How Does Life Insurance Work in the United States

Life insurance companies in the United States are heavily regulated by each state department of insurance, but all states are members of the NAIC, which stands for National Association of Insurance Commissioners. Federal regulation of the insurance industry would save time for insurance companies when it comes to “approving” their products, currently each state has to give the insurance company permission before their products can be sold. “Permission” is a fancy way of charging a fee, to both insurance companies and insurance agents, which hopefully goes towards benefiting the underlying consumer. Life insurance rates do not usually vary by state, the premium for a twenty-year term best health class rating in the state of Washington is the same as other states, however the underlying premium tax the insurance company has to pay may be different. The premium tax is built into life insurance illustrations, so don’t worry about adding the tax when reviewing life insurance quotes.

Life insurance companies base the price off “rate classes” and “table ratings” for the entire United States. The price of life insurance is correlated to the “proposed insured’s” health. Basically, the “premium” (what someone pays) is based on the health of the person applying for life insurance. If someone is really healthy (according to life insurance underwriters), they will pay less money. Conversely, if someone is in poor health, they will be charged a higher premium or declined. Life insurance is purchased through insurance agents who are “appointed” by insurance companies. It sounds a little like a medieval Netflix special, but insurance agents are required to get a license and be “appointed” with the insurance company before they can offer their products.

It is sensible to work with independent insurance agent who are appointed with multiple life insurance companies because they will have access to more products, but people often purchase life insurance from a “friend of a friend” who happens to be a “captive” insurance agent. A “captive” insurance agent can only represent ONE insurance company, they are confined to one life insurance company for better or for worse, no take backs. Generally, these agents are newer to the life insurance industry and while their intentions may be pure, the life insurance products they offer are more expensive with less benefits. As time goes on more captive agents leave than stay, they go “independent” in order to have more options for clients, however captive insurance companies will typically build compensation models in way that makes it hard for agents to leave by taking away their renewal commissions.

How would you like to work somewhere and come to find out you have been hoodwinked? This leaves a lot of captive insurance agents in a difficult dilemma because once they understand the marketplace of life insurance products, it can be hard to drink the Kool-Aid. If you want to get the best deal on life insurance, get the facts, shop around, speak with multiple people and use common sense. It will be easy to make the right decision when you take a few minutes and evaluate the information.

The next steps:
 application process – paperwork, either digitally or physically
 underwriting process – underwriter determines rating based on overall insurability

Once the agent knows the rating, they can provide the final price the insurance company is willing to charge to take on the risk. Meaning a healthy forty-year-old person might pay thirty dollars a month for a one-million-dollar term life insurance policy, but same age in bad health might pay five hundred a month for the same death benefit.

After the agent explains the information and the proposed insured decides on a plan, the agent will notify the insurance company to “issue” a policy, then after “premium” / money has been collected, the policy is “in-force” and becomes “effective”.

If a premature death happens, an experienced agent will know how to help beneficiaries navigate the death claim process. People who buy online or from a call center usually forget to think about the “what if I actually die” part of the equation. First, it would be the same price to purchase the policy from an experienced local agent from the identical insurance company, but who does the beneficiary have in their corner if the insured is dead? Chances are the person who sold them the policy is long gone.

What will the beneficiary’s state of mind be like? Would it be better if they had an experienced life insurance agent they could call for help? Does the beneficiary feel comfortable processing the death claim on their own? Just ask an experienced agent who has actually facilitated a life insurance death benefit claim, you will be able to see the truth. Also, it is the same price if you buy the same product from a local agent. If you need help understanding anything around life insurance, give us a call or schedule an appointment online to talk. We are always looking to help people get the correct amount of life insurance for however long they want it to last. Call our Bellevue Washington office directly at 425-246-4222 or visit