Not Everyone Can Buy Life Insurance: 3 Key Requirements You Must Meet

1. Need: The Reason for Buying Life Insurance

Life insurance is designed to fill a need—whether it’s providing financial support to your family in case of your death, covering debts, or funding your children’s education. Insurance companies will assess whether there is a legitimate need for you to get coverage.

Here’s how need plays into the process:

• Financial Dependents: If you have family members who depend on your income, life insurance helps ensure that they won’t be financially devastated if you pass away unexpectedly. For example, a spouse, children, or aging parents.

• Debt: Life insurance is often used to cover debts such as a mortgage, personal loans, or business debts. It ensures that your loved ones won’t be burdened with these liabilities if something happens to you.

• Business Protection: If you’re a business owner, life insurance may be necessary for key person coverage, buy-sell agreements, or ensuring the continuity of the business in your absence.

Insurance companies want to see that there is a genuine need for life insurance. If you don’t have any financial dependents or liabilities, it might be harder to justify the purchase of a large policy. However, many people overlook the need for insurance early on in life, before these responsibilities build up, missing the opportunity to lock in coverage while young and healthy.

2. Capacity to Pay: Can You Afford the Premiums?

Life insurance comes with regular premium payments, and one of the biggest considerations for insurers is whether you have the capacity to maintain these payments over the life of the policy.

Capacity to pay involves two key factors:

• Income Stability: Insurance companies will look at your income level to determine if you can afford the premium payments consistently. They don’t want you to take on a policy only to have it lapse after a few years because you can’t afford it.

• Budgeting: It’s important to realistically assess your budget. Life insurance is a long-term commitment, especially if you’re opting for a whole life or universal life policy. You must be sure that paying the premiums won’t strain your finances in the future.

Even if you have a need for life insurance, you still have to show that you can pay for it. Before applying, evaluate your current income and financial obligations to ensure you can afford the cost of premiums in the long run.

3. Good Health or Insurability: Can You Qualify Based on Your Health?

The third and most important requirement is your health. Insurance companies need to know that you’re in good health before they agree to cover you. This is what determines your insurability, and it’s where many people face challenges.

Here’s how your health impacts life insurance eligibility:

• Medical Examination: Most life insurance policies require a medical exam to assess your current health status. They’ll check for pre-existing conditions, lifestyle habits (like smoking or drinking), and your overall medical history. If you have severe health issues, it could lead to higher premiums—or even disqualification.

• Age Factor: As you age, the likelihood of developing health problems increases, which makes life insurance more expensive and harder to qualify for. Applying for life insurance when you’re younger typically results in lower premiums and a better chance of being approved.

• Pre-Existing Conditions: Certain health conditions, such as heart disease, diabetes, or cancer, might make it difficult to qualify for life insurance. In some cases, you may still get coverage, but at much higher rates, or with certain exclusions.

However, some policies don’t require medical exams. These are called guaranteed issue or simplified issue policies. While they provide a way for people with health issues to get coverage, the premiums are often much higher, and the death benefits may be lower.

Why These Requirements Matter

Insurance companies use these three factors—need, capacity to pay, and good health—to manage their risks. Life insurance is all about balancing the likelihood of having to pay out a claim against the premiums collected. If someone has no financial dependents, unstable income, or severe health issues, the risk of offering them a policy becomes too high.

• Need ensures that you’re not buying life insurance unnecessarily or for speculative purposes.

• Capacity to pay guarantees that the policy will remain active and won’t lapse due to non-payment.

• Good health ensures that the insurer isn’t taking on too much risk by insuring someone likely to make a claim soon.

The Importance of Acting Early

One of the biggest mistakes people make is waiting too long to purchase life insurance. Health tends to decline with age, and your financial obligations can increase over time. It’s easier to qualify for coverage when you’re younger and healthier, and premiums are much lower at that point.

If you’re thinking about getting life insurance but aren’t sure whether you meet these three requirements, it’s a good idea to consult with an insurance advisor. They can help you evaluate your situation and determine the best type of coverage for you.