Health Concerns for life insurance differ from insuring a life annuity

By Shane Flait ©2008

Both life insurance and life annuities are handled through insurance companies. But they view your health status differently for these two product types. Let’s see why.

A life insurance policy is sort of the reverse of a life annuity. You buy life insurance to protect your dependents (who will become your beneficiaries) in the event you die too soon. On the other hand, you buy a life annuity to protect you in the event you live too long so as to outlive your savings.

The risk that the insurance companies take to supply benefits is whether or not the premiums (i.e. contributions) you pay them will cover those benefits.  These risks are based on the projected life expectancies of their clients – i.e. those they insure.

In a life insurance contract, the insurance company risks that the insured person will die earlier than expected thereby requiring the company to pay out benefit money to you before it receives from you sufficient premiums with earnings to pay that benefit.  For an annuity, the company’s risk is that the annuitant lives beyond his life expectancy – requiring it to pay out more than it received from your contributions and their earnings. So a life insurance company makes a greater profit if you live longer than expected where as the Annuity insurance company makes a greater profit if you die earlier than expected.

Insurance companies handle the life expectancy risk of clients by spreading this risk over many clients with reliable statistics on when those clients will die. Life insurance companies need to know something about their clients’ health so the life expectancy statistics they use are appropriate to those clients. If only sickly people signed up for life insurance, the company would go broke if it expected these people to die at a normal age.

So expect health questions when you apply for life insurance. If you do have some health problems, you may have to pay higher premiums to account for the higher than average risk of early death you pose for the company.

Annuity companies, on the other hand, are generally not concerned with clients’ health since they’re not a risk if you die early. That’s profitable for them. You health is not critical here as it is for life insurance.

Of course there’s also a risk also of poor management, lack of reserves, lack of a large client base for both life and annuity insurance companies. That circumstance can undermine the return on its investment earnings from your premiums and contributions that they planned. In that case they may not have the money to payout benefits when they come due.  

So, realize that the status of you health is more important to a life insurance company than to an annuity insurance company. But always buy an annuity or life insurance only from a financially strong insurance company so the benefits you contract for will be supplied when needed.

Shane Flait is a writer and educator. Get more info at www.EasyRetirementKnowHow.com