Understanding how life insurance works can be confusing, especially if you don’t have any life insurance yet. Some questions may sound too simple to ask an insurance agent, but as some anonymous person once said, “There are no stupid questions, just stupid people.”
With that advice in mind, here are some of the most common questions people ask life insurance agents, along with the answers. And remember, these answers may not fit everyone’s situation, so ask your insurance agent how you’re affected.
1. How much insurance is enough?
This varies by situation, but as a rule of thumb the minimum is 20 times annual earnings for a typical person without a child or other family member with a disability that will require lifetime resources, says Amy Rose Herrick, a Chartered Financial Consultant in the Virgin Islands.
If that amount is invested at only a 5% modest to low risk return it would replace the earnings and leave the principal intact, Herrick says. Someone with $50,000 in earnings multiplied by 20 equates to $1 million invested at 5%, providing $50,000 a year in earnings.
2. How much life insurance should a stay-at-home parent have?
The same amount as the working spouse, Herrick recommends. The loss of a stay-at-home spouse has a huge impact on the family that has adequate insurance with two choices: 1. Spend a lot of money on daycare, home help and supportive help for all of the things the stay-at-home parent did; or 2. The working spouse can quit work and become a stay-at-home parent until they’re ready to return to the workforce when family needs are different or the children are older. With adequate life insurance, they have a choice.
3. Should I insure my kids?
Herrick says she encourages children to insure children and young adults after their own insurance needs are met for at least $100,000 each. Some people don’t consider the loss of a child to be a financial loss, but she disagrees.
Herrick says she’s seen families face the death of a child at the same time they are struggling with medical bills, counseling bills, funeral costs, travel costs, student loans that need to be repaid for a child who never lived to finish college, time off work to try and grieve beyond the three days often used from an employer for paid time off or time needed during business hours to settle estate type issues, the need for family members to be sitting in court day after day during a child’s murder trial, and trying to help support financially or now raise young grandchildren now parentless.
“Behind every tragic headline is a real family that will never be the same,” Herrick says. “Life insurance takes the lack of financial resources out of the rest of the awful things they must deal with.”
4. How do I know the insurance company you’re recommending is reputable?
With more than 1,200 insurance carriers selling life insurance in the United States, you probably haven’t heard of most of them, says Christopher Huntley, co-founder of JRC Insurance Group. Independent insurance agents such as Huntley sell for many carriers, many of which have been in business for more than 100 years and carry an “A” rating.
Ohio National, for example, has been in business since 1909 and is rated A+ (Superior) by A.M. Best. “They’ve grown their life insurance sales 24 years in a row, and yet most of my clients have never heard of them,” Huntley says.
Look on an insurance company’s website to learn about its financial strength and history, Huntley recommends. Also ask your agent to provide financial ratings for any carrier they represent. Or look up a rating online at A.M. Best and Standard & Poors.
5. How do I know they’ll pay my claim?
Life insurance companies pay 100% of legitimate claims, Huntley says. Sometimes, however, they get bad press from cases where a policyholder allowed their policy to lapse or lied on their application.
In many cases, insurance companies will pay a claim when they shouldn’t, he says. Six months before Heath Ledger overdosed on drugs, he claimed on his ING life insurance application that he didn’t use any illicit drugs, Huntley says.
“Since an ING insurance adjustor could prove this was a blatant lie, ING had grounds to deny the claim, which they did,” he says. “However, due to negative PR from the ensuing lawsuit, ING ended up paying an undisclosed amount to Ledger’s estate.”
6. Will my health condition mean I’m denied coverage?
Each life insurance company underwrites differently, Huntley says. Some companies are more lenient on health conditions while others will decline applicants seemingly for any minor health flaw, he says.
“Your best bet is to speak with a knowledgeable, independent agent about your health history to match you up with the carrier that will offer you the best approval for your unique situation,” he says.
Aaron Crowe is a freelance writer who specializes in personal finance topics including insurance, real estate and kids and money. Follow him on Twitter @AaronCrowe or find his website at AaronCrowe.net.