How Does Life Insurance Work & Life After the Coronavirus

If you’re googling how does life insurance work – it may be that you’re simply looking for the basics or possibly you have coverage and are wondering how the pandemic impacts the life insurance industry.

Whatever your question I am going to try to give you the answers you need. 

As an aside, I took a bit of a break after the coronavirus. This was for a number of reasons. First and foremost, we live in Toronto and like everyone else we’ve been preoccupied with the spread of COVID-19. So work has taken a backseat.

Secondly, life insurance sales and purchases don’t seem as pressing when our whole financial system is in flux. Unemployment is rife, which means most of us simply are concentrating on the necessities.

This pandemic is like nothing I have ever seen and I’ve been on this planet for nearly 55 years. In fact, my birthday is coming up in a couple of weeks.

So what does all of this mean for the life insurance biz? Will processes be changing? Will insurers weather the storm? Let’s take a closer look right now! 

So let’s get this out of the way. I do sell life insurance – but I know that dealing with a knowledgable INDEPENDENT life insurance agent is your best bet. We can save you time, money and hassle and the good news is a consultation doesn’t cost you a dime. The insurers pay my commission. 

So let’s get on with the show! 

The loss of a primary breadwinner often results in the loss of a family home and inconceivable lifestyle changes. 

My guess is, the current pandemic has really pushed that reality home for most of us. If you’re like me business has either stopped or stalled and that’s just a small taste of what happens when an income ceases to never return.

“Term life insurance can help you bridge that gap for decades at a relatively low cost. If you die while the policy is in force, you’ll leave behind a lump sum of cash for whomever you choose. Since term life insurance doesn’t last forever and has no investment component, it’s typically much cheaper than whole life insurance.” Find the Best Term Life Insurance, Nerd Wallet 

Term life insurance comes in a couple of different packages so I will start with the traditional version. The good news is term life insurance is super affordable which means most of the families I work with are able to purchase adequate coverage.

When clients call me the first thing we do is discuss their financial situation to determine how much coverage they REALLY need to keep their family in the situation they’ve become accustomed to.  In fact, this figure typically shocks most people. 

Face Value

The industry standard for income replacement is 7  – 10 times your gross salary in protection (this is known as the face value). When you do the numbers you quickly see that $100,000 of coverage sounds like a lot but is quickly used when someone passes away. 

Once we determine the face value of the policy, which typically comes in increments like $100,000, $250,000, $500,000 and $1million we assess how long the coverage is needed.

Ivari “(Formerly Transamerica Canada), has a compelling online insurance calculator that can give you insight into how much coverage you really might need.”

Term

The length of time you need coverage is called the term. Typically clients select 10, 20 or 30 year periods. Selecting your term is VERY important. I have sadly seen clients pick a lesser term like 20 years, because they believe their needs will change over time. The thing is sometimes the need for life insurance exceeds your estimate. Now what?

Well if you are younger and in great shape, it’s not too much of a worry. In fact, you will pay LESS than you did 20 years ago because the risk to insure you is now lower. Why? People living longer,  advances in healthcare and more competition have made life insurance more affordable than it’s ever been!

…the real issue crops up if you’re sick or older. Life insurance may become MUCH more expensive or even unobtainable. If in doubt select a longer term. Remember if you find that you no longer need the protection you can simply cancel your coverage. 

Take me for example. I’m healthy, I go to the gym regularly, I jog outside when the weather’s good and I’m not taking medications for any health issues whatsoever. You think I’d be a good candidate for a preferred health rating, wouldn’t you? Not so fast. Because there’s a history of cancer in my family (my mother and sister), I can never achieve better than a “standard” health rating when I apply for life insurance. This would be true even if I were an elite athlete on a strict vegetarian diet. 

Remember, if an agent quotes you preferred life insurance rates, there’s no guarantee you’ll get them. It’s entirely up to the underwriters so don’t let anyone tell you otherwise. Not to mention, preferred or elite rates are offered on minimum coverage amounts depending on the carrier. For example, if you’re applying for $250,000 of 20 year term, standard rate may be the best available. 

One more thing I would like to mention – it’s SUPER important for you to be as truthful as possible about your medical issues. Hiding or misrepresenting anything is fraud, which means when you die your beneficiaries (person/people you select to benefit from your policy) won’t get a dime. 

Traditional life insurance often requires a medical exam

….and it’s one of the things that some my clients  loathe. The thing is I’m not sure why because it’s a very simple process. I wrote an article about how most people are healthier than they think. So the fear is for the most part baseless.

Also, depending on your health, age and the amount of coverage you apply for, you may not be required to do a blood or urine test. Some carriers like Empire Life will issue you a policy after you’ve successfully answered the questions on their e-applicaiton. Some applicants will be required to only do a phone interview with a nurse-practitioner. Depending on how the health interview goes, you may or may not be required to do do additional tests. The life insurance company always reserves the right to have you do blood and vitals.

Here’s what you can expect. Your independent life insurance agent arranges for a medical test to be done in your home at a time that’s convenient fo you. A nurse will show up at the pre-arranged time and take a urine and blood sample, height, weight and blood pressure. He or she will also ask you some health related questions. The insurance company foots the bill for the test regardless of whether you’re underwritten and whether you purchase the insurance. 

To maximize the results of your physical there are a couple of things you can do:

1. Schedule the exam first thing is in the morning

2. Don’t eat anything before the exam

3. Drink plenty of water the day of the exam

4. Get a good night rest the night before the exam

5. Clean up your diet a couple of weeks before the exam 

6. Avoid caffeine 24 hours before the exam

7. Avoid working out the night before your medical 

After this is said and done all of your information is sent to labs for analysis and underwriters receive the results. An underwriter is a professional that is trained to asses the risk of insuring applicants.

“The exams “really provide a source of data that has a significant protective value for life insurance writers,” Boylan says. The exams can confirm the information provided on the application, or reveal health issues that applicants aren’t aware they have or might not have disclosed. The full medical underwriting process can help group applicants into health classes, which determines what their rates will be. Those who are healthier pay lower rates for coverage.”

How No-Exam Life Insurance Works, Forbes

So what if you have a phobia or needles – or maybe you have more serious medical issues and fear being rejected. 

Well I have some good news for you. 

You can get coverage without a medical exam. There are two different approaches. 

Simplified Issue 

The first is simplified issue life insurance. While you don’t need to complete a  medical exam, you are required to answer a bunch of very specific health and lifestyle questions. These questions help underwriters classify your eligibility and assess your premiums. 

Simplfied issue is marginally more expensive than a traditionally underwritten policy, but this is changing and it’s becoming more and more affordable. In fact, my guess is we are moving toward issuing more simplified issue policies in the future especially in the days of the coronavirus. 

Guaranteed Issue 

If you don’t qualify for Simplified,  guaranteed issue may be your only option because everyone qualifies for guaranteed. This Tier of coverage is for people with serious health issues like life-threatening cancer or dementia. As you can imagine this is much more expensive coverage as the insurer takes on a lot more risk. You are added to a pool with higher risk applicants who all have moderate to serious health conditions. This is a way for the insurance companies to cover their butts. 

All guaranteed issue life insurance typically comes with a 2 year waiting period. If you die of natural causes within the first 2 policy years, the insurance company will refund your beneficiaries all the money you paid into the plan. After the policy has been in force for 2 years, you’re covered for the full death beneift regardless of cause of death.  

Both of these types of coverage have their place. Simplified issue is available as term or whole life insurance. It works well for those have mild to moderate health issues or clients who want coverage immediately and don’t have time to wait for underwriting. 

Guranteed issue is a fantastic option for those with serious medical conditions who would otherwise be uninsurable. Both simplified and guranteed issue are wonderful tools for final expense planning. 

Read more here if you are looking for burial coverage. 

….and that’s not all! There are even more choices.

If you are looking for coverage for life and cash value accumulation, check out permanent life insurance. As I mentioned above term insurance works as a safety net to cover lost income during periods of vulnerability. Permanent life insurance provides your beneficiary with some cash no matter what. 

This is a very complicated product and it costs a heck of a lot more because there is a guaranteed payout. Does this permanent insurance work for most people? Nope…but there are exceptions. 

Whole Life Insurance

If you are thinking about whole life coverage I don’t suggest it unless you:

1. Have an estate you want to protect from burdensome taxes
2. Are a business owner with excess cash
3. Own a property you would like to pass down to a family member
4. Have exhausted all your tax shelter options
5. Need to create a trust for a child or dependent with special needs
6. Would like to set up a charitable gift
7. Would like to start a policy for a child and gift it to them as an adult
8. Are looking at finally expense coverage

You get the picture. If you want to buy a whole life policy you should have some cash to play with…

But there are exceptions and this is one of the most important! If are looking to cover the costs emanating from your from your death, final expense plans are very affordable and help a lot of my clients protect their families. 

Well this is a great question. If you have a term policy and you die during your term, your beneficiaries will receive a tax-free cheque from the insurance company. This is one of the greatest benefits of life insurance. 

The payment is mad in one lump sum – but there are also ways to have the money paid out over a period of time. 

If you pass away AFTER your term has expired or BEFORE your two year waiting period is over (this is something that may be part of your policy. It’s not always the case so be sure to read the fine print)…

….your beneficiaries won’t receive a payout because you are not covered. 

If you have a permanent policy your familiy will receive a payout provided you’ve kept up with all your payments.

Not usually. That said there are the rare exceptions for the following: 

1. Fraud: If you lied on your application or left something out the insurer may investigate the claim and deny a payout if they find something awry 
2. Suicide: If you commit suicide in the first two years your claim will be denied 
3. Lapse of Payment

Rest assured life insurance is a regulated industry so this doesn’t happen often. For the most part claims go off without serious issues 

Well now that’s the million dollar question. What is going to happen to the insurance industry in the days of the coronavirus.

We have received a ton of calls from people looking for life insurance over the past few weeks. With the virus unfolding there have been some pretty major changes. 

First and foremost, all life insurance medicals have been cancelled indefinitely. This means no nurses going out to draw blood and take vitals. 

That said life insurance companies have found an answer. 

A number of companies upped their limits for obtaining traditional coverage to $1 million or less without a medical exam. If you are under the age of 55 and healthy this may be the perfect solution for you.

If you have moderate to serious medical issues, then simplified issue coverage may be your best bet to get some coverage in place now. You can always apply with a traditional carrier when things return to normal.

Over the coming weeks, we will see how the virus continues to affect Canada. As the news hits my desk I will be reporting the changes to you. 

BUT as it stands things are still working pretty seamlessly.