Financial Planning For Business Owners - Common Life Insurance Questions and Answers
BY: GARY DEK ON MONDAY, AUGUST 04, 2014
Only current and former business owners know the immense sacrifices required to become successful entrepreneurs. Running a business in America has never been more challenging, and it often requires your full-time attention. Between managing employees, optimizing operations, finding and closing new client accounts, and handling the finances/accounting, business owners hardly have time for personal needs, let alone managing their family’s finances.
This is why it is more important than ever to find the right information, especially in regards to financial and estate planning. And one of the cornerstones of safeguarding your family’s financial future is life insurance.
Shopping for life insurance can be frustrating, and you may have a lot of questions – not just about the specific policy you want to purchase, but how things will work once you own one.
How can I figure out how much life insurance I should buy?
LifeHappens.org is a non-profit organization who promotes life insurance awareness, and the company has a great life insurance calculator. Otherwise, see here for a detailed explanation of the factors to consider when purchasing coverage. The amount of life insurance your family needs is determined by your existing assets (e.g. checking/saving accounts, 401K/IRA/retirement accounts, pensions, social security, investment income, etc.) versus liabilities and cost of living (e.g. mortgage, car and student loan debts, medical expenses, credit card bills, education costs, etc.).
As a single young person, should I purchase life insurance?
You may not be married or have children now, but you might someday, and purchasing your life insurance while you’re young and without health problems is more cost effective than waiting until you’re older. If you do eventually get married and have kids, your rates will be locked in by then and your “insurability” will be guaranteed, so you won’t have to worry about the costly premiums you’d have to pay if you purchased the policy in older age with worse health.
This is not to say you should buy a life insurance policy at 30 with no financial dependents, but purchasing coverage in tiers can provide benefits. If you anticipate a family in the next few years, a policy now and another in 5 years can stagger your coverage for the long-term.
What exactly does a life insurance medical exam entail?
Unless you buy an expensive “guaranteed” policy, you will have to complete a medical exam. Be prepared to have your height, weight and blood pressure checked, as well as provide a urine and blood sample. Your insurance company will take into account your blood test results, age, gender, family health history and the answers to any and all medical questions to decide what your premiums will be. If you have any questions regarding what criteria is looked at to decide what rate class you fall in, contact your insurance company.
If your current poor health leaves you with a less than desirable rate you, could try to get a better rate by improving your health. If you are a middle-aged, overweight man with high blood pressure who smokes, you might be able to get your rate re-evaluated if you lose weight, quit smoking and lower your blood pressure. Generally these changes have to be sustained for at least a year before your insurance company will consider a reassessment of your premium rate. If, for some reason, your health declines, you would simply be held to your current rate.
There are many tips to finding cheap life insurance.
Is there a grace period if I miss making a payment on time?
Yes, most insurance companies give a 30-day grace period. As long as you make your payment during this period, you will have no issues with your policy. If you fail to make your payment on time or within the allotted grace period, your coverage may lapse. If you have a permanent policy, the insurer may pull the amount owed from the cash value.
However, if you become disabled, you can choose a “waiver of premium” arrangement, which means you won’t have to pay your premiums while you are disabled.
Am I allowed to have multiple policies?
Yes, you are allowed to have more than one policy. Many Americans get life insurance coverage as an employee benefit, but still need to purchase private coverage on their own.
You may decide to purchase both term and whole life insurance policies, or buy multiple term contracts as additional protection is warranted, such as when you decide to have more children. But if you apply for more protection than what you seem to need, your insurance company will want to know why.
Can a policy be purchased on someone else other than myself?
Yes, but only if you have what insurance companies call an “insurable interest” in the other person. An “insurable interest” means that you have a vested interest in that individual’s well-being. This extends to spouses, domestic partners, or business partners.
Can I purchase a policy on another person and not tell them?
In most cases, you are not allowed to purchase life insurance on someone without their approval or consent. Nonetheless, there are certain exceptions in some states where a spouse is able to get coverage on their significant other. You will need to discuss this with your agent/broker, company representative or financial advisor.
Can anyone be my life insurance beneficiary?
Yes, the policyholder is allowed to pick whomever he/she wants as the beneficiary. Most policy owners pick a husband or wife, but you are also permitted to have more than one beneficiary. For example, a $500,000 term life policy may be split, with $250,000 going to your spouse and the rest equally divided among 2 surviving children.
If I have a credit life and whole life insurance policy, will one not pay out in the event of my death?
No, life insurance policies do not cancel each other out. When you die, as long as you have paid all your premiums, any and all of your policies will pay out to those you have named as beneficiaries.
Are you required to take a medical exam when purchasing all life insurance?
If your employer offers life insurance as an employee benefit, you most likely will not have to take a medical exam. In general, employers providing group insurance policies will hold annual enrollments. If you are requesting to buy a large amount of coverage, you may be required to prove “insurability”.
On the other hand, if you buy a “simplified issue” life insurance policy, you will have to answer some questions regarding your medical history, but you won’t be subjected to a full on medical exam.
To avoid the exam and questions altogether, you can get “guaranteed issue” life insurance. Unfortunately, your premiums will be significantly higher than a traditional term policy, compensating the insurance company for the added risk.
What life insurance questions do you have?