Despite their simple purpose and straightforward financial structure, life insurance policies may come with an exceedingly complex collection of caveats, riders and coverage exemptions. Life insurance shoppers frustrated by the time-consuming process of vetting individual policies and choosing proper levels of coverage may fail to perform adequate due diligence. In a worst-case scenario, policyholders who fail to catch a key loophole or restriction in their policy may render their beneficiaries unable to collect benefits.
Consider Your Family’s Needs
First, prospective policyholders must choose a policy type that reflects their family’s needs. Since it offers guaranteed payouts, whole or permanent life insurance is far more expensive than term life insurance. Depending upon the prospective policyholder’s age and health, and the time of purchase, a whole life policy may cost six to eight times as much as a term life policy with a comparable face value.
Consider the Size of the Policy
Likewise, a policy’s size plays a major role in determining its cost. Once their mortgage has been paid off and their children are no longer in school, most people have little need for an expensive, high-payout policy. As such, shoppers should have a candid conversation with their insurance agent or use an online life insurance calculator to right-size their policy.
Do You Need “Level Term” Life Insurance?
Term life policyholders who initiate coverage early in life may need to renew their policies more than once. Before signing up for a policy, insured parties should confirm that it provides for unbroken coverage during the entire length of its term, preferably at a guaranteed rate. This is known as “level term” life insurance. Likewise, the best term life policies offer policyholders the option to convert their policies into permanent plans that offer guaranteed death benefits without term limits. While this can be costly, most insurers prorate the rolled-over policies to reflect policyholders’ prior premium payments.
Check to see if Your Policy Requires a Medical Exam
Prospective policyholders should ask their future underwriters whether they require an official medical exam from their customers. Most insurers waive the medical exam requirement for term policies issued to customers under age 40 and valued at less than $100,000. Likewise, prospective policyholders should determine how their beneficiaries may elect to receive payouts. Underwriters who don’t offer a lump-sum payment option and pressure beneficiaries to receive death benefits in the form of exotic long-term annuities may be hiding something.