Just like most U.S. consumers, physicians are reticent about life insurance and typically procrastinate with research and purchasing even though they are intimately aware of the need and benefit. They certainly know and understand that there are many products available and that they indeed have a need for financial protection. But like most consumers, they loathe the idea of an expected drawn-out process and perceive the purchasing process to be painstaking.
The industry as a whole continually contributes to making the subject of something as simple as life insurance for physicians difficult to understand. Although there are many simple to purchase products in the marketplace, a one-page application still results in a twenty-page policy with terms that only an industry expert or attorney would typically understand.
The focus of the following text is to offer answers to prevalent questions in a manner that makes life insurance more understandable. Physicians need to know the difference between one product and another and how it may or may not offer solutions to their financial protection needs.
There are three basic types of life insurance but, each type has many variations with additional options that can be added depending upon your needs. But, again, there are only three basic types of life insurance.
- Term Life Insurance: This product is life insurance that pays a death benefit to the beneficiary or beneficiaries listed on the policy if the insured dies during a specified term (specifically annual, 5-years, 10-years, 20-years, or 30-years,) also known as the policy period. Simply put, if you pay and then die during a specified period, the insurance company pays your beneficiary, end of story.
- Universal Life Insurance: Universal Life (UL) is a combination of term insurance and a savings account similar to an annuity. UL can be easily be misunderstood if not explained in a simple fashion. In contrast to term insurance, which offers temporary financial protection, if set up properly, UL is considered permanent insurance. The premium charged for the UL policy is typically more than the cost of insurance in the early years of the policy and then is actually less than the cost of insurance in the later years. The company directs the overage of the paid premium in the early years to a cash account that earns interest tax-deferred. Then, in the later years when the periodic premium is short of covering the cost of insurance, the company will use a portion of the money in the cash account to make up the difference and therefore the policy remains in force. The funds in the cash account are always available to the policyholder and can be withdrawn through policy loans or partial surrender. Any funds withdrawn are non-taxable because they are considered a return of premium. Lastly, the UL policy is extremely flexible since the death benefit, and periodic premium can be changed during the policy period to accommodate the needs of the policyholder whereas with other types of insurance (term and whole life) this is not allowed.
- Whole Life Insurance: Considered to be the oldest form of life insurance, Whole Life is considered permanent insurance because as long as the periodic premium is paid, the policy will remain in force for the lifetime of the insured. The periodic premium that is calculated when the policy is issued is etched in stone. It will never change unless the policy becomes paid up. Since the periodic premium is more than the cost of insurance, the Whole Life policy also builds up cash value that is available to the policyholder via policy loans or partial surrenders.
These three are considered the basic forms of life insurance. There are however, many variations to each along with optional coverages (riders) that can be added to help the applicant meet the needs of their individual situation.
With life insurance, insurance companies have become very creative to respond to the needs of consumers. Using term, universal life, or whole life insurance as a basis, insurance companies continue to offer variations or hybrids in the marketplace.
- Term Variations: Even a basic product like term insurance can be purchased in various forms to meet your individual needs. Decreasing Term is a product that is used to cover loans for the policyholder. Designed with a death benefit that decreases over time, this product has been used widely to cover a mortgage, vehicle loan, and personal loans. As the loan balance decreases, so does the death benefit which saves the policyholder premium dollars over time.
There are also several riders (options) that can be added to a term policy such as an additional insured rider which allows you to add a spouse to the policy, a child term rider that allows for all children born now or in the future to be added, a waiver of premium that allows the insurer to pay your premium if you become disabled, an accidental death benefit that pays an additional death benefit if you die as the result of an accident, and return of premium that allows all premium paid to the insurer if you outlive the policy.
All of these will enhance the basic coverage that a term policy provides. The policy is purchased for periods of time such as annual, 5-year term, 10-year term, 20-year term, and a maximum of 30 years.
- Whole Life Variations: As insurers attempt to garner money that is used for investing, they have developed whole life policies that can be used for financial protection and act as an investment vehicle. The Variable Whole Life insurance policy was designed to allow policyholders to direct the funds in their policy’s cash account to sub-accounts. A sub-account is similar to a mutual fund and can enhance the amount of interest being credited to the cash account in the policy. The insurance policy remains permanent since it remains in force for the life of the insured and premiums will remain unchanged as well.
- Variable Universal Life: Variable Universal Life (VUL), is a hybrid UL policy which allows for the cash value to be directed into a variety of sub-accounts which are then invested into a variety of accounts similar to mutual funds. The policyholder is given the choice of which accounts to invest in such as stocks or bond markets.
- Equity Indexed Universal Life: An Indexed Universal Life policy (EIUL) is similar in many ways to a Variable Universal Life policy except the funds in the cash account can be invested into subaccounts that can accumulate earnings based on index performance from market indexes such as the S&P 500 and NASDAQ. Since the investments are made into securities type accounts, the EIUL is governed by the SEC rules and regulations. EIULs can be very complex, so the consumer should always consult with a licensed professional to make an informed decision about purchasing this product.
The underwriting process can be as confusing to consumers as the policy itself. Do I have to have a medical exam? Why do they need my medical records? Can I purchase insurance that doesn’t require medical information? Do I get my money back if I’m declined? What is the MIB?
Let’s take each of these questions (fears) and deal with them.
- Do I have to have a medical exam? Depending on your age, health, and the death benefit you apply for, you may need to have a medical exam. All standard insurance is underwritten, meaning the company must have a clear picture of your health history to apply an accurate rate to your policy.
If you are younger and in good health, you’ll likely need only a para-med exam which typically involves a blood and urine sample and a few additional medical questions by a licensed technician. If you have some medical history or if you are getting on in years, the insurance company will likely require some additional testing, but the good news is you don’t pay for it. In almost every case, however, the underwriter will want information from your health care provider, and they pay for that as well.
- Why do they need my medical information? Your insurance premiums are based on several things. Your age, your health history, if you use tobacco or nicotine products, and your height and weight. Although we’re all upstanding and honest consumers, your underwriter will want to corroborate the information you provide by getting as much information as possible from your healthcare provider. It helps the insurer establish the appropriate rates, and it helps you by getting the lowest rate possible according to your verified health history.
- Can I purchase insurance that doesn’t require medical information? Yes, you can. There are guaranteed issue policies available from insurers that ask only a few medical questions. But, the premium you pay will be significantly higher than a policy that has gone through medical underwriting because the insurer cannot get a clear picture of the risk they are taking.
- Do I get my money back if I’m declined? In fact, in most states, you will get a refund if you are not satisfied with your policy within the first thirty days (yes, you are covered during that time).
- What is the MIB? The MIB or Medical Information Bureau is a national database that contains certain health information for people who have been DECLINED insurance because of underwriting reasons. This database does not contain medical information on everyone, only those applicants that have been declined coverage.
Probably at the top of the frequently asked question list, knowing your insurance needs can be easy to determine. Your agent will help you understand how much insurance is recommended by doing a “needs analysis.” This is a simple method (usually done with software) of exploring your current financial situation, combining the information with your future financial needs that will result in a clear picture of your insurance needs. You then have the option of taking care of all or a portion of the needs you have discovered.
Although this question should be answered by your agent, there are some things to consider that will help you better understand which type of policy will best meet your needs.
- Term Insurance: Term insurance is the most affordable of all types of insurance products. It’s used primarily to insure against debts that will be paid within thirty years. Young families that accumulate significant debt will typically purchase term insurance because of the low cost for a large amount of insurance.
- Whole Life: Whole life insurance has a bad reputation but may be a fit for the conservative investor who wants a guaranteed investment along with a guaranteed death benefit. This product can be a solution for those who wish to have a fund available for final expenses in the event of their death.
- Universal Life works great for individuals looking for a low-cost life insurance that will also build significant cash value during the policy term. It is a means of saving for the future but has the option of withdrawing money without tax liability. It is also flexible and can be changed during the policy period to accommodate changes in the financial situation of the insured.
- Equity Indexed Universal Life: The EIUL is a great solution for the individual who is looking for a death benefit and wants to earn significant interest on their investment. Since the policy has a floor on investment losses, values from the previous year will not be affected in a down market. The policy acts as insurance against financial loss for surviving loved ones but also as an investment vehicle during the life of the insured.
One of the best things about life insurance is there is considerable competition between insurers in the marketplace. Many which are highly rated, offer competitive rates for their products and are willing to accept individuals who might normally be declined in a conservative market. Some of the better companies offering products nationally are:
- Northwestern Mutual
- New York Life Insurance Co.
- Lincoln Financial Group
- John Hancock Financial
- Prudential Financial
- American International Group
- Guardian Life
Although life insurance can appear confusing to U.S. consumers, it is a necessary evil to deal with. When you rely upon a reputable and experienced insurance professional to help you navigate the life insurance landscape, you will find that having the peace of mind of knowing your loved ones are taken care of in your absence, is well worth the effort applied.