premiums (Price won’t change)
  • Guaranteed Cash Value
  • Non-Guaranteed Cash Value

How does whole life insurance work?

The premiums paid into the policy pay for the life insurance death benefit while a portion of the premium goes into a tax-deferred savings account called the “cash value.”  The cash value earns interest and dividends, increasing the cash value over time.  

Why do people buy whole life insurance?

People buy these polices to supplement their savings.  This is due to the fact that the policy offers a guaranteed rate of return, called the guaranteed cash value. The policy also has a non-guaranteed rate of return based on the performance of the insurance company. 

Below is an example illustration of a Whole Life policy for $100,000 in coverage for a healthy man, age 60:

Whole life illustration for a male age 60 in good health for $100,000 of life insurance coverage

Guaranteed Universal Life (GUL)

Guaranteed universal life insurance was created to compete against whole life insurance. The goal, therefore, is to provide permanent life insurance that lasts the insured’s entire life, at a lower cost.  It is usually about half the cost of whole life insurance. 

The reason GUL is less expensive than whole life is because it grows very little to no cash value over time.  

GUL offers the following features:

  • Lifelong Coverage
  • Level Guaranteed Premiums (Price won’t change)

How does a GUL policy work?

When the client pays the required premium and doesn’t take any loans or withdrawals from the cash value, the policy will pay out the death benefit when the insured passes away. 

Below is an example illustration of a Guaranteed Universal Life policy for $100,000 in coverage for a healthy man, age 60:

guaranteed universal life illustration for a male age 60 in good health for $100,000 of life insurance coverage

Whole Life vs. Guaranteed Universal Life

In conclusion, both policies offer guaranteed death benefits, guaranteed premiums, and a guaranteed premium payment structure.

The main difference between whole life and guaranteed universal life is that a GUL policy will build little to no cash value.  Because of this, all other things being equal the GUL policy is about half the cost of a Whole Life Policy.

What factors affect the pricing of life insurance?

Underwriting is the most important part of obtaining the lowest price on your life insurance. Your goal, therefore, is to find the lowest priced option and find an insurance company who will offer you those rates. Certainly, this is where an experienced life insurance expert will come in handy.   

Insurance carriers look at your current and past health, tobacco use, family health history, lifestyle, and avocations.

Health of Client

First of all, the healthier you are, the easier it is to get the best rates. Being healthy is based on current and past health history, therefore, the underwriter will look at your current and past medical profile to determine your rate class.

READ: 10 Questions: Buying Life Insurance During COVID-19 Pandemic:

Tobacco Use

Many insurance companies don’t like tobacco use, especially cigarettes. As a result, cigarette users typically pay rates three to fives times more than non-tobacco users.

In contrast, some insurance carriers may offer non-tobacco pricing for chewing tobacco or cigar use.

Prescription History

Every carrier, or insurance company, will review your prescription history from the past five to ten years.  If they find conflicting information, then they will request a copy of your medical history to cross examine the information.  

Family Health History

Family Tree

If your parents or siblings are diagnosed or passed away prior to age 65 due to diabetes, heart disease, or cancer, some insurance companies won’t offer you the best rate, even if you are super healthy. In contrast, other carriers disregard family history all together.

Driving History

If you have more than three moving violations in five-year period, or a DUI in the past ten-years, then you’re not going to qualify for the best rates. Even though you may be healthy, companies will consider you to be a higher risk.

Avocations of Insured (Lifestyle)

Do you fly planes? Rock Climb? Race Cars? Scuba Dive? Heli-Ski? Spelunk? That’s awesome!

For those reasons, however, you may be a little tougher to underwrite depending on how often you participate in these activities and the level of extremity. 

How do I save money on life insurance?

Photo by Fabian Blank on Unsplash

If you want to save money on life insurance, then you need to find the lowest priced options and obtain the best underwriting offer.

How to obtain the lowest life insurance rates and best underwriting offer:

  1. Work with a life insurance expert.
  2. Review multiple quotes. (It’s free to review quotes.)
  3. Shop your case with underwriters.

What should I look for in a life insurance professional?

Now that you have done your research, you’re ready to find a life insurance professional. It’s important to remember that there is no “best type” of professional to work with. Instead, we have laid out what to look for in a life insurance expert.

Below are the three principal traits to look for in a professional:

  • Trust
  • Experience
  • Education

Trust

Do you trust they are doing what is in your best interest?   Here are some things that can help you build trust.

  • Are they able to work with multiple insurance companies?
  • Do they have a designation like a CFP®, CLU®, ChFC®, or MSFS?
  • Is there a fiduciary responsibility? Fiduciary vs. Suitability

Experience

Here are some ways to figure out if they are experienced:

  • Do they know how to determine how much coverage your need?
  • Do they know how to obtain the best rate through underwriting?
  • Can they explain how they will help you obtain the best rate?

Education – Designations (CFP®, CLU®, ChFC®, MSFS)

Designations are a set of letters after a professional’s name, which therefore signify that they have completed additional education to be designated a professional by that organization.  

Furthermore, some designations are harder to obtain than others. For instance, some require a one-day seminar, while others require completion of 6 courses plus a comprehensive case analysis followed by a cumulative 6-hour examination (CFP®)

As a result, we recommend the following designations for life insurance planning: CFP®, CLU®, ChFC®, or MSFS.

READ: List of designations and what they mean.

Do brokers need a Securities Registration to sell life insurance?

Photo by Rick Tap on Unsplash

A securities registration is not necessary to sell life insurance, but it is necessary to present and sell variable life insurance.  As a result, an un-registered life insurance broker can’t present or sell these products. Therefore, if you are interested in learning about these options, make sure your broker is a registered representative.

Which advisor is the best for life insurance planning?

The best advisor is the one with life insurance expertise, the ability to shop with different insurance carriers, understands life insurance underwriting, and therefore makes you feel the most comfortable with the process.  Above all, if you can trust your advisor, that’s the best one to work with. 

What type of professionals advise on life insurance planning?

Below are the types of insurance and financial professionals advising clients on life insurance planning.  

  1. Captive Life Insurance Agent
  2. Career Agents
  3. Independent Life Insurance Broker
  4. Online Life Insurance
  5. Fee-Based or Fee + Commission Financial Advisor
  6. Fee-Only Financial Advisor

What do you need to sell life insurance?

Your broker or agent needs to pass state testing and hold a license in the states they conduct business. In addition, if they want to sell variable life insurance, they need to be securities registered with a Series 6 as well as Series 65 & 63.

Captive Life Insurance Agent

Captive agents can only sell their parent company’s products, hence they are “captive.” They cannot provide outside options from other companies. Some captive insurance carriers may allow other options to be sold only if the client is declined a policy from the parent company.  

Examples Captive Agents: State Farm, Farmers, All State, Liberty Mutual, American Family

Career Agents

Career agents work for a parent company but can sell products from other insurance companies. Furthermore, many career agents work for mutual insurance companies which sell many of the whole life policies available on the market.

Examples Career Agents: Northwestern Mutual, Mass Mutual, New York Life, Guardian Life

Independent Life Insurance Broker

Independent brokers work with multiple insurance companies. Sometimes they may also sell other types of insurance like homeowners, auto, business, health, and other lines of business. Additionally, brokers can be individuals or large agencies like Aon, Hub, Gallagher, Mash, or local brokers listed on Trusted Choice.

Large Brokers: Marsh, Aon, Willis, Gallagher, HUB

Smaller Brokers: Trusted Choice

Carriers: Lincoln Financial, Prudential, AIG, Principal, Legal & General, Grange, Erie

Online Life Insurance Brokers

Online life insurance brokers are the same as independent brokers. Therefore, the pricing for a policy is no different online compared to another broker.

Examples of Online Brokers: Select Quote, Policy Genius, Quotacy

Tutorial on how to run your own term life insurance quote.

Fee-Based Financial Advisor or Fee + Commission Financial Advisor

Fee-based advisors can earn income in the following ways:

  • Assets Under Management (Percent of Assets Managed)
  • Fee for Service
  • Commissions on Stock, Mutual Fund, or Bond Trades
  • Commissions on Insurance Sales

Examples Fee-Based Advisors: Ameriprise, Edward Jones, Wells Fargo, LPL, Most Major Banks

Fee-Only Financial Advisor

Fee-only financial advisors earn their income by charging a fee for service or a fee based on assets under management (AUM). Because of this, they cannot earn a commission on a life insurance policy. As a result, they still need to partner with an insurance broker to place any life insurance business and cannot receive any form of compensation in return.

Examples Fee-Only Advisors: Fisher Investments, Hall Capital Partners, Moneta Group

Examples Local: NAPFA Organization

How to determine how much life insurance you need?

There are three ways to determine how much life insurance you need1:

  • Multiple of Income Approach
  • Financial Needs Analysis Approach
  • Capital Needs Analysis Approach

1Fundamentals of insurance Planning, Lynch, The American College Press, 2011

The most common ways to determine your need is the Multiple Income Approach or the Capital Needs Analysis, but that doesn’t make them the best.

There are two concepts to understand:

  • Replacement Income – The amount of money you are replacing on an annual basis.
  • Replacement Period – The length of time during which you want to replace that stream of income.

Multiple of Income Approach (MIA)

This concept is fairly simple: take your income and multiply it by the number of years you want to provide an income.

How it works:

  • Replacement Income = $75,000 (Income)
  • Replacement Period = 5 years
  • Death Benefit = $375,000 (5 years x $75,000)

This option isn’t very accurate because it doesn’t account for investing those funds or other needs you may want to consider.

The next two options do a better job of assessing your actual need.  

Financial Needs Analysis Approach (FNA)

This approach accounts for your entire financial picture by including debt, expenses, college planning, and assets. When planning for your benefit, consider how much money your family would need on the day after your death, to be able to invest, grow and account for your family’s expenses for the next given period of time.

How it works:

  • Replacement Income = $75,000 (Income 20 Years after death)
  • Replacement Period = 20 Years (Spouse turns 65) Assumed IRR = 5% (Assumption)
  • Death Benefit = $934,666 (will return $75K annually for 20 years)

The financial needs approach and the capital needs approach differ in that with the financial needs approach, none of the original death benefit is left at the end of the replacement period. 

Capital Needs Approach (CNA)

The main difference between the FNA approach vs. CNA approach is that the replacement period never ends. Therefore, you are planning to receive a certain amount per year for the lifetime of your beneficiary.

How it works:

  • Replacement Income = $75,000 (Yearly Income Lifetime)
  • Replacement Period = Lifetime Assumed IRR = 5% (Assumption)
  • Death Benefit = $1,500,000 ($75,000 annually for life)

Financial Needs Approach vs. Capital Needs Approach?

The financial needs approach will generate a lower death benefit amount, thereby reducing the cost of insurance. In contrast, the capital needs approach will provide lifetime income and the death benefit will be higher.

Which formula you choose depends on your goals. Additionally, some people choose an amount in the middle.  

Older Clients

Older clients who are closer to retirement and have saved more, may choose the financial needs approach because the cost of life insurance is higher due to their age.

Younger Clients

Younger clients who are farther from retirement, have less savings, and have higher debt may choose the capital needs approach because they may require more life insurance, and since they are younger, cost of life insurance is lower.  

Which type of life insurance policy should I buy?

Let’s say you’re 35 and you plan on retiring at age 65; you therefore may only need coverage for 30 years.  Additionally, if you want to keep coverage past retirement, it may be a good idea to purchase a permanent policy now. This is because right now, you are healthy, younger and have time to build cash value (equity) inside the policy.  

How much life insurance do you want to keep past retirement?  

Life insurance past retirement can help you with the following financial goals:

  • Estate Taxes
  • Liquidity at Death
  • Protection from Economic Life-cycles
  • Long-Term Care Funding

Depending on your financial goals you may want to consider a permanent life insurance plan.

What are the different ways life insurance is underwritten?

There are four ways life insurance policies are underwritten.

  • Traditional Underwriting
  • Accelerated Underwriting (Newer Concept)
  • Simplified Issue Underwriting
  • Guaranteed Issued Underwriting

Since traditional underwriting is the most comprehensive and commonly used underwriting option, we will focus on how this process works.

How does the life insurance underwriting and application process work?

Here are the steps to apply for and obtain a traditional life insurance policy.

  1. Review the Coverage
  2. Submit an Underwriting Questionnaire
  3. Apply with Best Offer
  4. Complete Underwriting
  5. Obtain Medical History
  6. Place Coverage In-Force

1. Review the Coverage 

First of all, you’ll want to determine your death benefit and type of life insurance policy. Then, you’ll narrow down which insurance carriers to work with. 

COMPARE: Different Accelerated Underwriting Life Insurance Options

2. Submit an Underwriting Questionnaire

This will help you shop your policy with multiple carriers to obtain the lowest rates. This is especially helpful if you have any medical history or risk factors.

Why is an underwriting questionnaire a great way to shop for life insurance?

Your questionnaire will be sent out to various insurance companies without any of your identifying information. In contrast, if you were to submit a formal application and received a decline, it would be recorded in the MIB, which may make it difficult to obtain a better rate somewhere else.

What is the MIB?

The MIB, (Medical Information Bureau) was created by insurance carriers to protect the industry from fraud.

3. Apply with Best Offer

Once you review offers from various insurance companies, you’ll be able to formally apply with the best offer.  

4. Complete Underwriting

Next, you’ll conduct a phone interview. The interview will ask about your medical history, lifestyle, family history, avocations, and financial questions. Based on your answers, you may or may not have to conduct an exam.   

Background Check

  • Motor Vehicle Report
  • Prescription History Record
  • MIB Record
  • Credit Report

Exam:

  • Blood Analysis
  • Urinalysis
  • Height and Weight
  • Blood Pressure Reading

Don’t want to complete an exam? READ: How you can get an exam free life insurance policy duing COVID-19:

5. Obtain Medical History

Depending on the information disclosed during the phone interview, background check, or exam, the carrier may then want to review copies of your medical history.  Additionally, if you have any conflicting information in your background check the carrier will request your medical history.

6. Place Coverage In-Force  

Once the underwriter has reviewed all the information, they will make an offer.  You could receive the “tentative” offer, a better offer, a worse offer, or be declined. 

If there is a better option available, you’ll then be able to reapply with a new carrier.

Placing the life insurance policy in-force

Before you place the policy in-force, you can adjust the death benefit and type of policy. Coverage is only in-force when the carrier has received the first payment.

What other features can I add to a life insurance policy?

Riders allow you to add additional coverages or provisions to your policy, thus, allowing your policy to offer more benefits for different needs.

Below are examples of the most common riders:

Accidental Death Rider

An accidental death benefit rider provides an additional payment if death occurs due to an accident.

Child Rider

A Children’s Term Insurance Rider pays a life insurance benefit if one of your children passes away. In addition, this rider will include your stepchildren and legally adopted children.

Long-Term Care Rider

This allows an insured to utilize their death benefit to pay for long-term care. Because of this, this rider has become very popular as a way to fund long-term care expenses.

Waiver of Premium or Disability Rider

If an insured person becomes disabled, then a waiver of premium rider pays all life insurance premiums due after that disability.

What is a life insurance policy review?

Photo by Lukas from Pexels

A policy review is the process of reviewing the following components of your life insurance policy:

  • Death Benefit Amount
  • Coverage Length
  • Conversion Option (Term Only)
  • Performance (Permanent Only)
  • Policy Features

Reviewing a term life insurance policy is simple. You want to determine the following:

  1. Death Benefit (Do you need more?)
  2. Term Length (Do you need it to last longer?)
  3. Conversion Option (When does it expire? Do I need to convert?)

If you find yourself with a higher mortgage, more kids, higher debt, or higher income it may be time to increase your coverage.

Conversion Option

Most term policies offer a conversion feature, or rather, the ability to exchange your term policy for a permanent policy without proof of insurability.  However, many insurance companies restrict when you can convert a policy.  As a best practice, it’s a good idea to know when those limitations will apply.  

Performance Review

If you own a permanent life insurance policy, then you should be reviewing your policy’s performance. Just as you review your investments and portfolio, you want to make sure your policy is performing as expected. Above all, this allows you to make any changes to the policy prior to major issues arising.

Policy Features

Even insurance companies come out with new features and one of the most popular features available today is a life insurance policy that contain a Long-Term Care Rider.  While these riders were not available 10 years ago, they have become popular today. This is probably because this rider allows the insured to access the death benefit prior to death to pay for long-term care costs.

How often do you conduct a life insurance policy review?

We recommend reviewing a policy every five years because this allows the advisor to make sure the policy is on track to perform as expected.  It will also give you enough time to make changes to the policy if it is performing poorly.

FAQ’s about your life insurance policy:

What is the contestability period of a life insurance policy?

Every life insurance policy has a two-year contestability period.  In other words, if the insured passes away within two years, the insurance company has the option to contest the policy and investigate to determine if any fraud has been committed.  Conversely, if the client passes away after the two-year contestability period, the carrier simply pays the claim.   

Does the life insurance company still pay the death benefit in the case of suicide?

If the insured purchases a policy and commits suicide within the first two years, then the insurance company will not pay out the death benefit and will return all premiums paid. In contrast, if the insured commits suicide after the two-year contestability period, the carrier is required to pay the death benefit.  

National Suicide Prevention Lifeline:

1-800-273-8255

What if I lie on my life insurance application?

During Underwriting

If you lie on your life insurance application, then the insurance company will try to uncover any other inconsistencies and possibly decline your case. As a result, this may make it difficult to obtain coverage from another insurance company.   

During Two-Year Contestability Period

If you lie or fail to disclose information on your life insurance application, and you pass away during the two-year contestability period, the carrier will contest the claim.

For example, if you do not disclose that you have a history of recorded drug use (hospitalizations or criminal activity), and the underwriter fails to discover it during the underwriting process, the carrier will have the ability contest the claim.

For that reason, the carrier may not pay out the death benefit when you pass away. 

After Two-Year Contestability Period

In contrast, if your lie or fail to disclose information on your life insurance application, and you pass away after the 2-year contestability period, the carrier is required to pay out the claim.  

Using the example above, if that same person passed away three years later, after not disclosing their drug use history, the carrier cannot contest the claim.

Next Steps

In conclusion, we hope that The Definitive Guide to Life Insurance Planning gives you a solid understanding on all aspects on life insurance planning.   

If there are any topics you think we missed, please let us know by sending us an email and we’ll add them to the guide.

Working with Jerry C. Thomas, CFP®

If you need assistance with your insurance planning, we are a full-service agency, specializing in helping you find the best life insurance at the lowest prices to meet your financial goals.

Our goal is to provide life insurance planning using a fiduciary model: we offer only what is in the clients’ best interest at all times.