What is the best kind of life insurance for someone who is less than healthy?

Question

I'm researching life insurance for a 55 year old female relative who lives in California. A smoker since her 20s and a very heavy smoker for the past 7 years or so, her health is not ideal but at least she hasn't been diagnosed with a terminal illness of any kind. What kind of life insurance is best in this situation? No exam, or with exam? A fairly large policy and cost effective premiums are important.

Answer 1

Although rated (meaning high premiums), it is likely that life insurance will still be a great deal. I would stick with a level term policy for the period that it is needed. This of course gives rise to the question what is the insurance needed for?

For example it could be to cover a mortgage. Assuming this person is a significant contributor to the mortgage payment, and that there is 20 years left on the note. I would sign up for a 20 year level term policy for the current amount of the mortgage.

I would use an independent online broker such as Zander or Select Quote. I found slight better rates with the former.

Often times agents will push a person to a whole life policy (universal life is a kind of whole life) saying that the premiums will remain the same for as long as the policy is in force. However, under the hood, you actually have an annual renewable term (ART) policy and a savings account. Given this person's habits, the ART will increase at a startling rate, and the savings account pays little or no interest. There are much better options available to the educated.

If you are a glutton for punishment you could compare the two by contacting an agent. Expect the whole life policy to be about 10x more expensive. Also expect the agent to do his best to sell you on the whole life policy. You run the risk of falling for what is not much better than a scam.

So really the most important question to ask is: What financial hardship will be caused by this person's demise? Then: How can this be mitigated with planning, investing, and insurance?

The most important thing to understand is that if you talk to a traditional life insurance agent they will always recommend a form of whole life as that is how they make their living. The second most thing to understand that whole life is almost always the wrong choice.

Answer 2

The first step is to get clear in your mind what the "insurance" is actually for. In what circumstances do you need (note, "need" not "want") it to pay out, and how much do you need it to pay out?

If you are insuring against some event which has a known end date (paying off a loan, paying for your kids to complete their college education if you die young, etc) then "whole life" insurance is almost certainly not the most cost effective option, though it is what insurance companies will try to sell you because it makes the most profit for them.

In fact "whole life insurance" is a classic example of oxymoron, unless you have reason to believe that you may be immortal. Financially effective insurance is about balancing the chance of something happening against the cost of it happening, and using those two numbers to decide what premium you should pay. Since it is certain that everybody will die eventually, on average "whole life insurance" is really a rather poor type of investment scheme, unless you are unlucky enough to fall under a bus the day after your policy starts! The reason it is a poor investment scheme is because it is completely non-transparent what the insurance company is actually doing with your premiums - except for taking a large slice of them every year as profit for the insurance company itself.