Important Choices and Considerations for Purchasing an Individual Life Insurance Policy

This is the second of five columns helping federal employees understand their choices when it comes to purchasing a life insurance policy. Many federal employees are enrolled in the Federal Employees Group Life Insurance (FEGLI) program which is an employer-sponsored group life insurance policy. The employer-sponsor is the federal government.

However, federal employees who are in need of life insurance have other options. One of the options is to purchase an individual life insurance policy from an insurance company that offers individual life insurance policies. This column presents some of the employee choices and considerations that go into purchasing an individual life insurance policy.

Whether to Purchase a Term Life Policy or a Permanent (Cash Value) Life Policy?

SEE ALSO:

• Choosing the Best Life Insurance Coverage for Federal Employees
• Federal Employees Should Review Their Life Insurance Needs and Choices

A term life insurance policy that is effect throughout a specified period of time (the “term”) provides a death benefit that pays to the named policy beneficiaries if the policy owner dies during the term. The term can range from 10 years to as many as 30 years. Some life insurance companies offer 35- or 40-term policies. Once the term expires, the policy owner can either renew it for another term, possibly convert the policy to a permanent life insurance policy or allow the term life insurance policy to lapse.

A permanent life insurance policy differs from a term life insurance policy in several ways, namely:

• Permanent life insurance stays in effect as long as the policy owner pays the premium.

• A permanent life insurance policy pays the named beneficiaries both a death benefit and built-up cash value.

• Term life insurance premiums are generally much less expensive than permanent life insurance premiums. This is because term insurance policies do not build up cash value, and

• A term life insurance policy owner cannot borrow from the policy. With some life insurance companies offering permanent life insurance policies, a permanent life insurance owner who has built up a sufficient amount of cash value is eligible to borrow via a policy loan. The policy owner is responsible for repaying the loan.

There are several options available with term life insurance policies. The best option will depend on the individual policy owner’s circumstances. The following are the several types of term life policies:

A• Level term or level-premium policy. A level term insurance policy has a fixed annual premium payment for the term of the policy. Since actuaries must account for the increasing costs of insurance over the life of the policy’s effectiveness, the level premium is comparatively higher than annual renewable term (ART) policy premiums.

• Annual renewable term (ART) policy. Annual renewable term policies are one-year term policies that can be renewed each year without the policy owner having to provide evidence of insurability. The premiums increase from year to year as the policy owner ages.

• Decreasing term life policy. A decreasing term life insurance policy has a death benefit that declines each year according to a predetermined schedule. The policy owner pays a fixed, level premium for the duration of the policy. Decreasing term policies are often used in concert with a mortgage.

• Return of premium term insurance. A return of premium term life insurance policy will refund the policy owner if the policy owner outlives the policy term. If the policy owner dies within the term, the policy beneficiaries are paid the death benefit. Does this mean that there is no downside to owning a return of premium term policy? Actually, there is one downside – the policy owner will pay a larger premium compared to a level term policy with the same death benefit and the same term.

What Affects Life Insurance Premiums and Costs

Many factors can affect the cost of life insurance premiums. Certain things may be beyond an applicant’s control, but other criteria can be managed to potentially bring down the cost before (and even after) applying for life insurance. The applicant’s health and age are the key factors that determine the initial premium cost.

Preparing a Life Insurance Application

A life insurance application generally requires an applicant to provide personal and family medical history and beneficiary information. The applicant for a life insurance policy may need to take a medical exam and will need to disclose any preexisting medical conditions and dangerous hobbies such as skydiving. The following are essential elements of most individual life insurance applications:

• Age (date of birth). This is the key factor because life expectancy is the biggest determinant of risk for the insurance company.

• Gender. Women statistically live longer than men. As a result, they pay lower premiums than men of the same age.

• Smoking. An individual who smokes is at risk for many health issues that could shorten the individual’s life expectancy, resulting in higher risk-based life insurance premiums.

• Health. Medical exams for most life insurance applications include screening for health issues such as heart disease, diabetes and cancer that can indicate health risks and a shorter life expectancy.

• Occupation and lifestyle. Dangerous occupations and hobbies can result in larger premiums.

• Family medical history. If an applicant for life insurance has evidence of a major disease or health condition, such as heart disease, in his or her immediate family, the risk of the applicant’s developing certain conditions is much greater than the average person. The result could be a denial for life insurance or a larger risk-based premium, and

• Driving record. A history of moving violations or drunk driving can increase the cost of life insurance premiums.

Standard forms of identification will also be needed before a life insurance policy can be written. This includes a Social Security card, driver’s license, or a U.S. passport.

Since life insurance policies are a major expense and commitment to the life insurance policy owner, it is critical for an applicant to do proper due diligence to ensure that the life insurance company chosen has a solid financial strength and history. For that reason, it is strongly recommended that a life insurance applicant engage the services of a life insurance broker who will assist the applicant in choosing the appropriate life insurance company, as well as assist in the life insurance application. A life insurance broker will have a life/health insurance license in the applicant’s resident state. Applicants for life insurance can obtain a list of the licensed life/health insurance brokers in their resident state by contacting the applicant’s State Insurance Commission department.