Archive for September 11th, 2007
Continuing on with dissecting life insurance policies, the suicide and contestability clause is common to all policies, whether term insurance, whole life or universal life. Referring back to my policy, let’s look at the two provisions.
Incontestability and Suicide clauses
On the third page of this attachment under General Provisions they cover the two year suicide and contestabiltiy clause.
You can read the specific legal language, but in a nutshell what they are saying is that if you die from suicide or something that was materially misrepresented on the application, during the first two years of the policy the company can refuse to pay the death benefit. After two years the only reason they can refuse to pay is for non payment of premium.
Sounds a little ominous, but if you tell the truth about your health history and don’t do yourself in, the company is going to pay.
Just a note about my experience with clients who have passed away during the contestable period. I have never had a contestable policy that wasn’t paid in full dating back to 1978 when I wrote my first life insurance policy. It’s important for agents to push for full disclosure from their clients. It protects the client’s family.
Contestable claims take longer than a claim after the two year contestable period. Companies take this seriously and work diligently to get all of the records they need to satisfy themselves that what you died from wasn’t known to you at the time of application.
One client of mine is probably the epitome of why it takes longer. About 6 months after his policy went in force he was diagnosed with colon cancer. He lived for about 4 months. In that 4 months, without exaggerating, he saw 25+ doctors. Now, getting records from 25 doctors can be done fairly expeditiously if you have all of their contact information from the start. The problem was that he was the only one who knew all of the doctors he had seen, so the insurance company was peeling an onion. They would get one record and it would note a referral to another doctor. They would get that record and it would note another referral, and on and on. It took four months to settle the claim, but it was paid in full with interest for the four months.
A piece of good advice would be, if you are terminally ill, and you have life insurance in force, keep a record of all the doctors you see and their contact information and make sure your beneficiary knows where the list is.
Bottom line. Insurance companies want to pay claims. Sounds crazy, but it is true. Remember, tell the truth and don’t do yourself in and your heirs will get the proceeds of your life insurance.
September 11th, 2007
We have been gutting term life insurance this week starting with a look at an actual policy. Being a contract as it is, there are plenty of definitions and clauses and options and such. So my previous posts didn’t get too hefty, I picked out a few items to discuss separately.
The conversion option is, I believe, one of the least touted, most understated benefits in a term life insurance policy. That option is detailed in the attached portion of my policy.
Conversion Option
On the second page of this attachment conversion is spelled out. Cramming all of that half page down into a sentence, the conversion option allows you to convert all, or part, of your term policy to a permanent policy without evidence of insurabiltiy during the conversion period.
The holes this option can plug are endless, but let’s explore just a few recent cases. A man contacted me wanting to replace his term policy that was coming to the end of its’ guarantee. He had some significant health issues that included both a heart attack and prostate cancer. He had survived it all and is doing fine, but the cost of a new policy was pretty hefty as these were recent events.
We began discussing his current policy, the one with the guarantee that was running out. He had the policy for almost ten years and when he took the policy out he was approved at a preferred rate. Remember, conversion uses the rateclass of the policy being converted. There is no evidence of insurability required. We ran quotes to convert enough insurance to meet his needs and were able to provide the coverage he wanted for substantially less than a new term policy would have cost.
In another case a client had a $250,000 term policy that he had purchased through me while he was still working. Now retired on a generous pension, he wanted less insurance but wanted a permanent plan. This was going to be his final expense policy. With no physical and just a one page request to change his policy, we converted his term policy to a universal life policy for $50,000 with a guaranteed level premium to age 100. If he lives beyond that, the policy is guaranteed to remain in force to age 120 with no further premiums.
Other reasons to convert. Back to the policy schedule in my policy.
Premium schedule
On the last page of this attachment it shows that my term insurance policy has a guaranteed level premium of $1678 annually for 20 years. The guaranteed premium in the 21st year is $41,000 and some change. I had suggested before that a person might even consider paying that premium if they were terminally ill. That would still be my recommendation if they were beyond the conversion period.
But, if the policy is still in the conversion period, it could be converted to a permanent policy for just over $14,000 a year, guaranteed. And, unlike the annual increase in the term policy, if you happen to outlive expectations, the premium is then locked in at a level $14,000.
Bottom line. You’ve heard the analogy of sticking your finger in a hole in a dam. The conversion option in your term life policy has more fingers than you can count. It is flexible (all or part of the policy), stops health issues in their tracks (no evidence of insurability) and is guaranteed. I really, really like the conversion option.
September 11th, 2007
The ABC reality weight loss show, Fat March, concluded last night with the remaining 6 participants completing a 575 mile walk from Boston to Washington, DC. Plenty of pounds were shed. Plenty of sore knees to show for it.
I have followed Fat March strictly from a life insurance standpoint, hoping that we could share some relevant information out about how obesity affects life insurance rates and the impact that weight loss can have on those rates.
The nature of the show is such that people could be voted off and some were. It’s a shame that those that left the show weren’t able to weigh in at the finish line also, because I know of at least one participant, Will, who continues to lose weight and has actually lost more than any of the people who finished the show.
Again, I will give their beginning and ending weight and their beginning and ending cost of a $250,000 term life policy. Just to reiterate, these quotes assume no other health issues and also assume that the weight loss is maintained for a year. The results were dramatic.
1. Michael started at 319 and is now 239. Start $735, now $277.
2. Chantal started at 250 and is now 199. Start $535, now $262.
3. Sam started at 382 and is now 297. Start $686, now $485.
4. Jami Lynn started at 236 and is now 186. Start $430, now at $142.
5. Loralie started at 241 and is now 185. Start $381, now $220.
6. Shea started at 289 and is now 234. Start $475, now at $210.
Congratulations to all. More than just weight loss, it appeared that all participants came away with a new appreciation of their ability to overcome the past and take control of their lifestyle. Life insurance underwriters reward that. More importantly people who make those changes are rewarded with better health, longer lives, and waking up feeling great.
Bottom line. Obesity is the road to a number of dangerous health issues such as diabetes and heart disease. Getting control of a weight problem adds years, quality years to a person’s life.
September 11th, 2007
In the last post we covered the fact that the “default” payment option is a lump sum payment to your beneficiary. Either the owner of the policy or the beneficiary can change that option. Attached is the portion of the policy that deals with payment options.
Term life insurance policy payment options
The owner might choose another option if the thought of the beneficiary receiving a large lump sum of cash doesn’t see like a prudent idea. If one of the five alternative options is chosen, the company retains the lump sum and pays it out as per the owner’s wishes. A good example of where this might be prudent is if a husband dies and leaves an elderly wife behind. Choosing a lifetime income option might very well be better than a lump sum. It really depends on your take on the beneficiary’s ability to handle money.
The beneficiary can also choose to accept the money in one of the five options other than a lump sum. Again, the beneficiary may be more comfortable receiving monthly payments for life than one big chunk.
Option 5 comes into play in one other circumstance. If a death occurs during the contestability period it is not unusual for the claim to take longer than 30 days to settle. If that happens, the company pays interest on the death benefit, so that when the claim is settled it comes as a payment of the principal (death benefit) and interest. I will cover death during the contestable period in another post. It’s nothing to be worried about, but you should, as a beneficiary, be aware of it. Companies want to pay, but by law they have to do their due diligence.
The Annuity tables are pretty self explanatory. For instance, Option 1, the lifetime income option. If you have a $500,000 policy and when you die your widow is 75, she will receive $7.72 per thousand per month for life. $3860 a month guaranteed for as long as she lives.
Bottom line. The owner and the beneficiary of a life insurance policy should discuss these options. The owner has the control of choosing the option prior to death and, if the owner leaves it as a lump sum, the beneficiary has the option after death.
The rest of the policy is the copy of the application. I’ve shared my policy and it’s “fine print”. I will leave the application up to your imagination. It’s a bit to personal to put out for personal consumption, but suffice it to say that as long as I’m on my medication everything seems to go just fine.
September 11th, 2007
Now we are into some exciting stuff. We have blown past the cover and are now truly into the guts, the purported fine print, of my policy. I won’t hit on every detail of the next 4 pages. I figure if you can follow my ramblings, a little contract language should be a piece of cake. Please don’t hesitate to ask questions if I miss a part that is important to you.
Term life insurance policy definitions
They very graciously start off by giving you the location of their home office. No phone number, so refer to your agent for questions or changes or Google the company and get their customer service number. Your best service should come from your agent though.
The definitions are very straightforward. Ownership of the policy is generally maintained by the person being insured. There are instances where someone else may own the policy such as a buy/sell agreement where business partners own policies on each other. There is also Trust ownership. This generally is done as an estate planning tool.
Assignment! You can assign all or part of this policy to, for instance, a bank to pay off a loan. The insurance company, upon your death, will pay off the loan and give the balance of the proceeds to your beneficiary. Keep in mind that assignments are paid before beneficiaries.
It talks about payment of premiums and the grace period. If you are late with a payment your policy enters the grace period. If you die before paying the premium but still during the grace period, the company will pay the death benefit minus the premium due.
Reinstatement. If you mess up and go past the grace period you can resinstate the policy subject to the four requirements.
Change of Premium. If you take your time and don’t let your general mistrust of the insurance industry get the best of you, this is very straight forward. As mentioned in the last post, I get calls every once in a while from folks who lose it after the first 5 words, “We may change the premium”. Please read on and then if you have a question, call.
Renewal. The policy can be renewed beyond the initial level term period. When you see the prices (last post) you might think there is no way, never, uh uh. The one instance in which those prices make sense is if you get to the end of the level term period and know you are terminally ill.
Conversion. In a nutshell, during the conversion period, you can change all or part of your policy to a permanent policy, a universal life or whole life policy, just by completing a policy change form. No proof of insurability is required. I will cover the beauty of the conversion option in another post because I believe this is the gold nugget in your term policy and I can go on and on…..
Exchange. Read it and you should get the scoop here. They will “exhange” your policy for a new term policy during the exchange period as long as you medically qualify. Sounds a little like applying for a new policy. If you have to do that, shop it and make sure they still have the best deal out there.
General provisions. This is as close as it gets to fine print. Here is where they talk about the suicide and contestability clauses. It’s really very straight forward. If you misrepresent something on the application or commit suicide, they don’t have to pay…..if it happens in the first two years of the policy. The only contestable issue after that is non payment of premiums, so keep that policy paid. And yes, if you misstate your age or sex on the application, they can adjust the premium upon your death. Depending on which way you misstated, that could either increase or decrease the death benefit.
It has a formula for determining the death benefit. Pretty straight forward and companies are very fair about this.
Beneficiary provisions. Talks about where to find the beneficiary in your policy (in the application), that the owner of the policy can change the beneficiary, and what happens if a beneficiary dies. I will go more into beneficiary designations in a separate post.
Payment of proceeds. States that the default payment option is a lump sum. Unless your beneficiary chooses another option they get it all at once. But there are options and they will be covered in the next post.
Bottom line. The “fine print” really isn’t all that fine. No sneaky wording. Compared to many contracts I’ve read, this is simple, easy to understand, and about as straight shooting as it gets.
September 11th, 2007
