September is marked as “Life Insurance Awareness Month”, and while we at Independence Advisors do not sell any type of life insurance (or any insurance product for that matter), we recognize the importance of life insurance (and other insurances) in the context of a holistic financial plan.
In this blog, I will not go into the different types of life insurance or the different ways life insurance is used in financial plans. Rather, I am going to touch on a few high-level issues common with many life insurance policies that are important to keep in mind on an annual basis.
Health Rating/Underwriting Class: For most life insurance policies, the proposed insured must go through a medical exam (height, weight, blood, and urine) along with a medical history from their physician. Insurance companies have different names for each rating, but for simplicity’s sake let’s break them down into two categories:
- Non-Smoker: Standard, Preferred, and Super-PreferredSmoker:
- Standard Smoker, Standard-Plus Smoker
Using logic, Smokers receive higher premiums than Non-Smokers, and Super-Preferred Non-Smokers receive the best premiums (lowest dollar amount). Smoking, along with high cholesterol or other medical issues can increase your premiums substantially.
Action: What many people do not know, is that they can go back to the insurance company a few years later and try to improve a substandard rating – thus decreasing their premiums. An example, if I received a smoker rating at the beginning of the policy but have since stopped smoking, I can go back to the insurance company and try to get a new health rating. For example, if you have not smoked for 5-7 years an insurance company may consider changing your underwriting class – typically after a new medical exam if done. This can be done for other various medical or lifestyle issues in an attempt to get a better rating and lower premium – it can never hurt to ask!
Reducing the Face-Amount of Coverage: Many times we find clients that have purchased life insurance coverage (specifically term coverage) to make sure they are protected while their children are in school and/or while they are working. At the time the policy is purchased, they may elect to have the maximum amount of coverage – but as life moves on, the original amount of the policy may be more than is necessary. In most cases, you are able to reduce the face amount of coverage while keeping the policy in place, but at a coverage amount that is suitable and at a lower cost.
Example: I buy a life insurance policy in my 30’s for $2 million of coverage. As I approach retirement and my kids are no longer in school, I determine I only need $500k of coverage. I could reduce the coverage to $500k, which keeps the policy in-force and while reducing my premiums.
There are many other issues we look at when reviewing a client’s life insurance policies – but these are just a few high-level matters to keep in mind when reviewing your current coverage. Insurance has a place in everyone’s financial plan, it is important to review your coverage to make sure everything is working according to your needs and plan. Please let us know if we can help with any questions that may arise!