By Michael Giusti
Wait, you’ve never heard of National Life Insurance Day? OK, turns out, many people haven’t heard of National Life Insurance Day. To be fair, it’s only been a recognized day for a few years.
Marked every May 2, National Life Insurance Day celebrates the day life insurance was said to have first become available in the United States way back in the mid 1700s.
The original life insurance policy was said to be written in 1759 by the Presbyterian synods in Philadelphia and New York City. Those religious groups created the Corporation for Relief of Poor and Distressed Widows and Children of Presbyterian Ministers.
Those initial policies were seen as putting a price on a human life and were met with some distaste from the public, but people began accepting life insurance once they realized they were tools that helped the widows and children that otherwise might be left destitute after a breadwinner passed away.
By the early 1800s, dozens of life insurance companies sprouted up throughout the country, and the rest is history.
Still, the holiday and the product it’s celebrating have something in common — people really don’t typically spend a lot of time thinking about them. Unfortunately, in the midst of a global pandemic, more people than ever have death on their minds. And when you are thinking about death, life insurance isn’t a long leap.
Who needs life insurance
Life insurance is a terrifically versatile and diverse product that fits into the financial planning of various stages in life. What stage of life someone is in determines which insurance policy is right for them.
When people are starting out in life, the lower-cost temporary policies known as term policies make a lot of sense.
Term policies protect policyholders for a given period of time – say 25 years. If the policyholder dies during that time period, their beneficiaries are paid the face value of the policy. If they live past the end of the policy, the insurance company keeps the premiums and the coverage ends.
Term policies are ideal for protecting the financial future of family members and loved ones. If people depend on someone for their income in order to support themselves, term policies offer an inexpensive option to replace that income if the policyholder dies.
Term policies are also strong options for ensuring that long-term debts are covered, such as a mortgage, if the policyholder dies. Term policies are also good options for ensuring long-term commitments can be honored, such as paying for college tuition for their children.
The biggest draw for term policies is their cost. Term policies have fallen in cost over the past two decades. A term policy today costs scientifically less than it did at the turn of the millennium, and a fraction of what a permanent policy would cost for the same death benefit.
A whole new world of insurance
Once people have moved up through life and are approaching retirement, their kids have gotten through school, and their debts are all paid, does that mean life insurance’s usefulness has run its course? Not so fast.
The other category of life insurance – permanent life insurance – still might have its uses.
Permanent life insurance still offers a death benefit like the term policies do, but they come with another benefit.
Beyond the fact that as long as you keep paying your premium your policy never expires, permanent insurance can also serve as a retirement tool.
As permanent life insurance matures, it builds a cash value, which can be withdrawn or borrowed against. That pool of money, if used in conjunction with retirement savings, may be a useful tool for extending those savings.
One such strategy proposes that in years that the stock market rises, and 401(k) accounts grow, retirees use those proceeds to fund their retirement. But in years where the market contracts, rather than selling low to cover their monthly bills, instead retirees can withdraw some of the cash value from their permanent insurance to cover those expenses, leaving the 401(k) intact so it can recover when the market rebounds.
Permanent insurance may also be a solid option for tax-sheltered long-term savings.
Insurance in the time of COVID
With the global pandemic, many facts of life have changed, and that is equally true when it comes to life insurance and how it is bought and sold. Life insurance companies are still writing policies, but some standard operating procedures may have changed.
For one thing, in many states stay-at-home orders have made it difficult, if not impossible, to conduct the in-home paramedical exams required to underwrite most policies. Instead, many insurers are turning to big data to fill that gap. Rather than height, weight, and blood pressure collected by a nurse in an applicant’s living room, some insurers are turning to electronic medical records and other available data to assess a prospective policyholder’s relative risk.
Some states are still allowing in-home paramedical testing, as long as everyone involved follows the Centers for Disease Control and Prevention’s guidelines for safe interactions, such as wearing masks and other personal protective equipment.
Still other policies can be written without any medical information or exam at all, but those policies tend to be more expensive and offer less attractive death benefits.
When an applicant fills out the application, there is always a lengthy list of questions used to assess their risk. Like always, life insurance applications will ask about any international travel the applicant has embarked on and may be planning in the near future. One potential new question an applicant might find is whether they recently went on a cruise or were tested for the coronavirus or were exposed to someone who was.
It is essential that every question is answered — and answered completely truthfully.
While those questions are not necessarily deal breakers, they may trigger a delay in getting the policy finalized and in place. In the case of future international travel, the applicant may need to wait a couple months after they return home before the policy can be put in place, especially if that travel took them to China, Italy or any of the international danger zones identified by the CDC.
And if someone has tested positive for the coronavirus, they can generally still get a policy. Again, it just may mean that they will have to wait a set number of days after a full recovery before their policy kicks in.
In some cases, the applicant may also have to provide a medical certification of good health from a physician before a policy can kick in.
That said, if someone did suffer from a COVID-19 infection that left them with a permanent debilitation, such as diminished lung function, that may be taken into consideration during underwriting for a new policy.
What about death?
If someone who already has a life insurance policy in place dies of COVID-19, they will almost certainly be covered, and their beneficiaries will be paid the full death benefit.
That is because life insurance policies typically don’t have any exclusions that would rule out coverage in case of an epidemic or pandemic. In a way, that is really the kind of thing life insurance was meant to do.
That said, if the policy is an accidental death and dismemberment policy, known as an AD&D, COVID-19 would not be covered because those policies are meant to cover accidental deaths, not illnesses or diseases.
Now, presuming someone did have either a term or a permanent life insurance policy, they may not be completely safe, if the policyholder was less than truthful in the application process. In that case, the insurer would potentially have grounds to void the policy and pay nothing out.
For example, if the insured failed to disclose upcoming international travel or withheld the fact that they recently tested positive for COVID-19, that could be grounds for the policy to be voided.
And even if they don’t die, if they withhold information or misrepresent anything on an application, the insurance company can still void the policy if they catch wind of it during the two-year contestability period.
Policyholders could also be in trouble if they missed payments and their policy lapsed. Typically, policies have one-month grace periods to get the policy back in good standing in the case of a missed payment, but if someone dies while the policy is in limbo, the insurer will be under no obligation to pay the death benefit.
If someone is in financial trouble, it is best for them to call the insurer before missing a payment so they know their options and the repercussions of missing a payment.
Finally, if someone is worried about dying during the period between when they start their application and when their policy kicks in, many insurers offer temporary policies that they can buy to bridge that gap.
We have come a long way in 300 years, but life insurance is still as important a financial planning tool today as it was in the 1700s.
Michael Giusti is a senior writer at InsuranceQuotes.com. He has worked as a journalist for more than 20 years, including as a reporter at a daily newspaper in Florida, as an editor at a regional business journal, and as a writer for national and international publications. He specializes in business, technology, finance, insurance, automotive and industry-focused writing.