The basic idea behind life insurance is easy, right?
You pay a monthly premium, the life insurance company invests it and then pays your heirs when you die. This ensures that your family will have some financial help once you’re gone. They can pay your burial costs, living expenses, and any other financial obligations you may have. Is that all there is to know about life insurance?
Of course not! There are many questions to be answered about specific life insurance policies, how they work, and which one would be best for you. LIMRA, formerly the Life Insurance and Market Research Association, created a quiz to help us better understand the ins and outs of life insurance. Here are some of the most commonly misunderstood facts about life insurance, how it works, and what it can provide.
True or False: The primary reason life insurance companies collect medical information is to have documentation of preexisting conditions when a claim is submitted?
FALSE. In general, health insurance companies access your medical records only to determine eligibility for health care coverage. This helps them figure out the appropriate policy and premium for you. It only makes sense that people in excellent health with lower risk factors pay a lower premium. Those with preexisting conditions can still get life insurance but may be charged a higher premium and understandably so. It’s only when a person falsifies information on an application that their claim is denied. So don’t lie. Be honest.
Most insurance companies in the United States belong to the Medical Information Bureau (MIB). You can request a free copy of your file from MIB and review it. It’s definitely worth checking this out because any incorrect information can affect your life insurance premium.
True or False: If a life insurance company goes bankrupt, the policies are canceled and the policy holders lose their benefit.
FALSE. First, life insurance companies must follow reserve requirements. They are legally required to keep a specified amount of reserves on hand – capital that’s available to pay out death benefits in a worst case scenario. Second, insurance companies have insurance, also called reinsurance. In the US, without reinsurance, life insurance companies are only allowed to issue policies with a maximum limit of 10% of the company’s net worth. So if a life insurance company wants to grow, they have to have reinsurance.1 Last, each state has a life and health guarantee association to provide a safety net and protect policyholders if insurers go bankrupt. The amounts are limited, so it’s important to review your state’s limits.2
Question: What type of life insurance is appropriate to cover a temporary need?
ANSWER: Term life insurance provides coverage for a certain time period; it’s designed only to protect your dependents in case you die prematurely. If you have a term policy and die within the term, your beneficiaries receive the payout. The policy has no other value. It is ideal to have the term expire when the need for life insurance ends: Your kids are grown, your mortgage is paid, etc.3
We hope this has helped clear up some misconceptions about life insurance and how it works. Do you still have life insurance questions? Are you trying to find life insurance, but not sure where to start? Send us a message or give us a call today! We’ll answer your questions and help you find the policy that’s right for you.
1 PolicyGenius “What to do when your life insurance company goes bankrupt” March 1, 2017
2 AAA Magazines “Life Insurance Lowdown” August 18, 2017
3 NerdWallet “The Differences Between Term and Whole Life Insurance” March 29, 2017