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If you don’t have evidence of insurability, you won’t be able to get life insurance coverage. But what is it and why does it matter?
Evidence of insurability is the process by which life insurance companies determine if the amount of coverage you are applying for aligns with your particular financial circumstance
Your evidence of insurability is based on your insurable interest, or the financial loss your dependents would face if you died
The medical component of the underwriting process has no impact on your evidence of insurability; you may be in excellent health but still ineligible for life insurance due to financial reasons
To get life insurance coverage, insurers evaluate two factors: your health and your finances. While most people worry about how their medical history might impact their life insurance rates, your financial background can also impact how much coverage you receive — if any at all.
During the life insurance application process, underwriters evaluate your evidence of insurability, or financial background, to determine how much coverage to offer you.
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Evidence of insurability is proof that the coverage you’re applying for coincides with the income you earn and the needs of the dependents you are covering. It’s separate from your health-related history, which is evaluated during the life insurance medical exam. Evidence of insurability is assessed by insurers because life insurance coverage isn’t meant to be a way to get rich — it is an income replacement that protects your loved ones when you are no longer around to provide for them.
Ensuring your financial viability prevents life insurance companies from giving you too much life insurance.
To prove your evidence of insurability to a life insurance company, you’ll have to show something called insurable interest, which is essentially proof that someone would be financially burdened in the event of your death. Insurers also look for financial justification of your life insurance coverage to verify that you are receiving a coverage amount that is applicable to your particular financial circumstance.
Your insurable interest and financial justification for life insurance are completely separate from the medical exam, which is used to determine what type of coverage you can get based on your health. You can be in perfect health but because of your insurable interest and financial justification, you may still not qualify for life insurance and vice versa.
Insurers won’t offer policies to candidates who can’t prove insurable interest, though if your situation changes after your policy goes in force, life insurance companies cannot then invalidate your policy.
To evaluate your insurable interest and financial justification, life insurance companies look at a range of components, primarily income and age.
The life insurance death benefit is meant to be an income replacement, meaning that insurers won’t grant you coverage beyond what’s reasonable for your individual financial circumstance.
This means that if you’ve been unemployed long-term, you might not be eligible for coverage whatsoever. If you’re simply in between jobs and unemployed for the short-term, the life insurance coverage you receive will likely reflect your previous pay. You may be asked to prove that you are on the job hunt or to provide pay stubs and documentation from your last job.
The projected cost of your lost income — or the economic cost of your work if you are a stay at home caretaker — is how your coverage is determined.
Each life insurance company has different guidelines for income replacement, sometimes reaching as high as 40 times your income in your 20's. As you age, the amount of income replacement a life insurance company offers decreases, and can drop as low as five times your income in your late 60's. Once you enter your 70's, income replacement is up to the life insurance company's discretion.
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Because life insurance coverage is meant to cover the financial loss faced by dependents, non-working spouses can also prove evidence of insurability and the need for income replacement. If a non-working spouse dies, then their services — such as caretaking — will need to be paid for.
Most insurance companies cover non-working spouses based on the income their spouse earns. Here’s how the top life insurance companies cover non-working spouses:
|LIFE INSURANCE COMPANY||NON-WORKING SPOUSE POLICY|
|AIG||Matches up to $1.5 million of working spouse's coverage. Coverage limited to 10x working spouse's income if household income is less than $25k.|
|Banner Life||Matches working spouse's coverage. If household income is below $20k, no coverage will be offered.|
|Lincoln Financial||Matches 100% of working spouse's coverage. Maximum coverage is determined on a case-by-case basis.|
|Prudential||Matches 100% of working spouse's coverage. Maximum coverage is determined on a case-by-case basis.|
|Pacific Life||Matches 100% of working spouse's coverage up to a maximum of $3 million ages 70 and below. Matches coverage on case-by-case basis ages 71 and above.|
|Mutual of Omaha||Matches 100% of working spouse's coverage up to a maximum of $2 million|
|SBLI||Matches up to $2 million of working spouse's coverage|
|Transamerica||Matches up to 50% of working spouse's coverage up to a maximum of $2.5 million|
A unique situation, such as additional assets, may change how much coverage you are eligible for.
Just as life insurance rates increase with age, life insurance companies use your age to determine the amount you can multiply your earned income by and thus create the coverage you receive. Each life insurance company has its own general guidelines about this.
There are a few reasons why being younger can qualify you for more life insurance coverage relative to your income. For starters, if you’re younger, you likely have a higher earning potential than you would if you are in your 60s or 70s, which means you would need a higher amount of income replacement.
Secondly, as you age, you tend to have fewer dependents and less of a need for life insurance. For example, if you purchase life insurance to leave a death benefit for your grandchildren, you might need to prove that you are their primary caretaker and aren’t simply gifting them money.
Aside from income and age, underwriters may look at your mortgages, debts, assets, unearned income, financial history, and dependents when deciding upon your financial justification for purchasing life insurance. Each life insurance company treats each circumstance differently, and someone with no income but earnings from assets would qualify for coverage differently than someone with no income and no assets.
While it may be tempting to lie about your financial circumstance to get the best policy, life insurance companies are allowed to run a soft credit check on you during the application and find out the truth, which can disqualify you from purchasing coverage completely or invalidate your life insurance policy. Life insurance companies also share this type of information with each other which will hinder you from shopping around.
This makes it vital that you’re honest with the underwriter when they’re asking you about your financial history — or on any other part of the life insurance application for that matter.
Bankruptcies over 10 years ago and records of arrest, civil judgments, and lawsuits over 7 years ago won’t show up on the soft credit check run by life insurance companies.
Each life insurance company treats an individual’s financial circumstances differently.
The graph below shows how each life insurance company treats bankruptcy:
|LIFE INSURANCE COMPANY||BANKRUPTCY POLICY|
|AIG||Will not consider coverage until after two years of discharge from chapters 7, chapter 11, chapter 12, and chapter 13.|
|Banner Life||Best insurer for bankruptcy. Requires discharge and income to be re-established for chapter 7 and allows for individual consideration for chapter 13.|
|Lincoln Financial||Will consider coverage for chapter 13 while pending, but only after income, need for insurance, and ability to pay are verified. No other bankruptcy cases accepted.|
|Prudential||Most cases postponed until bankruptcy is discharged, though if majority of debt is repaid and income is stable, can be considered on a case-by-case basis.|
|Pacific Life||Allows for chapter 7 and chapter 11 bankruptcy after 1 year of discharge|
|Mutual of Omaha||Considers reasonable amount of coverage if on a repayment plan for chapter 13. Other bankruptcies are not considered until discharge.|
|Protective||Considers chapter 7, chapter 11, chapter 12, and chapter 13 after a certain amount of time after discharge.|
|Transamerica||Considers chapter 7 after discharge. Considers chapter 11, chapter 12 after adequate financial documentation and court approval is provided. Considers chapter 13 if applicant is regularly employed and amount of debt doesn't exceed stated maximum amount.|
To demonstrate insurable interest, the underwriter will ask you to list your policies beneficiaries during the application process. They would need to be people who rely on you for financial support or would face a financial loss if you died. If you get a divorce or have another child, you can always adjust the beneficiary of your policy at a later date.
There are a few relationships that are valid for insurable interest. These people usually include:
Likewise, there are relationships that may be more difficult to prove insurable interest by life insurance companies, including:
If your beneficiary is one of the above, you’ll have to demonstrate the financial relationship of both parties to the insurer. Life insurance companies might ask you to prove the relationship’s financial dependency or that any financial obligations are shared — such as bills or a mortgage — in order to name them as a beneficiary on the policy.
During the initial phone screen, which is usually the first step in the life insurance application process, you’ll be asked to provide some information about yourself, including your salary, age, and dependents. This usually provides the underwriter with enough information to determine your financial viability for a life insurance policy.
However, if you are asking for coverage that seems disproportionate to your circumstances or the underwriter doesn’t believe you have a need for the amount you are asking for, they may follow a more intricate financial underwriting process and follow up with additional questions. It’s always good to have the appropriate paperwork on hand to show the underwriter in case they ask for any documentation.
Just because you’re unable to prove evidence of insurability on a life insurance application doesn’t mean you’re completely barred from purchasing life insurance coverage altogether.
Individuals who aren’t able to purchase traditional life insurance can usually opt-in for a type of whole life insurance policy called final expense life insurance, which pays out a small death benefit to cover end-of-life expenses so your loved ones don’t have to. The pay out can usually cover some medical bills and funeral costs. There are two types of final expense life insurance policies to choose from: guaranteed and simplified.
Although final expense life insurance can be costlier than a term life insurance policy and doesn’t usually offer enough coverage, acquiring some life insurance coverage is better than having none at all.
The graph below demonstrates how much a 68-year-old man would pay for a guaranteed issue or simplified issue final expense life insurance policy versus a term life insurance policy.
Methodology: Sample monthly premium rates based on policies offered by Policygenius in 2020.
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