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Managing your life insurance in the COVID-19 era

The life insurance landscape in 2020, like so many other things, is complicated by the COVID-19 pandemic. Beneficiaries are concerned about receiving death benefits for insureds who died of COVID-19, and would-be policyholders aren’t sure they can even get life insurance in the midst of a global pandemic. Fortunately, the insurance industry is strong enough to take these circumstances in stride.

For the most part, death benefits are being paid out for coronavirus-related deaths — but there could be exceptions, particularly if the insurer finds inaccuracies on the initial application. As to whether you can get life insurance as the pandemic rages on, the answer is usually yes, with some exceptions. If you have symptoms of COVID-19 or have already tested positive, your life insurance application is likely to be declined.

Most applicants who are in good health can get life insurance — though the process may take longer than it used to. The trickiest part of your life insurance application in the COVID-19 era may be the medical exam. There are reports that some insurers are temporarily waiving the exam requirement in lieu of medical records. Others may simply approve the policy without the exam. Insureds may or may not have the option to take an exam later for a lower premium.

You can navigate these tricky waters best by getting clear instruction from your prospective insurer on what’s expected of you. Be organized and responsive to any information requests. And finally, be patient.

What is life insurance?

Life insurance is an agreement between a policyholder and an insurance company. In return for the payment of premiums, the insurance company agrees to pay a lumpsum when the insured individual dies. That lumpsum is called the death benefit, and it is paid to the policy’s designated beneficiary.

How does life insurance work?

How does life insurance work? Often, you would contract directly with an insurer to initiate your own life insurance. In that case, you are the policyholder and you are also the insured. As policyholder, you’d designate one or more beneficiaries to receive your death benefit. Upon your passing, your beneficiary or beneficiaries file a claim with your insurer to receive the funds. That benefit is nontaxable and there are no restrictions on how the beneficiary uses it.

In some situations, the policyholder and the insured can be different. A business, for example, might hold a life insurance policy on its CEO. In that case, the business is the policyholder and pays the premiums, but the CEO is the insured. The business would also be the beneficiary. This arrangement is only legal if the insured’s death would cause financial harm to the policyholder. In other words, you can’t establish life insurance on a stranger or someone whose death would not affect you financially.

Types of Life Insurance

The two primary categories of life insurance are term life and permanent life. Before you get too far in your search for life insurance, it’s critical to understand how term and permanent life policies differ.

Term life insurance

Term life insurance has a fixed premium for a specific period of time, or term. If you stay current on the premiums and you pass away while the policy is in force, the insurer should pay the death benefit out to your beneficiaries. After the term expires, you can usually renew your coverage at a higher premium or simply let the policy expire. Some term life policies can also be converted into permanent life insurance, which is explained below.

Term life insurance is less expensive than other types of life insurance because it offers only the death benefit and no other features. It’s often used by younger families who want to secure a death benefit on the household’s bread winner. Should something happen to the income earner, surviving family members can use the death benefit to pay off a mortgage or otherwise establish their own financial security.

Permanent life insurance

Permanent life insurance doesn’t have an expiring term — it covers you for the rest of your life, assuming you keep up with the premiums. This form of life insurance has a savings component in addition to the death benefit. When you pay your premium, a portion covers the cost of your insurance and a portion is funneled into a savings account. The money in that account is called your cash value. It’s invested on your behalf according to the terms of your policy and grows over time.

Permanent life policies generally allow you to access your cash value while you are living in some way. Many permanent life policies, for example, let you borrow against your cash value at a competitive interest rate and with no defined repayment schedule. You may also be able to withdraw funds directly. Generally, any borrowings or withdrawals will reduce the policy’s death benefit.

Notably, permanent life insurance has some appealing tax characteristics. Investment earnings in your cash value account normally do not incur taxes year to year. You can even access those funds without tax implications. Generally, you would only incur a tax liability if withdraw or borrow more cash than you’ve paid in premiums. Surrendering your policy or selling it in a life settlement can also be taxable if the proceeds are in excess of your cumulative premium payments.

There are many flavors of permanent life insurance, which should be clearly understood before buying such policies, to ensure that guaranteed protection would continue up to the desired attained age.

Common misconceptions of life insurance

Life insurance is easily misunderstood. The confusion arises partly because the contracts can be fairly complex, but also because life insurance can serve different financial purposes. Two common misconceptions about life insurance have to do with who benefits from the policy and when those benefits are available.

Misconception No. 1: I buy life insurance for myself.

Life insurance can have different features, but the most recognized feature is the death benefit. And that death benefit isn’t for you — it is a gift you leave for your family. You might purchase life insurance to ensure that your family members can maintain their standard of living after your death. Or, you might simply want to set up a guaranteed inheritance for your heirs that cannot be claimed by your creditors. Either way, it’s an investment you make in your loved ones and not yourself.

Misconception No. 2: I don’t get anything for my premiums while I’m living.

Permanent life policies do allow you to access your benefits while you are living. Each policy specifies these options, but you may be able to withdraw your cash value or borrow against it.

Your insurer may also offer add-on features that would provide even more options for accessing the funds while you are living. An accelerated death benefit, for example, lets you use part of your death benefit to pay for medical costs if you are diagnosed with a terminal illness. You might also have the option for a long-term care rider, which provides monthly payments to help with required nursing home or custodial care.

Because you can tap into your permanent life policy while you are living, you could design your insurance to function as an extra security blanket for your retirement. If your policy allows it, you could access the cash value as income or use it to fund healthcare in your senior years.

Life Insurance Underwriting Process

When you apply for life insurance, a life insurance agent reviews your information and provides a quote for your coverage. The insurance carrier then conducts a deeper review and either confirms that quote or adjusts it either upwards or downwards based on the results of several tests.  That deeper review is called underwriting. Knowing the basics of life insurance underwriting can help you avoid unnecessarily high premiums.

Full underwriting

Unless you’ve specifically requested a simplified or shortened underwriting, your life insurance application should go through the full medical underwriting process. That means you can expect to complete a health questionnaire or interview and submit to a medical exam. You may also have to authorize access to your medical history, credit history, and, possibly, financial records.

The medical exam is typically done by a mobile technician who’s sent to your home. The technician would check your height and weight, measure blood pressure and pulse, and collect blood and urine samples. The samples are sent to a lab, normally to check for drug use, life-threatening conditions like HIV, along with general health measures such as cholesterol and glucose levels.

The insurer uses all of that information to evaluate how risky you are to insure. If you’re in poor health, there’s a higher chance the insurer will have to pay out the death benefit sooner — and that translates to a higher premium. If you are generally healthy, you are lower risk and the insurer can provide your coverage at a lower cost.

Full underwriting can take two to six weeks from the time you submit your application. At the end of the process, the insurance company either confirms the quote you initially received, provides a counter offer in terms of price and/or coverage amount, or makes a counter-offer to provide additional insurance for an extra charge.

Accelerated underwriting

Two types of life insurance have an accelerated underwriting process: simplified-issue life insurance and guaranteed life insurance. Both are normally more expensive that standard life insurance with full underwriting.

Simplified-issue life insurance does not require a medical exam. You only need to answer a few questions about your health and health history. This may sound appealing, but there is a cost. If you don’t provide the insurer with a complete picture of your health, your premiums will probably reflect a worst-case scenario. In other words, unless you have chronic health issues, you’ll pay substantially more for the same death benefit if you forgo the medical exam.

An application for guaranteed issue life insurance won’t even ask you any health questions. Everyone is approved, regardless of health. The caveat is that the death benefits on these policies are typically very small and intended only to cover burial expenses. Guaranteed issue life insurance is also expensive, more so than simplified issue.

How much is life insurance?

Life insurance premiums vary dramatically depending on several factors, such as:

1. The size of the death benefit

2. The type of life insurance; term life insurance is more affordable than permanent life insurance

3. Any special features or riders on the policy

4. Your age, health, and gender

5. Your lifestyle: whether you smoke, use recreational drugs, etc.

Average national life insurance rates

According to data from S&P Global, the average premium across all life insurance policies in 2019 was $44 monthly or $538 annually. That average includes everything from cheaper term life policies to more expensive permanent life policies with all the bells and whistles. For context, the premium on permanent life insurance can be 10 or 12 times what you’d pay for an equal amount of term life coverage. In that light, the average across all policy types isn’t terribly meaningful.

You can get a better sense of the life insurance rates you’ll pay by looking at sample rates by policy type. The table below shows term life and whole life premiums by age. Whole life is the most common type of permanent life insurance. It offers fixed premiums and a guaranteed rate of return.

As you can see, term life is fairly affordable when you are young, but the rates get substantially higher as you age. Whole life is a much larger investment than term, but you should get the benefits of tax-deferred investment returns and cash value that you can access while you are living.

Note that life insurance is prohibitively expensive for smokers. If you smoke, expect to pay three-to-four times more than the nonsmoking premiums shown here.

Who needs life insurance?

Some experts only recommend life insurance for those who have dependents. It is true that life insurance is commonly used to create financial security for family members who depend on your income, but that’s not the only reason to initiate life coverage. You also might need life insurance in these scenarios:

1. You have elderly parents who have no life insurance. You could initiate a policy that’s intended to pay for their burial expenses.

2. You want to provide a tax-free inheritance to your loved ones.

3. You don’t want your loved ones to pay for your burial expenses.

4. You have maxed out other tax-advantaged retirement plans, such as a 401k, and you would like to supplement those portfolios with another tax-deferred investment.

5. You have shared debt with a spouse, such as a mortgage. You’d like to secure funds that could pay off that debt after you’re gone.

At what age should you buy life insurance?

The right age to buy life insurance is different for everyone. If you can support the premiums, there are some advantages to investing in life insurance in your 20s. If that’s not possible, know that most people are better off securing their life coverage before the age of 65. That’s not to say you can’t get coverage as a senior who’s older than 65 — you can. Seniors have a range of life insurance options, but the premiums get more expensive as you get older.

Advantages to buying life insurance at a young age

The advantages of buying life insurance when you’re young include:

1. The premiums should be lower, for two reasons. Insurers can charge you less annually because you will pay those premiums for a longer period of time. But you’ll also pay less because you are healthier and have a longer lifespan when you’re young.

2. When you are younger, you typically have lower cash balances and higher debts. If you have a spouse or children, they may not have the resources to support those debts and maintain their quality of life without you. A death benefit could provide those resources if something happened to you unexpectedly.

3. With respect to permanent life insurance, you may also get more value from your insurance by initiating the policy earlier. This is because the cash value tends to grow slowly at first and pick up speed over time. Should you initiate a permanent life policy in your 20s, for example, you have decades to build a sizable cash value balance that will be available by the time you’re ready to retire.

Disadvantages to buying life insurance at a young age

The main disadvantage of purchasing life insurance at a young age is that your life situation could change significantly. For example, you might buy life insurance to protect your young spouse who wasn’t working in the early years of the marriage. If you divorce, you probably don’t want to support that premium any longer. There are options, though. For example, you could change the beneficiary. Or, with respect to permanent life insurance, you could cash out the policy by surrendering it or selling it in a life settlement.

What’s the Best Policy for Me?

The right type of life insurance for you will depend on what you need to accomplish. Permanent life policies are often appropriate in these situations:

1. You want to leave an inheritance.

2. You want to supplement your retirement income.

3. You want a backup plan to help pay for long-term healthcare expenses.

4. You want tax-deferred earnings growth.

5. You can afford higher premium payments in exchange for the opportunity to build cash value.

6. You want to secure funds to pay for your funeral and burial, so you loved ones don’t have to absorb those costs.

Term life may be the right choice when:

1. You want to protect family members who are temporarily reliant on your income.

2. You want to make sure your debts can be paid off until the kids are grown.

3. You want to ensure your kids have funds for college tuition, even if something happens to you.

How Much Life Insurance Do I Need?

For term life, experts recommend you buy insurance equivalent to 10 times your annual salary. That means if you make $100,000 annually, you’d want a $1 million policy. Alternatively, you could add up the expenses that the death benefit would need to cover, such as:

1. Your salary for at least five years

2. Outstanding debts, including the mortgage

3. Burial expenses

4. Future college tuition

The right amount of coverage for a permanent life policy, however, is less clear cut. The first issue to contend with is the cost. A $1 million permanent life policy can be prohibitively expensive for most households. Plus, it’s likely that by the time you die, your mortgage will be repaid and your kids will have graduated from college. What’s left at that point is your future cash needs, plus any inheritance you want to leave. For that reason, you might land on the right coverage level by evaluating what you can afford to pay in premiums as well as how much you’d like to your family to receive when you’re gone.

How to buy life insurance and what to look for

The first step in buying life insurance is understanding what you need. The second step is finding an agent or broker you trust. You certainly can shop life insurance policies on your own by calling each insurer independently, but you’re more likely to overlook key details that way. That’s because life insurance policies can be complex and hard to understand. It’s useful to have an expert on your side to help you look past the pricing and compare coverage levels, features, riders, and options.

You’ll also want to assess each insurer in terms of financial strength and customer service ratings. You can look up an insurer’s credit ratings for free at Fitch Ratings and AM Best. Try U.S. News and Nerd Wallet for a gage on customer service performance by company.

How Harbor Life can help your life insurance search

As an expanded arm of our life settlement business, Harbor Life also has an agency arm to help you purchase life insurance coverage or change your current life insurance strategy. The advantages of working through us include:

1. Access to an expansive network of top-rated providers.

2. No-pressure quotes. You can get a quote from us online and make that purchase (or not) directly, without having to talk to anyone.

3. Guidance and support. We’re here to help. If you need education, guidance, or a recommendation, we will provide it. If you prefer to take your quote and buy the coverage directly from the insurer, you can do that, too.

4. Customized solutions. Our team is very good at tailoring solutions to your needs. Our experience in the life settlement industry has brought us in contact with so many people who don’t have the right life insurance. We know how to identify what plan you need and how to find it for the lowest rates possible.

To learn more about how we can help you make the right choice about life insurance, call us today at (800) 783-5614, or reach out via email to vikas@harborlifesettlements.com.