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Understanding life insurance

October 07, 2019

What's the difference between buying life insurance online and from an advisor

What’s the difference between buying life insurance online and from an advisor?

You can do so much online: book a vacation, order groceries, rate your dentist. You can even buy life insurance online, sometimes without answering any questions about your health.

It sounds simple and easy, and it is. But the life insurance you buy online has some important differences from the insurance you buy from an advisor. You need to understand these differences before you decide how to buy.

Let's begin with a basic picture of how insurance works.

How does life insurance work?

The basic idea behind insurance is the spreading of risk. Let's say you have 100 families in a village and 100 villages in a kingdom. If the main breadwinner in a family dies suddenly, that family could be in serious financial trouble. But what if each family in all the villages in the kingdom has been putting away money regularly. And they've stored it in a shared emergency fund. That pool of money will help provide for the grieving family. Pay someone a small percentage of the money coming in to manage that pool. Build it up through wise investments. Make sure the money gets paid out at the right time to the right people. Now you have something looking very like modern insurance.

Your life insurance company takes the premiums (monthly or annual fees) paid by its thousands of policyholders. Then it pools them together to pay death benefits, expenses and taxes. It invests the remainder in low-risk, long-term investments to pay future death benefits. The investment growth on that money adds to the pool.

Risk factors in life insurance and how it works

Insurance is all about protecting yourself and your property from risks. Generally, the higher the risk, the more your insurance will cost. The chances are greater that you'll make a claim. And that's why life insurance usually costs more for:

  • Smokers
  • People with serious health conditions
  • People in dangerous occupations, like lumberjacks or roofers

It's also why buying life and health insurance gets more expensive as you get older. You're more at risk for things like heart disease and cancer.

Insurance companies find out how risky it would be to insure you through a process called underwriting. They ask you questions about your health and lifestyle, and sometimes even have you undergo a few medical tests. The life insurance company looks at your answers and test results. It decides if you're at a greater-than-average risk of dying than the average person. If so, your life insurance will cost more.. If the risk is high enough, you may not be able to get underwritten life insurance at all. That could happen if you've been seriously ill or you're very old.

What's the difference between guaranteed-issue and underwritten life insurance?

When you buy life insurance from an advisor, the life insurance company will underwrite your application. The extent of that underwriting will depend on your age and how much insurance you're applying for.

Guaranteed-issue life insurance that you buy online typically requires little if any health information from you. That's why high-risk people tend to buy it. But the proportion of high-risk policyholders in the guaranteed-issue pool will be much higher than in the underwritten life insurance pool. The insurance company needs to adequately protect so many people at such a high risk of dying. So it charges everyone in the guaranteed-issue pool significantly more. Even if they're healthy. No questions separate the healthy people from the unhealthy ones. Because the risk is so high, guaranteed-issue policies tend to be small - typically no more than $25,000.

That's why, if your health is reasonably good, it could be worth the extra time and effort to buy an underwritten policy through an advisor. You could end up paying less and getting more coverage. And the health screening process isn't as onerous as it once was. (See: Sun Life Financial announces industry-leading underwriting and product changes.)

Consider what could happen if you own a small guaranteed-issue policy for a long time. Suppose you buy a policy for $20,000. That could pay for the funeral you're expecting to happen soon. What if you end up living for another 10 years? By then, you could realistically have paid more than $20,000 in total premiums.

Why buy life insurance from an advisor?

Along with the potential cost savings and flexibility that come with being underwritten, you get financial flexibility when you buy from an advisor. In a face-to-face meeting, you can:

  • Ask questions that will help you fully understand your options
  • See which of the coverage and payment features offered (that aren't simple enough to offer online) make the most sense for you

An advisor can also help you build life insurance into your overall financial plan. This can be especially helpful if your financial picture is complicated. That could be business ownership or a blended family. Or if you want to use life insurance to leave money for your children.

Why buy life insurance online?

You may prefer the ease and convenience of buying life insurance online. You might think of it the way you do your banking or book your vacations. You may not need a very large policy or a lot of special features right now. You may even have been turned down for underwritten life insurance because of poor health. But you want at least some coverage, so you're looking for a guaranteed-issue product.

You're not limited to guaranteed-issue policies when you buy online. Some insurance companies also sell online life insurance options that fall somewhere between guaranteed-issue and fully underwritten. These offer larger policy amounts and more features than guaranteed-issue, and ask some health questions. Because they're not fully underwritten, they might cost a bit more. But you might be willing to pay for that online convenience. And your situation could change or become more complicated. Then you can meet with an advisor to see how you can add to the coverage you bought online.

It's your life and it's your life insurance. Make sure you understand the facts.

  • Get a quote online. Want to apply for your life insurance online? You can, with Sun Life Go insurance. Be sure to read the product details before getting a quote online.*
  • Speak with an advisor. Make informed decisions with helpful advice. Talk to your advisor or find one near you.

*Quebec residents will need to talk with a licensed representative to complete an application.

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