As an insurance agent, I am interested in the way new risk factors affect my industry. I searched the internet for news stories of life insurance and Covid-19. One news story seemed to paint a dire picture for people trying to get term life insurance. I wrote an email to the author explaining that term life insurance is traditionally the most difficult type of life insurance to qualify for, even under normal circumstances. Part of the appeal of term life insurance is low premiums. The only way to maintain low premiums is through a low rate of claims. To give you an idea, one life insurance company (I promised not to mention their name) told me only about 1% of their term life policies result in a claim. With a claims rate that low, any new risk factors could dramatically increase premiums. So it stands to reason that term life policies have additional underwriting restrictions for Covid-19 in order to protect premium rates.
My email continued by mentioning another type of life insurance policy that has been relatively unaffected by Covid-19: simplified issue whole life. Most simplified issue whole life policies haven’t made any changes to their underwriting guidelines. One of the few companies that made changes added a Covid-19 questionnaire and they temporarily reduced the maximum issue age to 75 (they normally issue policies to age 85). However, it’s important to note that even if a company doesn’t change its underwriting guidelines for Covid-19, people can still be denied coverage if they experience damage to major internal organs. Recent damage to internal organs usually has underwriting consequences regardless of the pathogen that caused the damage. Some insurance companies may not feel the need for Covid-19 restrictions because they already deny coverage for anyone with a recent hospital admission. If you have any questions, don’t hesitate to contact me.
Below is a quick reference for the benefits of simplified issue whole life:
- 1st Day Coverage. For non-modified plans, you are fully protected the very first day your coverage goes into effect with no waiting period.
- Ease of Issue. No physical exams.
- Premiums will Never Go Up. Lock into a rate at your current age and the cost will never increase regardless of changes to your health and age.
- Benefits will Never Go Down regardless of changes to your health and age.
- All Policies Build Cash Value.
- Benefit is Paid Tax Free for lump sum payments.
- Your Policy Can Never be Cancelled as long as premium payments are made.
- Protected Asset. You will never be forced to liquidate this plan (assuming you have a living beneficiary).
If you have any questions about these benefits of simplified issue whole life, don’t hesitate to send us a message.
The great thing about being young is the number of options available. This applies to whole life insurance as well. I will discuss four whole life options for young adults: simplified issue whole life, fully underwritten whole life, limited pay whole life, and single premium.
Simplified issue whole life is the easiest to sign up for. Only a handful of underwriting questions are asked and most of the time you have an underwriting decision before the agent walks out the door. This type of policy is highly recommended for seniors, but young people usually have better options.
Fully underwritten plans are good for young adults, but not for older adults. Of course this is a generalization. There are certain circumstances where I would recommend the opposite. Fully underwritten doesn’t always mean medical exams. There are no medical exams if the policy is small enough. A physician statement might be required (a statement from your doctor claiming you are in good health). Physician statements don’t require any effort from the applicant, but they do slow down the underwriting process since doctors typically view physician statements as a low priority.
The next type is limited pay whole life. This type of policy has advantages. The first advantage is the limited number of payments before the policy is paid up in full. You can have the policy paid up in 10, 15, or 20 years. You can even have the policy paid up at a certain age, like when you’re 65 or 85. The other advantage is having a policy paid up before you retire. Paying for life insurance in retirement can sometimes be a heavy burden. There are two versions of limited pay whole life: simplified issue and fully underwritten.
The last type is single premium. This type gives you whatever coverage one premium payment can buy. This is a one and done deal. The biggest downside to single premium plans is the lack of tax advantages (the IRS treats these plans less favorably than other plans).
I remember a debate a while back about insurance agents and fiduciary responsibility. Fiduciary responsibility means that someone can be held liable for enrolling a client in a product, knowing that a better product is available. To my knowledge, insurance agents don’t have a fiduciary responsibility to the policy owner unless they are selling products that require a securities license (variable products).
In my opinion, insurance agents need fiduciary responsibility with graded whole life. Currently, insurance agents are required to disclose the limitations of graded whole life, but they do not have fiduciary responsibility per se. I can understand certain underwriting situations where an agent doesn’t know of a better offer because very few insurance companies would make a better offer. I am talking about the obvious situations where nearly all companies would offer something better. I think insurance agents should be held responsible in those situations.
When high risk clients come to the realization that graded whole life is the only option, I often hear them say, “Well, I wasn’t planning to die in two years anyway.” I think they say that to make themselves feel better, but the reality is that many people do pass away in the first two years of a policy.
Insurance agents are the last line of defense against inferior products. Even in a situation where you think graded whole life is the only option, an agent might be able to surprise you with something better. You should never buy graded whole life without consulting an agent. When your goal is to fund a cremation or burial, simplified issue whole life should be the product to reach for.
Everyone wants the most coverage for the lowest price. However, you have to be careful with term life for seniors. The appeal of these plans is their initial price. They are often the cheapest option when first purchased. However, the premium rates are not locked in like whole life. Instead, consumers will experience a premium increase every five years. If the consumer can somehow afford all the price hikes, the policy automatically cancels at age 80, 90, or 95 (depending on the company). Whole life may be more expensive at first, but you will eventually save money with having a locked in rate. Meanwhile, your neighbor who has a term life product looks disappointed because a premium increase just showed up in the mailbox.
Be careful of slick advertising that spends most of its focus on price. That should be a red flag. A focus on price is a way to divert attention from the product’s disadvantages. Check out quotes for simplified issue whole life where you will see policies that don’t go up in price or cancel at a certain age.