Life Insurance: Frequently Asked Questions

Premiums vary among insurance companies, so it pays to compare quotes. Insurers group applicants into risk classes—preferred, standard, substandard, or uninsurable—based on health, lifestyle, and other factors. A terminal illness at application generally renders you uninsurable; chronic conditions (e.g., diabetes, heart disease) often result in substandard rates.

High‑risk jobs or hobbies also push applicants into substandard classes. Premiums align with your class: a standard risk pays an average premium for similar applicants. Categories differ by company, so even if one labels you “substandard,” you may get a better offer elsewhere. Once approved, your policy cannot be dropped as long as premiums are paid.

• How do cash values accumulate? Earlier, faster build‑ups are generally preferable.
• Historical performance? Check Best’s Review, Life & Health to see how actual results compared with projections and peers.
• Are special features useful or just bells and whistles?
• Financial strength ratings? Ask for A.M. Best, S&P, and Moody’s ratings; aim for top‑tier stability.

• Complex provisions. Many products blend investing with insurance, making apples‑to‑apples comparisons difficult.
• Policy suitability. Ensure the recommendation clearly matches your needs; consider a second opinion from your accountant or financial planner.
• High commissions & costs. First‑year commissions can be large; scrutinize total costs before buying.
• Unbundling insurance and investing. If you want both protection and returns, many buyers prefer term insurance plus separate investments.
• Insurer safety. Verify financial strength; even venerable firms can face stress in extreme claim environments.

Many states require two cost indexes to aid comparisons: the net payment index (cost to carry for 10/20 years—lower is cheaper) and the surrender cost index (focus on cash value—can be negative; lower is cheaper). These apply to term and whole life. For universal life, compare cash value growth and cash surrender value (the amount paid if you cancel). Given equal premium, death benefit, and interest assumptions, the policy with the higher surrender value is generally better.

Life insurance replaces income for your beneficiaries and can support estate or business objectives. You likely need coverage if anyone depends on your income. Typical situations:

• Families/single parents with dependents: higher needs; insure both earners when applicable; consider coverage for a non‑earning spouse’s household services.
• Adults without dependents: usually minimal coverage (burial, debts) unless a spouse would face hardship.
• Singles with no dependents: burial/debts only, unless for estate planning.
• Children: generally burial/medical only; many advisors prefer self‑insuring.
• Retirees: lower need unless for estate purposes or surviving‑spouse income.

Calculate household expenses, assets, debts, and other income sources. The goal is a death benefit large enough that invested proceeds can sustain your dependents’ lifestyle without touching principal. Rules of thumb (e.g., 5–7× salary) are only starting points—do the math.

Gather a year of bank and credit‑card statements and your latest tax return to estimate income needs accurately; underestimates risk underinsurance, overestimates waste premiums.

There are two broad families: term (pure protection for a set period) and cash value (whole life, universal life, variable forms) which combine protection with a savings/investment component. For many under ~40, term is typically cheaper; many term policies are convertible to permanent without a medical exam.

Term insurance types

• Renewable: auto‑renews (1/5/10/20 years), premiums rise with age.
• Re‑entry: medical exam later or pay extra.
• Level: premium stays the same for a guaranteed period; most term sold today.
• Decreasing: face amount declines (often to match a mortgage) while premium stays level.
• Return of Premium: higher cost; premiums returned if held to term.

Cash value (permanent) types

• Whole Life: level premiums, guaranteed cash value growth, potential dividends; loans available against cash value.
• Universal Life: flexible premiums/benefits; cash value grows at a fixed minimum rate; monitor to avoid lapse if underfunded.
• Variable Universal Life: invest cash value in subaccounts; higher upside and risk.
• Variable Whole Life: benefits tied to chosen investment fund performance.

Generally, children only need enough coverage for burial and medical expenses. Alternatives include self‑insuring these costs or adding a child rider to a parent’s policy.

Many buyers choose term life for protection and invest the difference in tax‑advantaged accounts (IRAs, 401(k)s). If you already own a cash‑value policy, don’t rush to surrender it; cash value is tax‑deferred and can become substantial over time, though returns are typically conservative. Balance that with higher‑return investments (e.g., broad stock funds) for long‑term growth.