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Understanding life insurance

November 14, 2018

The difference between buying life insurance online and from an advisor

Does HOW you buy life insurance affect WHAT you buy? What’s guaranteed-issue life insurance? We explain some basics.

You can do so much for yourself online: book a vacation, order groceries, rate your dentist. Doing it yourself is fast and convenient, and it puts you in the driver’s seat. And while many Canadians still look for a full-service, face-to-face relationship with an advisor, you can even buy life insurance online.

Buying online sounds simple and easy, and it can be. But the life insurance you buy online can have some important differences from the insurance you buy through an advisor, and you need to understand these differences before you decide how to buy.

Let’s begin with a simple picture of how insurance works.

How does insurance work?

The basic idea behind insurance is the sharing 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 if all the families in all the villages in the kingdom have been putting a bit of money regularly into a shared emergency fund, that pool of money will help provide for the bereaved family. Pay someone a small piece of the money coming in to manage that pool, to build it up through wise investments and to make sure the money gets paid out at the right time to the right people, and you have something looking very much like modern insurance.

Your life insurance company takes the monthly payments from its policyholders and pools them together to pay death benefits, expenses and taxes. It invests the remainder in a diverse range of investments to pay future death benefits. The investment growth on that money adds to the pool.

How does risk affect the cost of insurance?

Insurance is all about protecting yourself and your property from specific risks. Generally speaking, the higher the risk, the more your insurance will cost, because the chances are greater that you’ll make a claim.

Life insurance usually costs more for:

  • Men
  • Smokers
  • People with serious health conditions
  • People with high-risk hobbies like skydiving and mountain-climbing

It’s also why buying life and health insurance gets more expensive as you get older and more at risk of developing conditions like heart disease and cancer.

Insurance companies find out how risky it would be to insure you through a process called underwriting. You answer questions about your health and lifestyle, and sometimes even have a few medical tests (like blood and urine) done. If a life insurance company looks at your answers and test results and decides that you are at risk of dying sooner than most people of your age and sex, your life insurance will cost you more than the average person’s.

If the risk is high enough – if you’ve been seriously ill, for example – you may not be able to get underwritten life insurance at all. If you’re healthy, however, the picture looks different. The more information the insurance company has about your health and lifestyle, the less your coverage could cost, depending on the kind of policy you’re applying for.

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

You can look at life insurance according to how much underwriting is involved:

Fully underwritten

  • Several medical and lifestyle questions; medical tests such as blood and urine sometimes required if you want a very large policy, or if you’re older
  • Many features offered
  • Largest amounts of coverage – as much as $200 million

Simplified issue

  • Just a few health questions, no tests
  • Fewer features
  • Smaller amounts of coverage – usually up to $1 million

Guaranteed issue

  • No health questions, no tests
  • Fewest features
  • Smallest amounts of coverage – usually no more than $50,000

Usually, when you buy life insurance through an advisor, the policy you’re applying for will be fully underwritten. The underwriting requirements will depend on your age and how much insurance you’re looking for.

But guaranteed-issue life insurance that you buy online typically requires no health information from you, other than whether you’re a smoker. That’s why high-risk people tend to buy it. That means there will be more high-risk policyholders in the guaranteed-issue pool than in the underwritten pool. So to adequately protect so many people at such a high risk of dying sooner, the insurance company needs to charge everyone in the guaranteed-issue pool significantly more – whether they’re healthy or not. Because guaranteed-issue buyers are usually just looking for a way to cover their funeral expenses, these policies tend to be small. They’re commonly around $25,000, and usually no more than $50,000.

And that’s why, if your health is reasonably good, it could be worth the extra time and effort to buy an underwritten policy. Because you’re willing to give the insurance company more information about yourself, you could end up paying less and getting more coverage. And the underwriting process isn’t as onerous as it once was. (See: Sun Life Financial announces industry-leading underwriting and product changes)

Why buy life insurance through an advisor?

Along with the potential cost savings and flexibility that come with being underwritten, you get more choice when you buy through an advisor. In a face-to-face meeting, you can ask questions that will help you fully understand your options, and see which of the coverage and payment features offered (that aren’t simple enough to sell 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 you have a more complex financial picture, like business ownership or a blended family, or if you want to use life insurance for estate planning. 

Why buy life insurance online?

You may prefer the ease and convenience of buying life insurance online the way you do your banking or book your vacations. You may want a quote right away and a policy issued quickly. You might not have a lot of questions, and those you do have can be answered by calling the licensed representative whom insurance companies must make available to you when you’re buying online. You may not need a very large policy or many special features right now. You may even have been turned down for life insurance because of poor health, so you’re buying a guaranteed-issue policy because you want enough insurance to pay for your funeral.

But you’re not limited to guaranteed-issue policies when you buy online. Some insurance companies also sell simplified-issue policies, or fast-track the underwriting process if you fit into certain lower-risk groups. If or when your situation changes or becomes more complicated, you can meet with an advisor to see how you can add to the coverage you bought online. If you’re not sure which route to take, you may be able to work with an advisor AND buy life insurance online – in which case, the advisor can help you understand how the policy you’re buying online works.

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. Get your personalized quote.
  • Speak with an advisor. Make well-informed decisions with helpful advice. Talk to your advisor or find one near you.

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