What determines my need for life insurance?
How much insurance do I need?
Should I buy term or whole life insurance?
How do I choose the right company?
What is the application process?
What is underwriting?
How long will it take to underwrite my application?
What do I need to know about the medical exam?
What determines the rate classification I receive from the insurance company?
What if I receive a higher rate than I applied for?
When does my coverage begin?
Do I need coverage on my non-working spouse?
When should I review my coverage?

What determines my need for life insurance?

Life stages and circumstances

When determining your life insurance need, you should first consider your life stage and circumstances. Marital status, number of dependents, size and nature of financial obligations, your career stage, and your intentions to pass on your property are all factors to consider. Your need for life insurance changes as the circumstances of your life change.

Starting out
In the "starting out" stage of life, you may be just beginning your career or family. You may not have children or other dependents at this stage, but that doesn't mean you have no obligations. For instance, if you paid for your college education with student loans, you likely had a cosigner for your loan--maybe your parents or a grandparent. The same may be true of your car loan. If you were to die before the loan is paid, your cosigner would be obligated to pay the debt. Under law, a cosigner is responsible for full payment of a debt in the event of default. Death doesn't erase the debt obligation.

Single adult
A growing percentage of the population now falls into the single adult demographic group. This group covers a broad spectrum of ages, lifestyles, and obligations.
    Family obligations--Parents
    Although you may not have a spouse, your death could have a serious financial impact on other family members. If, like many adults, you are supporting your parents (either financially or with care), your death could have a major impact, both emotionally and financially. They would not only lose the support you have been providing to them, but they would also need to come up with the money for your final expenses.

    Family obligations--Children
    If you are a single parent, the primary financial support for your children would die with you. If you are lucky, you may have family members who would step in and help your children if you died. If you are even luckier, they will be able to provide your children with the education and lifestyle you had hoped for them to have. Your need for life insurance as a single parent is even greater than that of a dual-parent, dual-income household, which would still have one income if one parent died. Life insurance is a cost-effective way to make sure that your children are protected financially should anything happen to you.

    Debt obligations
    In this stage of life, you may still be paying for or even still accumulating education loans. You may have purchased a house or condo with a cosigner. If you died, your cosigner would be legally liable for the payments on the debt.

    Protect your insurability
    Another reason to buy life insurance at this stage of your life is to protect your future insurability. Once you buy a permanent, cash value life insurance policy, it remains in effect for your entire life (assuming the premiums are paid), even if your health changes. If you were to experience a serious change in health, you might not be able to buy additional insurance coverage, but you would still have the permanent coverage you already own.
Dual-income couple or family
If you and your spouse both earn an income, it is possible that if one of you died, the other may not be able to cope financially on the remaining income. If there are mortgages, joint credit cards or other debt, or children in the picture, the loss of one income could be difficult to overcome. The more people who depend on your income while you are alive, the more life insurance you should own. If you died today with insufficient or no insurance, your mate could be forced to give up the residence or lifestyle for which you have both worked. When there are children involved, the loss of one breadwinner could mean a setback in the daily way of life, not to mention any plans for private school or college.

Single income family
The single income family has perhaps the greatest need for life insurance protection. If the breadwinner were to die it could leave the surviving spouse in a very difficult position financially. Ideally, life insurance would replace the deceased spouse's income so the family could maintain their current lifestyle.

Parent of grown children
Just because your children have grown up and left the nest doesn't mean you have no need for life insurance. You may have spent your entire adult life building an estate that you intend to pass on to your children, grandchildren, or favorite charity. You can use life insurance to ensure that the bulk of your estate passes to your heirs or designated charitable organization subject to certain tax advantages.

Part of overall financial planning Determining your life insurance needs should not be done in isolation. Instead, it should be looked at as part of your overall financial plan, with consideration given to your goals for savings and retirement, as well as tax and estate planning. As your life changes, your financial goals may change, as well as your need for life insurance, making it important to also periodically review your coverage.

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How much insurance do I need?

Family needs approach
The family needs approach is one of the more comprehensive methods of calculating your life insurance needs. It assumes that the purpose of life insurance is to cover the needs of the surviving family members. This method takes into account the immediate and ongoing needs of the surviving family members, as well as income from other sources and the value of assets that could be used to help defray the family's expenses (such as bank accounts and real estate).

These needs may include:
  • Final expense fund (funeral, final medical expenses, etc.)
  • Housing fund (money to pay off the mortgage or provide for future payments)
  • Education fund (private school, college, etc.)
  • Emergency fund (many advisors recommend 3-6 months living expenses)
  • Income needs for the surviving family members
To project your family's need, click on our NEEDS CALCULATOR

Rule of thumb approach

A simple approach is to use an old rule of thumb that life insurance coverage should equal seven to ten times - some say as much as 14 times - a persons annual salary. Unfortunately, the multiples provide only ballpark figures, which may be totally inappropriate for a particular family's needs and goals. For instance, single people generally don't need anywhere near this much life insurance, while the primary breadwinner in a family with young children may need tons. A modified version of the multiples approach is contained in the following table, which was prepared by insurer Principal Financial Group, Des Moines, Iowa. It's essentially a worst-case calculation of how much life insurance would be needed to replace 75% of a person's take home pay if there were no other income for the survivors. Social Security benefits, a surviving spouse's salary and investment earnings, among other things, would lower the insurance needs.

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Should I buy term or whole life insurance?

The answer to this question depends on who you are and what the life insurance is for.

Term Insurance
  • Temporary (1 to 30 years) protection.
  • No cash value or equity build up (like renting an apartment).
  • Lower cost as compared to whole life insurance.
Typical profile of a term buyer
  • Wants protection for a fixed period of time. For example: Until the kids are grown and through college, until the breadwinner is through the working years, or until a mortgage is paid off.
  • High need for insurance protection, but not a lot of money to pay for it. This could be the case for a young family.
  • Is not concerned with using life insurance as a savings vehicle.
Whole Life Insurance
  • Permanent life insurance protection.
  • Has a savings component, which in most cases grows tax-deferred.
  • Typically has a higher monthly outlay than term.
Typical profile of a whole life buyer
  • Wants insurance that will stay in force for life. Perhaps has a large estate and has been advised to use insurance as part of the estate plan.
  • Has maximized contributions to available tax favored retirement vehicles (401k, IRA, etc.). Is looking for another place to save money long-term.
  • Can benefit from the tax-deferred cash build-up that most whole life insurance offers.

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How do I choose the right company?

Price is not the only factor to consider when shopping for insurance. Sure, you can probably get inexpensive insurance from a fly-by-night company, but will it still be around if you ever need to make a claim? It is extremely important to find a strong, financially stable insurance company that will be able to pay your death benefit when the time comes. Insurance company ratings--available for most major carriers--are tools that can help you evaluate the financial strength of an insurance company.

Who rates insurance companies, and how do they come up with their ratings?
Insurance companies are rated by five major rating services: A. M. Best (which specializes in insurance only), Fitch, Moody's, Standard & Poor's, and Weiss. Some of these services rate only a few hundred companies, while others rate thousands. Each service has its own criteria and philosophy for judging insurance companies. Most services base their ratings on both qualitative and quantitative factors, such as debt, claims-paying ability, investment portfolios, financial reports, and historical performance.

What do all of those letters mean?
Each of the rating services uses a variation of an A through F scale to rate insurance companies. However, an A from one rating service does not necessarily equate to an A from another rating service. For instance, an A rating from A. M. Best is an "excellent" rating, while an A rating from Moody's is only "good."

Click here for a detailed ratings chart

Rating services stress that their ratings are not a guarantee of the financial strength of an insurer, nor are they recommendations to buy a policy or product from a particular insurer. Ratings are merely opinions based on data as interpreted by the insurance industry and financial experts. They should not be used as the sole measure of a company's quality. Other factors, such as reputation, claims-handling procedures, and customer satisfaction, are also important. In addition, you shouldn't limit your universe of potential insurance carriers to those in the highest rating tiers. A company with a "good" rating and a low-cost policy may be a better value than a company with an excellent rating and an expensive policy. The rating and the other factors should be considered along with price when you make your purchase decision.

Where do I find insurance company rating information?
Rating information is available from a variety of sources. The easiest way to get rating information is to contact the rating service directly, either through its website or by calling its customer service department. Most rating services provide free rating information to consumers, although you may have to pay if you need more than a few ratings. Ratings are also published in books and magazines that can be found at your local library. If you don't want to look up the information yourself, ask your insurance agent or financial planner to do some research for you.

Contact information for the major rating services:

A. M. Best Company
Ambest Road
Oldwick NJ 08858
Phone: (908) 439-2200
Internet: www.ambest.com

Standard & Poor's Corporation
55 Water Street
New York NY 10041
Phone: (212) 438-2000
Internet: www.standardpoor.com

Fitch, Inc.
One State Street Plaza
New York NY 10004
Phone: (212) 908-0800
Internet: www.fitchratings.com

Moody's Investors Service
99 Church Street
New York NY 10007
Phone: (212) 553-0377
Internet: www.moodys.com

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What is the application process?

After you've run a life insurance quote, you can then select a company that meets your needs and request an application online. Someone from our office will then call you to gather additional information and schedule a medical exam. The exam can be completed at your home or office at no cost to you. You can also contact us by telephone to request an application. Our insurance advisors will assist you with the process and make it as easy and simple as possible. Completed forms are sent or e-mailed to you for your review and signature. Once we receive all completed forms the application is then sent to the insurance company to go through underwriting.

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What is underwriting?

Underwriting is the process by which an insurance company examines, accepts, or rejects insurance risks so as to charge the proper premium for the coverage. The company classifies the accepted applicants into different risk categories to charge the proper premium.

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How long will it take to underwrite my application?

The underwriting process generally takes anywhere from three weeks to two months from the time we receive all completed paperwork. The average time period is one month.

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What do I need to know about the medical exam?

Depending on the proposed insured's age, the amount of insurance the insured is buying, or other factors, a medical exam may be required after the application has been completed. The exam may include a physical exam, blood work, and EKG. Typically, the exam is performed by a licensed health professional that works for the insurance company. The insurance company pays for the exam and any lab work. The results are sent directly to the underwriter for review along with the proposed insured's application, although the proposed insured may request a copy.

Common Questions about the Medical Exam

How long will it take?
The medical exam will take approximately 20-30 minutes.

Where and when is it done?
The exam can be performed at home or in your office Monday though Saturday.

Who does the exam?
Licensed paramedical examiners in your area complete the exam.

What is included in the exam?
A typical exam consists of height, weight, blood pressure, blood sample, urine sample and brief medical history. With larger amounts of insurance an EKG or treadmill test may be required.

What kind of medical history will be asked?
The examiner will ask about surgeries, treatments and other medical conditions. They will ask for the names and addresses of any doctors you have seen in the last five to ten years. To speed up the process, you will want to have this information handy.

How can I best prepare for the exam?
Blood pressure and pulse can be artificially raised by stress, alcohol, caffeine and tobacco.
  • Get a good night's sleep the night before the examination.
  • Abstain from alcoholic beverages for at least eight hours prior to the exam.
  • Do not smoke or chew tobacco for at least one hour prior to your examination.
  • Avoid drinking coffee, tea or caffeinated soft drinks for at least one hour prior to your examination.
  • Limit salt intake and high cholesterol foods 24 hours before your examination.
  • You should not engage in strenuous physical activities 24 hours before the examination.
Advise your paramedical examiner regarding any medication you are taking, even if non-prescription medications.
  • Have available your physician's names, addresses, dates of past visits, names of any prescribed medications and any information regarding injury and major illness during the previous five years.
  • If you belong to Kaiser or any other prepaid medical plan, have your medical record number available.
Drink a glass of water an hour or so before your appointment. This will help in obtaining a urine specimen.

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What determines my rate classification?

The insurance company looks at many factors to determine the rate classification. Examples include:
  • Your current health and physical condition.
  • Your medical history.
  • Personal habits (including tobacco usage and any history of alcohol or drug abuse).
  • Your occupation (a coal miner, for example, presents a greater risk than a bank employee).
  • Your avocations and hobbies (auto racing is a hobby that carries additional mortality risk and will increase the policy premium).
  • Your age (a 60-year-old applicant will pay a higher rate than a 35-year-old).
  • Your gender (except in states with unisex rates; rates for females are lower than comparable rates for males at a given age since women enjoy longer life expectancies).

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What if I receive a higher rate than I applied for?

Because insurance companies may have slightly different rating criteria, if your application for life insurance is approved at a higher rate than what was applied for, in many cases, we will automatically shop other insurance companies on your behalf to find you the lowest rate possible.

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When does my coverage begin?

Your life insurance coverage begins once the policy has been issued and all of the delivery requirements have been returned to the insurance company. Delivery requirements may include a premium payment, statement of health, delivery acknowledgement form or amendment of application.

Temporary coverage during the underwriting process may also be available with some insurance companies. In cases where temporary coverage (also called conditional coverage) is available, coverage begins once the completed application has been returned to the insurance company with a premium payment and you have completed the medical exam. The coverage is contingent upon you qualifying for the rate you applied for and a few other factors. Read the conditional receipt of your life insurance application for additional information.

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Do I need coverage on my non-working spouse?

We believe in most cases it makes sense to have coverage on your spouse, even if he or she is not working. This is for three reasons: 1. A non-working spouse provides an economic benefit to the household that would have to be replaced in the event of his or her death. Money may be needed for childcare, house maintenance, etc. 2. There could be large medical bills incurred prior to death that would still need to be paid. 3. If the non-working spouse is the primary care giver for the children, should they die, the surviving spouse may want the economic freedom to spend more time at home and less time at work. Life insurance proceeds would provide this freedom.

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When should I review my coverage?

Most financial advisors suggest that life insurance coverage should be reviewed a least once a year to make sure it is still adequate to meet your families needs. Other times for a review would include: A raise in salary, the birth of a child, if one spouse stops working or any other significant change in your families financial situation.

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