Have you ever felt disadvantaged in a contest – ill-prepared for an exam – or just plain misinformed? Whenever this happens you could find yourself on the losing end of something important. With life insurance, getting the best rate possible for your situation is very important, and should be the goal going into your application process. To do that you need to be prepared by having some understanding about the way it works.
You don’t need to be an expert – you just need to know some basics. Knowing the basics will help you to be better prepared for your application process. Knowing what to expect will also give you an advantage, so you are in the strongest possible position to obtain your best rate.
You might think that learning about life insurance rating sounds about as interesting as sleeping on a brick. And you’d be right, if you cracked open a life insurance manual. However, I wrote a book that puts it in terms you’ll not only understand, but that you will also enjoy – at least more than sleeping on a brick! (But, if you like sleeping on a brick, try a manual first) 😊
Here’s an excerpt from my book, The Life Insurance Marathon, that tackles this subject. I dedicated an entire chapter to life insurance rating – and how to get your best rate for your life insurance.
Under the Microscope
How Is My Rate Determined?
FROM A LIFE INSURANCE company’s perspective, everything about life insurance is risk-based. You represent a risk to the life insurance company when you apply for a policy. If you die while the policy is in-force, the life insurance company will pay your beneficiary the death benefit. Since the death benefit is a substantial amount of money, compared to the premium collected from you, the life insurance company has a strong incentive to reduce their risk through a process called underwriting. After your application is submitted, the underwriting process helps the life insurance company decide if you are a good risk, an average risk, a below average risk, or if they need to decline your application. In other words, they really want to get to know you.
Have You Ever Applied for a Loan?
It’s similar to a loan application process at your bank; you represent a risk to the bank. The bank needs to do their best to determine how likely it is that you will fully pay back the money you borrow. They look at your income, your credit history, years of employment, the collateral you’re offering, and more. Then they either deny your loan application, or they offer you the best terms they can based upon the information they have gathered.
The very best loan terms a bank can offer always go to the applicants who don’t need the loan. The credit and employment history of these applicants is so stellar, they could easily secure the friendliest terms from another bank because the risk of default is so low. It’s a similar process with life insurance, the best rates go to those who are the lowest risk for the life insurance company. The younger and healthier you are, the lower your life insurance premium will be. The opposite is also true. As you age and/or your health declines, your life insurance premium for a new policy will increase.
Here’s the great news! Once you lock in a price for a life insurance policy, the price will remain the same if the policy offers a guaranteed level premium. Even as you age, or your health declines, your premium will still remain the same. Again, this is similar to a loan from your bank. Once you’re approved and the loan is funded, your fixed interest rate will not increase due to your changing situation, even if you lose your job and your credit is negatively affected. Similar to a loan from your bank, the life insurance company cannot change the terms in the future.
Getting to Know You
So how does life insurance underwriting work? And what can you do to secure the best rate for your situation? There are five general categories of information that impact your eligibility and rate:
- Financial situation
Every life insurance company is interested in gathering information related to these five categories when underwriting an application for life insurance. While every company gathers similar information, they often have different ways of processing and interpreting the information. For example, some companies specialize in understanding diabetes so they can offer a more accurate rate to diabetics. Others are more general in their understanding of diabetes, and therefore may be less friendly to a diabetic applicant.
If you have a health condition, knowing which life insurance companies offer specialized underwriting for that condition is vital to securing the best rate. The key is to work with a well-organized life insurance agency that has access to many different life insurance companies, and who understands each of their underwriting niches.
HIGH-RISK APPLICANTS CAN STILL GET DECENT RATES
A friend recently approached me to shop a life insurance policy for him. I must admit, I was a bit skeptical about his ability to qualify. He had a stroke four years earlier at the age of 39, but was otherwise in very good health. I submitted a trial application for him to find out if any companies would consider a formal application. Most of the companies declined to cover him or proposed an extreme rate increase for what they call a sub-standard applicant. I was, however, pleasantly surprised to learn that two of the companies were willing to offer a standard rate, pending additional underwriting. Both companies are among the largest in the industry so I felt great about these initial offers.
Like any other industry, life insurance companies have their niches, so don’t count yourself out if you have a non-terminal health condition. In most cases there is a company that will offer you a policy, and its rate offer may be a pleasant surprise. Now let’s take a closer look at the five categories that determine your rate, and some tips to help you secure the best rate possible.
Once you begin to understand life insurance, you can take steps to properly protect your loved ones. It’s much easier than most people think!
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