How Life Insurance Works: 13 Questions Frequently Asked by Consumers

Written by ChoiceLifeQuote

Most people would agree that owning life insurance coverage is an important part of their overall financial plan, yet many consumers are not sure exactly how life insurance works.

This is completely understandable given the number of companies, agents, and policies in today’s marketplace.

Having considered questions commonly asked by consumers the following article, How Life Insurance Works: 13 Questions Frequently Asked by Consumers, is intended to provide you with an overview of life insurance basics, allowing you to be a more informed consumer when considering coverage.

Most people believe that owning life insurance coverage is an important part of their overall financial plan, yet many consumers are not sure exactly how life insurance works.

This is completely understandable given the number of companies, agents, and policies in today’s marketplace.

Having considered questions commonly asked by clients the following information is intended to provide you with an overview of life insurance basics, allowing you to be a more informed consumer when considering coverage.

options when considering life insurance coverage

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Understanding How Life Insurance Works

A basic understanding of how life insurance works is essential to ensuring that you have appropriate coverage for your family, business, or other obligations. When considering life insurance, it is important to choose the right type of policy, appropriate amount of coverage, and best insurance company for your specific situation. The following questions can be helpful in determining coverage needs and evaluating policy options.

1

What is the purpose of life insurance?

Simply stated… Life insurance can provide financial protection for those you care about, and other financial obligations, in the event of an unexpected or untimely death. A life insurance policy pays a tax-free death benefit to designated beneficiaries at the primary insured’s passing.

Policies are often primarily used for income replacement.

However, they may also serve other purposes such as paying off a mortgage; funding a child’s education; making charitable contributions; business continuation; tax-deferred cash value accumulation; and other objectives.

2

Who should own life insurance?

Essentially, if someone depends upon you for financial support you likely have a need for life insurance. Coverage needs often change throughout an individual’s lifetime based on certain “life events.” These events may include, but are not limited to, getting married, purchasing a home, having children, planning for college, owning a business, saving for retirement, planning for final expenses, or transferring wealth to future generations.

At some point in their lives, most people have a need for life insurance protection.

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According to Life Happens, a nonprofit organization promoting consumer education, “if someone will suffer financially when you die, chances are you need life insurance because it provides cash to your family after your death.”  

According to Life Happens, a nonprofit organization promoting consumer education, “if someone will suffer financially when you die, chances are you need life insurance because it provides cash to your family after your death.” At some point in their lives, most people have a need for life insurance protection.

Life Events

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life insurance for retirement
life insurance for final expenses

3

What are the different types of life insurance coverage?

Though the different types of coverage seem complicated, life insurance policies can essentially be divided into either temporary (term) or permanent coverage. Within these two basic categories there are several policy options offering features designed to meet specific needs. Highlights of term life insurance vs. permanent life insurance include the following:

Term vs. Permanent Comparison

Term

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    Lowest Initial Premiums
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    Temporary Coverage
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    Tax-free Death Benefit
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    Benefit Riders Available
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    No Cash Value Accumulation

Permanent

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    Higher Initial Premiums
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    Potential Lifetime Coverage
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    Tax-free Death Benefit
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    Living Benefits Available
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    Tax-deferred Cash Accumulation

4

What is term life insurance?

Term life offers basic life insurance coverage, traditionally at the lowest initial cost. This type of coverage provides temporary protection in the form of a death benefit for a specific period, or “term,” during which premiums remain level. Common term life policies offer level premiums for 10, 20, or 30 years, and are typically renewable at higher rates after the initial term expires. Some companies offer customizable term lengths to meet the insured’s individual coverage needs. Many term plans may also be converted to a permanent policy if the insured has a need for continued coverage. 

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The bottom line is that term life insurance offers pure coverage (death benefit) at the lowest initial cost, with premiums remaining level for a specific period.

The bottom line is that term life insurance offers pure coverage (death benefit) at the lowest initial cost, with premiums remaining level for a specific period.

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 Common Types of Term Policies:

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    Annually Renewable Term
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    Decreasing Term
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    Level Premium Term
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    Return of Premium Term

Common Types of Term Policies:

·         Annually Renewable Term

·         Decreasing Term

·         Level Premium Term

·         Return of Premium Term

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5

What is permanent life insurance?

Permanent life insurance is designed to provide lifetime protection for the primary insured. This type of coverage is initially more expensive than term life plans due to being priced for lifetime coverage. Unlike term insurance, many permanent policies accumulate tax-deferred cash value which may be accessed by the policyowner as needed.


There are a variety of types of permanent plans which offer different features to policy owners. As an example, whole life premiums are permanently fixed while universal life allows for flexible premiums. Additionally, interest crediting methods vary by type of permanent policy ranging from fixed interest rates to rates linked to a given market index. 

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Essentially, permanent life insurance offers a lifetime death benefit, tax-deferred cash value accumulation, and often living benefits.

Essentially, permanent life insurance offers a lifetime death benefit, tax-free cash value accumulation, and often living benefits.

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Permanent Policy Highlights:

  • Higher Initial Premiums
  • Lifetime Coverage
  • Tax-free Death Benefit
  • Living Benefits Available
  • Tax-deferred Cash Accumulation

Permanent Policy Highlights:

·         Higher Initial Premiums

·         Lifetime Coverage

·         Tax-free Death Benefit

·         Living Benefits Available

·         Tax-Free Cash Value Accumulation

·         Lowest Initial Premiums

·         Temporary Coverage

·         Tax-free Death Benefit

·         Benefit Riders Available

·         No Cash Value Accumulation

hour-glass-permanent life insurance

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6

How much life insurance coverage do you need?

In determining an appropriate amount of life insurance coverage, you should essentially consider those you love and what you owe. Calculating the replacement of your income for a certain number of years, your outstanding mortgage and other debts, estimated future education costs, and final expenses will give you a quick snapshot of your coverage needs. It is often recommended that a multiple of 7 to 10 times a person’s income be used to estimate required coverage, however an individual analysis of your personal situation can be much more accurate.

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According to Life Happens, “When purchasing life insurance, the question really isn’t how much you need, but how much capital your family will need at the time of your death, which depends on two variables: 1) How much will be needed at death to meet immediate obligations? 2) How much future income is needed to sustain the household?”

According to Life Happens, “When purchasing life insurance, the question really isn’t how much you need, but how much capital your family will need at the time of your death, which depends on two variables: 1) How much will be needed at death to meet immediate obligations? 2) How much future income is needed to sustain the household?”

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7

What should you look for in a life insurance company?

When purchasing life insurance, choosing the right insurance company is extremely important. With literally hundreds of life insurance companies to choose from this can be an overwhelming task. When evaluating an insurance company, we recommend that you consider the company’s product offerings and industry ratings. From a product perspective, you want to make sure that the company’s product portfolio includes policy options that meet your individual needs. Company ratings may seem a bit more complicated, but can be easily navigated by sticking with highly rated insurers.

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Working with an independent insurance professional can provide you with an advocate to assist in choosing the right type of policy, appropriate amount of coverage, and best insurance company for your specific situation.

8

How are life insurance companies rated?

Insurance companies are evaluated based on financial strength and credit worthiness by well-respected credit rating agencies such as A.M.Best, Standard & Poor’s, Fitch Ratings, and Moody’s.

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am best how life insurance works
Standard & Poors
Fitch Ratings
Moody's

Within the life insurance arena A.M. Best serves as an industry standard for company ratings. According to A.M. Best, “a Best’s Financial Strength Rating (FSR) is an independent opinion of an insurer’s financial strength and ability to meet its ongoing insurance policy and contract obligations.” Experienced independent agents traditionally recommend “A” (Excellent) or above rated companies to their clients. 

A.M. Best
Ratings

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    Superior (A++ to A+)
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    Excellent (A to A-)
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    Good (B++ to B+)
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    Fair (B to B-)
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    Marginal (C++ to C)
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    Weak (C to C-)
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    Poor (D)

9

Which life insurance companies would you recommend?

Now that is truly a “million-dollar question!”

Given hundreds of insurance companies offering literally thousands of life insurance products, there are number of outstanding options for today’s consumers. As previously discussed, company ratings are extremely important in choosing a life insurance company. However, underwriting standards and customer service are also significant considerations in how life insurance works.

When considering different underwriting practices, one company may offer flexibility related to certain medical conditions or tobacco use which lower an insured’s premiums when compared to another company.

Working with a trusted independent agent can be extremely helpful in choosing the right type of policy, amount of coverage, and best insurance company.

In providing the following insurance company recommendations company ratings, product portfolio, underwriting policies, customer service, and other factors have been taken into consideration. Recommended companies have been provided in alphabetical order for review.

AIG how life inusrance works
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    "A" rated by A.M. Best (as of 01/2018)
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    Competitive pricing
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    Flexible underwriting
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    Select-A-Term product
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    Competitive GUL products
ANICO how life insurance work
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    "A" rated by A.M. Best (as of 01/2018)
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    Competitive pricing
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    Non-medical underwriting
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    Living benefit options
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    Strong GUL products
Assurity how life insurance works
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    "A-" rated by A.M. Best (as of 01/2018)
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    Non-medical underwriting
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    Mutual insurance company
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    LifeScape Term 350 product
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    LifeScape Whole Life product
banner how life insurance works
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    "A+" rated by A.M. Best (as of 01/2018)
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    Exceptional pricing
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    Liberal underwriting
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    Convertible to age 95
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    Competitive for high risk
MetLife how life insurance works
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    "A+" rated by A.M. Best (as of 01/2018)
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    Strong reputation
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    Simplified issue products
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    Active military coverage
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    Marijuana use option
Mutual of Omaha how life insurance works
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    "A+" rated by A.M. Best (as of 01/2018)
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    Competitive pricing
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    Simplified issue products
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    Underwriting credit program
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    Strong whole life products
North American how life insurance works
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    "A+" rated by A.M. Best (as of 01/2018)
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    Competitive pricing
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    Excellent customer service
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    Strong Indexed UL
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    Privately owned company
Protective how life insurance works
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    "A+" rated by A.M. Best (as of 01/2018)
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    Highly competitive pricing
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    Solid customer service
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    Income Provider option
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    Strong GUL products
Prudential how life insurance works
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    "A+" rated by A.M. Best (as of 01/2018)
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    Competitive pricing
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    Niche underwriting
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    Tobacco users
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    Non-U.S. residents
SBLI how life insurance works
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    "A" rated by A.M. Best (as of 01/2018)
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    Competitive pricing
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    Accelerated underwriting
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    Great customer service
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    Annually renewable term

10

What should you expect when applying for life insurance coverage?

When applying for life insurance the company you choose will need to evaluate your application for coverage. This process differs depending on the type of policy, and individual company underwriting standards. Non-medical life insurance policies can be approved in minutes, while fully underwritten policies may take 4 to 6 weeks for approval in the process of how life insurance works.

Fully underwritten policies traditionally require an in-depth application; medical, motor vehicle, and pharmacy reports; and a medical exam. These policies are normally best for healthy individuals who want to get the lowest premium rates, or those who have medical issues which need to be evaluated.

No exam policies routinely include an application and medical, motor vehicle, and pharmacy reports; but do not require an intrusive medical exam. No exam policies offer quicker coverage without a medical exam for a slightly higher premium. Key features for both the fully underwritten and no exam life insurance options have been provided below.

Fully Underwritten Life

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    Lower Premiums
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    Requires a medical exam
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    4 to 6 weeks for approval
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    Evaluation of medical conditions
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No Exam Life

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    Higher Premiums
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    No medical exam
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    3 to 5 days for approval
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    Fast and simple coverage
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11

How can you get the best results on a life insurance exam?

If you are applying for a fully underwritten policy the life insurance company will require a medical exam or physical.

This exam allows the company to evaluate your current health and history, and often includes a series of medical questions, height/weight, blood pressure, blood and urine collection, and possibly an EKG.

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From a positive standpoint, you get a free medical exam out of the deal and if you are relatively health this can qualify you for lower rates. 

On the other hand, concerns related to the exam may cause the insurance company to increase your rate, or even deny coverage. Base on the exam’s potential impact on policy approval and premium rates it is important to get the best results possible. The following are a few pointers for getting the best results on your life insurance exam or physical.

Insurance Exam Best Practices

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    Schedule your exam in the morning. You will be required to fast (not eat) for six to eight hours prior to the exam, so early morning will likely work best since any food or drinks could potentially affect your lab results.
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    Prepare a list of current medications. The paramed examiner will need to know what medication you are currently taking, preparing a list of current prescription and over the counter medications will be helpful and save time.
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    Take it easy prior to your exam. Strenuous exercise prior to your exam may cause elevated blood pressure and pulse, so no workouts the morning of your exam. It may also be helpful to get a good night’s rest the evening prior.
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    Drink plenty of water the evening prior. Staying hydrated the day prior to your exam will help facilitate the required blood and urine samples.
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    No caffeine or nicotine prior to your exam. Drinking coffee and/or smoking cigarettes can elevate your blood pressure and negatively impact lab results, avoiding both the morning of your exam is highly recommended.
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    No alcohol prior to your exam. Drinking alcohol prior to your exam can leave you dehydrated, affect liver functions, and negatively impact other lab results. It is best to limit alcohol intake 24 hours prior to your scheduled exam time.
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    Limit sodium and fat intake. Excess salt and/or fat in your diet can affect blood pressure and cholesterol levels. For the best results limit excess salt and fat 24 hours prior to your scheduled exam.
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    Be straight forward with your examiner. It is important to provide complete and accurate information concerning your medical history to the paramed examiner. The information you provide will be evaluated along with your exam findings, lab results, medical information bureau reports, prescription checks, and other data. Any discrepancies or inconsistencies can potentially impact the underwriting process and ultimately policy approval.

12

What if you are denied life insurance coverage?

If you are denied coverage for either a fully underwritten or a no medical exam life insurance policy you may be able to apply with another company that would view your medical condition, or other challenges, more favorably. There are also additional coverage options available in the form of simplified and/or guaranteed issue life insurance plans.

These plans are more expensive than traditional policies, but offer an opportunity to secure needed coverage. There can also be a wide range of premium rates from one policy to another, so it is important to work with an experienced independent agent who can assist in evaluating appropriate coverage options.

BEEN DENIED LIFE
INSURANCE COVERAGE?

13

Why should you work with an independent life insurance agent?

​Independent life insurance agents have access to multiple companies, as opposed to a captive agent who works for a single insurer. An experienced independent agent can assist you in choosing the right type of policy, appropriate amount of coverage, and best insurance company for your specific situation. Veteran agents often have decades of experience in working with clients who have less than perfect health, and can be extremely knowledgeable about the underwriting requirements of different insurance companies.

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Working with an experienced independent agent gives you a significant advantage in navigating the life insurance buying process because they work for you, the client.

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Our team can assist you in choosing the right type of policy, appropriate amount of coverage, and best insurance company for your specific situation. Get the coverage you need, and save up to 73%. Give us a call at (800) 770-8229, or request an instant no obligation quote today!

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About ChoiceLifeQuote
ChoiceLifeQuote is committed to making life insurance simple by helping you to identify coverage needs, understand policy options, and get the lowest rates possible. We look forward to the opportunity to earn your business, request a free no obligation quote today!

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