No Physical Term Life Insurance Explained

No physical term life insurance is a slight variation on traditional term life insurance.  The actual policies are identical – the only difference is the level of risk that the insurance company is taking on, since in regular term life insurance you are required to take a physical examination to prove your insurability and in no physical term life insurance you are not required to take a physical.  Since the similarities are numerous and the differences are minor, it is essential to explain what traditional discount term life insurance is before explaining fully what no physical term life insurance means for you.

Taking out a traditional term life insurance policy is one of the smartest financial moves you can make.  It is extremely inexpensive, and it provides a huge psychological and financial safety net as you know your family will be fully covered in case the worst happens to you unexpectedly. 

A term policy is simply explained this way:  you enter into a policy or a contract with the insurance company for a set number of years, known as the term.  The term is often in multiples of 10 years (10, 20, 30), but it can be nearly any number of years the insurance company is willing to sell you a policy for.  You buy a set amount of life insurance at the outset and that is known as the face value or death benefit of the term life insurance policy. 

So for instance you will hear people say something to the effect of, ‘I have $500,000 worth of life insurance.’  This means that the death benefit on their life insurance policy is $500,000.  Each policy then has a premium that you pay each year to keep the policy active and in force.  This amount is set at the beginning of your term and you pay a constant amount each year of the policy; the amount you pay is directly related to the physical exam you take and other factors such as your age, your sex, occupation, etc.  If you die during the term and that policy is up-to-date with the premiums, then the insurance company pays your beneficiaries the death benefit (which is often tax-free as well).  If you do not die during the term, then the policy expires at the end of the term.

The amount you pay in premiums is directly related to how much risk the insurance companies take on when they write you a policy.  If you’re a healthy 25-year old with no history of family illness who doesn’t smoke and has a perfectly healthy bill of health then you’re going to get the lowest possible rates.  If, on the other hand, you’re a 50-year old male who is 100 pounds overweight and has Type II diabetes, then you’re not likely to get a great rate.  Much of this information is generally gleaned from the life insurance physical you’re given before the contract is finalized. 

Lately, in order to speed up the process of writing a policy, many insurance companies have moved towards a no physical term life insurance policy.  They ask a detailed list of questions about your family and personal medical history and then do background research to determine if you’re telling the truth.  While this might seem like one of the infamous “liar loans” that helped cause the housing crisis, but they are quite dissimilar because the insurance company does more than enough due diligence to determine the truthfulness of your answers.  If you are indeed being honest, the actuaries who work for the insurance companies have determined that you are no more of a risk to the insurance company than someone who takes the actual physical exam and you can get the term or joint term life insurance policy you’re looking for.  It's best to speak with your life insurance agent first to get all the information available on each insurance company and the options they offer.