Previously, I’ve written articles comparing the Survivor Benefit Plan and the closest alternative, term life insurance. This article isn’t going back to rehash that discussion, but rather answer the question of “How do I go about getting term life insurance?” I just went through this process myself, and I plan to outline it step-by-step in this article. Before I begin, I’d like to give you a little context.
First, although I’m a financial planner, I am not a licensed insurance agent. This means that I can discuss general insurance needs with clients (i.e. you probably need life insurance unless you’re retired or financially independent). However, I cannot compare two policies side-by-side or discuss specifics about the underwriting process. As a fee-only financial planner, I outsource that function to a company that has insurance licenses. We’ll discuss this later on. This article is written from a layman’s view, as I outline my personal insurance application process.
Second, my wife and I evaluated both the Survivor Benefit Plan and term life insurance. We decided that life insurance was our preferred course of action to address the financial risks that pertain to us. You should do the same before you start the underwriting process. I wrote a book, Military In Transition’s Guide to the Survivor Benefit Plan, which goes into more depth about this decision.
Third, when the underwriting process starts, it will feel invasive. This is the insurance company doing its job to figure out how much risk it will take by writing your life insurance policy, and how much to charge. If you don’t like the thought of this, you probably won’t like going through it.
Finally, after the underwriting, you need to go back and compare what you’re eligible for with the SBP & VGLI. We won’t discuss VGLI in this article, but if you come back with higher premiums, you might find that the apples to apples comparison has shifted away from a term life policy.
With that said, let’s begin.
Term Life Insurance Step 1: Determine how much insurance you need
We’re looking at term life insurance that will cover you until you’re in your retirement years. For most people, this is probably a 30 year term policy. However, some people retiring later, a 20 year policy might suffice. Your goal is to have enough coverage so that you have one term. By the end of this term, you will have retired and no longer need life insurance.
This also assumes that when you’re retired, you’re able to live on the income generated by your retirement assets, and that your pension is not necessary. If you plan to spend your post-military years depending on that pension instead of building up your retirement assets, then you might want to stop now and reconsider whether SBP is the right decision.
You can do this one of two ways:
- Figure out how much term life insurance you would need to approximate the SBP payout. The SBP Guide discusses this in more depth.
- Determine how much your SBP premium would be, then use that as the basis for how much term life insurance you can afford.
- Independently figure out how much you can afford per month.
I would suggest either first or second choice, for several reasons. First, people have a hard time prioritizing how much insurance (which isn’t really perceived as necessary) they can afford. Second, we’re so used to paying a very LOW rate for SGLI. In comparison, term life insurance rates seem astronomically high when they really are not. We’ve been getting a great deal on life insurance for years, and the real-world adjustment is hard.
In my case, I used both first and second methods. I started off with a payout number, $1.5 million that would create similar cash flow to the SBP payout. In other words, if I died before retirement, a $1.5 million payout would be sufficient to take care of my family’s major financial needs (house, college, car, etc.), while replicating the SBP payout (55% of my pension) almost indefinitely.
Once I came to that number, I shopped for rates on USAA’s website. Looking at 30 year term policies, the monthly premiums were about $200 per month for a standard policy. I figured that as long as the underwriting process didn’t uncover any big secrets, I’d probably qualify for at least this type of policy. This brings us to step 2:
Term Life Insurance Step 2: Try to think about where you stand, medically.
Each insurance company has their own way of evaluating risk. The successful companies are able to figure out those factors that cause their insured customers to become a higher risk (like smoking, drug use, etc.), and either deny coverage or charge a higher premium. The less successful companies go out of business. Here are a couple of things that you should know:
- You’re probably not going to get away with a whole lot, so it pays to be up front. If you have a medical history, the companies are going to figure it out. For example, smokers might be surprised to find out that a urinalysis can detect traces of nicotine, which insurance companies will charge a higher premium for. Be honest, and let the company figure out what to charge. If you seem dodgy, you might be denied coverage.
- If you think you might have grounds for a VA disability claim, you’ll probably want to get your insurance policy in place first. I have no idea whether or not I’ll get a VA disability rating. However, I do know that the insurance companies expect me to be honest when filling out my application. If I had applied for my term insurance policy after filing for disability benefits, I would have had to disclose any relevant information on my application. However, I don’t need to disclose issues that I don’t know about yet because I haven’t gone through the disability claims process. If you file your disability claim before applying for insurance, you risk being awarded a higher medical rating, or being rejected for coverage.
- Even if you think you’ve got medical problems, it’s worth going through the process. I’ve got asthma, high blood pressure, and a whole slew of life’s problems. Regardless, the insurance company issued me a policy at preferred rates.No matter how bad you think your health is, the insurance companies are pretty good at figuring it out. So let them.
Term Life Insurance Step 3: Get quotes.
I can’t tell you the process for every insurance company. However, I can give you a brief overview, then outline the process when I bought a term life policy.
You can either go through an insurance company like USAA, or you can go through an insurance broker. Since I’m a financial planner, I have a working relationship with a company called Low Load Insurance Services (LLIS). LLIS only works with fee-only financial planners…fee-only planners need a reliable insurance broker to work with, and LLIS keeps its costs low by not advertising directly to the public. This relationship allows both LLIS and fee-only planners focus on the things they do best. One thing that helps LLIS stand out is that their preliminary questionnaires are much more detailed than what you see when shopping for rates online. This means that quotes are less likely to change as you go through the underwriting process.
LLIS’ underwriting process was pretty straightforward. Although I knew that I wanted a $1.5 million, 30-year term policy, I asked them to look at $1 million, $1.5 million, and $2 million policies for 20 and 30 year terms. This allowed me to look at multiple options.
I received 3 quotes on each type of policy, from 3 different providers. This quote also included a financial profile on each provider. It’s not enough to just shop around for the cheapest rates…you need to know whether or not your insurance company can actually pay the claim. In this case, all three companies were rated ‘A’ or higher by Moody’s, Standard & Poor’s, and Fitch Ratings.
Now that I had solid confidence in each of the three companies, I could go back and select the cheapest quote. In this case, it was a policy through Prudential, so that’s where I decided to submit my application.
Term Life Insurance Step 4: Submit the application.
Up to this point, I hadn’t given any personal information away, other than answering a few questions. I could walk away at any point. Once I submitted my application, I knew that was going to change. You can still walk away, even after the application. However, this is where it starts to feel like the insurance company’s getting into your personal business. And they are, because that’s their job.
The application process consists of three parts:
- Physical Exam
Application. This is pretty straightforward, as it was a couple forms that LLIS sent me, based upon my term policy selection.
Questionnaire. The questionnaire consisted of a LOT of questions. These questions attempt to identify risk factors that might make writing a policy more expensive for the insurance company. First, the questionnaire asked activity-related questions. These include:
- Do you engage in high-risk activities?
- Do you travel overseas?
- What do your job duties entail?
There was also a lot of family illness history questions, such as:
- Heart disease
- Mental disorders
There are also questions on alcohol & drug use, as well as nicotine usage.
Physical Exam. After the application & questionnaire comes the physical exam. In my case, the insurance company outsources the process to a local clinic, then sends instructions on scheduling appointments. My appointment consisted of a basic physical exam, some blood samples, and a urinalysis.
I was told that the blood test is for HIV, and general blood health, which is very similar to the military’s annual health assessments. Although I knew the urinalysis would test for drugs (just like any military urinalysis program) I was surprised to find out they also test for nicotine. Beware: if you use tobacco products, the insurance company can, and will, test for nicotine. If you’re trying earnestly to quit, take this into consideration.
Term Life Insurance Step 5: Wait for the underwriting process.
Surprisingly, the underwriting process is quite uneventful. You might get a couple of clarification questions. For example, the insurance company asked me to clarify why I traveled to Germany (work-related conference), and what my office duties entailed (maintaining law and order throughout my entire cubicle). Other than that, everything happens behind the scenes.
Then I get the email: “Congratulations. Your policy has been approved at preferred rates.” This was a pleasant surprise because I thought the insurance company might have given me a higher rate. Turns out I’m still all right. However, there’s one last step before securing this policy.
Term Life Insurance Step 6: Put the policy in force.
Just because the insurance company has approved your application doesn’t mean that you have a policy in place. It just means that the insurance company has agreed to write a policy for under the specified terms. You still need to do the following:
- You still to accept those terms
- Insurance company must issue a copy of your policy
- You have to pay a premium against that policy
Most insurance companies will issue a quote at an annual rate. However, they’ll usually allow you to pay that premium monthly (at a slightly higher rate). Regardless, you do not have an insurance policy until the insurance company has received at least one premium payment. After that, you have a unique power over the insurance company:
For the length of the term, as long as you continue paying your premium the insurance company cannot change ANY of the terms of your insurance contract.
Most life insurance policies are unilateral contracts. In a unilateral contract, the insurance company locked into their end of the bargain as long as you keep paying premiums on time. Of course, exceptions exist, and they’re usually in the policy:
- Suicide: Most insurance policies have a period of time during which the insured cannot commit suicide. Usually, that is 1-2 years, but you’ll want to check your policy. Not that this is a consideration for most people, but insurance companies don’t want people to use this as a way to make their families get rich quickly.
- Misrepresentation: If, for some reason, you filled out your application with false information and your insurance company finds out, the insurance contract will usually have language that allows them to opt out. For example, if you presented a clean bill of health, then your underwriter sees a Youtube video of you skydiving without a parachute, they might want to cancel your policy. Without going into detail, which varies state by state, an insurance company can cancel your contract. However, they’re required to refund any premium paid during the time that the policy was in force. Usually, a life insurance contract will have an incontestable clause, which states that the company cannot cancel your contract after it has been in force for a certain period of time (usually one to two years).
- Nonpayment of premium: If you stop paying, you are essentially ‘opting out’ of your life insurance contract.
So you don’t think that people go skydiving without parachutes, huh? Here’s at least one person who does…if there’s one, then insurance companies will assume you might be another one.
Obtaining term life insurance is definitely more daunting than difficult. In the end, if you need term life insurance, you shouldn’t let the process scare you from getting a policy.
While our family made our term life insurance decision because it was an alternative to the Survivor Benefit Plan, there are many other reasons. For example, you might find that VGLI or commercial continuation of SGLI are simply not enough coverage. Perhaps you have a financial planner who recommends a higher amount based upon your income and family needs. Or perhaps you discovered on your own that your family might not be as well off as you think without your income, and you need to obtain life insurance.
Whatever the case may be, it’s important to take the time to consider whether you need term life insurance. If you need help, you should talk to your installation’s financial counselor or a fee-only financial planner in your local area.