IN DEPTH GUIDE TO PURCHASING LIFE INSURANCE
The purchase of life insurance is unlike most other purchases you’ll make in life. While it’s a product that has to be paid for many years, it’s also something that you hope you’ll never have to use. Even if it will be used, the proceeds go to your beneficiary, not you. And the proceeds could benefit your loved ones for many years after you’re gone. As a result, you should carry the perspective that you’re buying life insurance for your beneficiaries, and design the policy to serve their best interest. This is why having life insurance is such a selfless act of love, and also why it can be so difficult to commit to its purchase.
The steps below serve as a guideline to buying life insurance. Whether you’re purchasing online, or feel more comfortable sitting down with a broker face-to-face, the steps below will act as an in-depth guide on the process of purchasing life insurance. It can also be used for disability, critical illness, or long-term care insurance, although the processes for each of them differ slightly.
1. Identify: As mentioned in the first paragraph, life insurance should be purchased with the beneficiaries in mind. Start with the question, “how will my family’s lifestyle change without me?” with a focus on the financial aspect. You’ll need to have enough insurance in place to ensure that its lifestyle is not impacted in a dramatic fashion. In financial planning, this is referred to as your risk management goal and should be the first step in determining the amount of life insurance to purchase.
Your total insurance needs are usually comprised of cash needs and income needs. Cash needs include burial costs, paying off debts and other final expenses that are needed immediately after death. Income needs mean that your surviving family members will require a continuous stream of income now that a primary breadwinner of the family is gone. Existing sources of life insurance should be subtracted from the sum of the cash and income needs to yield the amount of life insurance that you need.
Of course, it’s always easier to use programs specifically designed to calculate your insurance needs. After you’ve figured out the value of each component that make up the cash and income needs, you will want to use a calculator to help you solve for the total required amount. There are many excellent life insurance needs calculator that are available online that can help you with this step. Here are some simple ones from Sun Life and BMO Insurance that do a great job at calculating your life insurance needs, and one from Manulife that also includes disability and critical illness needs.
2. Find a professional broker: The most important attributes of a life insurance broker are honesty and objectivity. He/she should always place your interests first. Otherwise, how can you trust him/her to find the perfect policy for you? You certainly want to be aware of signs that the insurance broker may not be working in your best interest. It is at this step where you can decide to buy face-to-face or online. The traditional face-to-face method provides a more intimate experience, although online is gaining popularity as people become accustomed to making purchases on the Internet.
Once you’ve found a suitable broker, explain your current situation and your risk management goals to him. Being an expert in the insurance field, he should be able to provide some valuable advice. For instance, given your life insurance needs and budget, he should be able to pinpoint a specific product, such as term-10, which is most suitable for you.
Although competence was not mentioned as a key attribute, it also shouldn’t be glossed over. Selling life insurance in Canada only requires the completion of a single course and application of a provincial insurance license. Essential credentials to separate the professionals from the rest of the pack include the Certified Health Insurance Specialist (CHS), Chartered Life Underwriter (CLU) and Certified Financial Planner (CFP).
A CHS specializes in an area called ‘living benefits’ which is the term used to described disability, critical illness and long-term care insurance. It also includes group benefits, extended health care and dental insurance and travel insurance that provides immediate access to healthcare. The expertise of a CLU includes risk management, wealth transfer, income replacement and estate planning, all of which are essential to life insurance. Finally, the most well-known designation of the three is the CFP. A CFP professional has the broadest of knowledge, and is educated on all aspects of financial planning, including retirement and investment planning. A CFP professional will be able to integrate your risk management goals into your comprehensive financial plan.
3. Shop: A life insurance broker, which is not affiliated with any particular insurance company, will be able to shop around for the best rates for you. A captive agent, on the other hand, represents a single company, and thus can’t offer you the same amount of choice a broker can. Because of this, captive agents have been phased out over the decades, and nowadays working with a broker is the more popular choice.
Make sure to ask the broker how many companies he is contracted with. If it’s only 1 or 2, then he does not provide much of an advantage over a captive agent. Ideally, he should have contracts with several insurance companies, so you know he has shopped around for his existing clients. Finding the best priced policy is one of the easiest ways to save on insurance premiums.
When comparing term insurance, it’s important to compare the premiums beyond the first 10 or 20 years of the policy, for it may vary drastically even if the initial term’s premiums are quite similar. There are some that differ by hundreds of dollars per month after the first renewal when the initial terms were identical!
Likewise, for permanent insurance, it isn’t as simple as looking at the price. Investment options, fees, cash values, coverage options, available riders and underwriting practices are all factors that should also be considered.
4. Apply: The next step is to fill out an application form. Some companies are starting to develop an electronic sales platform. But for the majority of Canadian insurance companies, a paper form is still the only format. An electronic submission should save time on the overall process, since applications are sent instantaneously instead of being mailed to the insurance company’s head office. Some software can even determine if you’re approved immediately, bypassing underwriting and saving time on the overall process.
5. Underwriting: When you apply for insurance, the insurance company will want to know as much detail as they can about you. This process, known as underwriting, allows the insurance company to assess your risk so that they’re able to formally offer you a contract. The risk assessed is based on all aspect of your life including medicals, financials, occupation and lifestyle. Similar to how a good driver receives favourable rates from a car insurance company, applicants with a good record in the above factors also benefit with lower premiums.
As part of the underwriting process, it may be necessary for you to undergo some medical tests. The most common tests include a paramedical exam, blood profiling and urine sampling. Other underwriting requirements may include an attending physician statement, inspection report or motor vehicle report. Fortunately, the insurance company bears the entire cost of underwriting, so there isn’t an out-of-pocket expense for you.
Upon receipt of the underwriting requirements, the underwriter will review the case and will come to a decision. You could be approved at the standard rate, which is the most common result. You could also be accepted at a higher premium, known as a rating, because of your increased risk. On the other hand, you can be approved with preferred underwriting to reward your above average health and lifestyle. Less common scenarios are that you may be declined insurance or an offer may be postponed, depending on the severity of your health or lifestyle risk.
6. Policy issuance and delivery: Once the policy is approved, it will be mailed to your insurance broker. He/she will then deliver it to you, assuming your health hasn’t changed since you first applied. If your health has changed, the underwriter needs to be alerted of this. Your broker will have to send the policy back to head office with the new information to see if there is a change to your risk level. If your health has remained the same since the date of the application, then your policy will be in force as soon as you sign the policy delivery receipt and pay for the first month of coverage.
With any insurance policy you have the right to change your mind within 10 days of policy receipt. If after you’ve read the contract and are unsatisfied with its content, you can return it to the insurance company for a full refund within this 10 day period. After the grace period has passed, you can still cancel the policy, but your initial premium will not be refunded.
7. Payment type: Insurance companies typically allow two types of payment: annually and monthly. A few companies also allow you to pay quarterly or semiannually. The longer the time between payments, the less expensive the premium. For example, if you choose to pay a $1,200 annual premium monthly, your monthly payments are greater than $100/month. This is because the insurance company receives the entire payment up front at the beginning of the policy year, instead of having to wait for the payments to come in over the course of a year.
You can also submit your payment at the same time as the application. The benefit of this is that under certain conditions, you will be covered immediately, without having to wait for policy delivery. The minimum requirement for this temporary coverage is that at least the first month’s premium must be paid at the time of the application. This is a way of obtaining coverage immediately after the application is completed.
8. Release of medical info: Information regarding your insurability will be treated as confidential. However, the life insurance company has the right to make a brief report to the Medical Information Bureau (MIB). The MIB is a non-profit organization of life insurance companies that provides information on applicants for its members for future applications and claims.
If you wish to obtain information on the reason the policy was rated or declined, you can inquire about the “Release of Medical Information” form. When submitted to the insurance company, they will release the relevant information to your physician. You can then schedule an appointment with your physician to discuss further. It is important to you to know the reasons behind the rating/decline so you can ask your physician for methods of improving your health and qualify at a standard rating in the future. It can also serve as a wake-up call to live a healthier lifestyle, in case you were unaware that your health was substandard.
9. Policy servicing: Once your insurance purchase is complete the process does not end there. Your personal situation undergoes constant change which may affect your need for life insurance. Some of the factors that may affect your risk management goals include the birth of a child, a promotion, the purchase of a home and the death of a family member.
After reviewing your insurance, you may find out that your current policy needs to be changed. For example, you may want to change your beneficiaries after a separation. Keep in touch with your broker so that he can connect you with the insurance company to make these changes.
When nothing can be done to your insurance policy to make it suitable to your current situation, you’ll need to replace it with a new one. Start over from number 1 and work your way through this list again.
And that is an in-depth guide on the process of purchasing life insurance. While it seems like a daunting task to complete all the steps, you will receive lots of help along the way. Your broker should assist you with any questions you may have, act as a channel for you to communicate with the insurance company to make your life simpler. Below is a sample timeline of how long each step should take. Keep in mind that there are exceptions to the timeline and it should only be used as an approximation.
Weeks 1-4: The application is couriered to the insurance company and is recorded in their systems. If additional medical underwriting requirements are necessary, they will be ordered by your insurance company or broker. It will take a few days for the nurse to contact you, set up an appointment, complete the tests and send the results back to the insurance company. Other reports such as the attending physician statement or an inspection report may also be ordered at this time. Depending on how quickly your physician’s office responds, this step can vary widely. You can speed up this step by letting your physician know that an insurance company may be contacting them. Usually they will understand and send the APS immediately. If no underwriting is required, your policy may be issued and delivered during this time.
Weeks 4-6: Additional underwriting requirements may be ordered during this time, depending on the results of the initial tests. For life insurance, additional tests could extend the underwriting process by up to 3 months, while additional tests for living benefits could postpone the process by up to 4 months. If no additional underwriting is required, your policy could be issued during this period.
Weeks 6-16: Policy issuance can occur anytime within this range of time, depending on quickness of underwriting. Once the policy is issued, it is mailed to your broker and he/she should arrange to meet with you for policy delivery.