NEW YORK (MainStreet) – If you were diagnosed with a condition that could affect your life adversely from that point on, would you want more life insurance or less?

Considering the life insurance business stays afloat by hedging its profitability against your mortality, folks with pre-existing conditions typically find themselves paying more for less. Christopher A. Hynes, attorney and certified financial planner for Hynes Financial Services in Massachusetts knows this all too well. At a recent Massachusetts Continuing Legal Education symposium, Hynes addressed a group of attorneys about getting and using life insurance to protect against future long-term care costs for those who have been declined for long-term care insurance because of pre-existing conditions.

“As a for-profit business, a life insurance carrier’s primary motive is to collect more money from policyholders, aka 'premium,' than it pays out in claims, aka 'death benefit,'” he says. “Consequently, from the carrier’s standpoint, the driving variable in this equation is how often a carrier will not have to pay out a death benefit on a policy due to the owner letting the policy lapse.”

That seems simple on the surface, but it gets complicated by a life insurance carrier's “lapse ratio” — which basically boils down to the odds that your policy will lapse without the insurance company paying a dime. One of the key reasons a life insurance policy with a fixed term, or “term life insurance,” is so much less expensive than indefinite whole life insurance is because it has a lapse ratio of more than 98%, Hynes says. That lapse ratio falls precipitously when a pre-existing condition is involved.

“Life insurance companies absolutely factor pre-existing conditions into their underwriting decisions and pricing,” says Chris Huntley, president of Huntley Wealth & Insurance Services in San Diego. “Depending on the type and severity of the medical concern, the insurance carrier may decline coverage to an applicant completely or 'rate' the applicant, asking them to pay a higher premium than someone without pre-existing conditions.”

For example, a 40-year-old, non-smoking man who qualifies for the best rating might pay about $18 per month for a 20-year, $250,000 policy. If the same 40-year-old man is 50 pounds overweight or takes medication for diabetes, he might qualify for a company’s “standard” rate, which would cost around $35 per month, about double that of his healthier counterpart.

So what constitutes a “pre-existing condition”? Not everything. Severe conditions that can drive down your overall health rating and lower life expectancy — such as sleep apnea, Type II diabetes or depression — can come with a weighty premium, according to Huntley. However, though some people consider high blood pressure or high cholesterol a pre-existing condition, insurance companies don't consider them a drag on mortality and typically won't penalize applicants with those conditions.

It also doesn't help to gloss over information about serious conditions when there are insurance packages out there that can help. Hynes notes that many clients will initially tell him that their health is “excellent,” only to reveal in their insurance application that they have had a recent bout with cancer or have been diagnosed a terminal illness.

“By contrast, I have also had others who feel that they are 'uninsurable' only later to discover that their particular health issues will not preclude them from obtaining coverage,” Hynes says. “My advice — don’t assume you’re not insurable if you haven’t spoken to an experienced independent agent who can guide you through the process with a variety of carriers who might not assign the same level of risk to the same health condition.”

If you're cut off from cheaper term life insurance and only have whole-life insurance plans available to you, for example, Huntley notes that underwriting guidelines tend to be more lenient on those plans. For example, Hynes notes that a 5-foot-10 man weighing 245 pounds would likely qualify as “sub-standard” if applying for term insurance, but could be bumped up to “standard” by a few companies offering permanent policies.

“If you’re considering two companies, the one who approves at the better health class will typically cost less,” Huntley says. “Having said that, when shopping for life insurance with a pre-existing condition, the name of the game is finding an insurance carrier that will treat an applicant most liberally or leniently with his or her particular condition.”

There are other ways of circumventing high costs even after you've consulted with an agent. Setting up the death benefit as an annuity payment rather than a lump sum payout can save roughly 10% to 15% in premiums. You can save another 15% to 20% on longer terms by “policy layering,” or breaking up your life insurance coverage one policy with a shorter term and another with a longer term. Some companies even lower premiums for applicants who have a four-year college degree or qualify as high-income earners.

Recently, Hynes notes that some life insurance contracts have added a contractual right for the policy-owner to take their death benefit during life if they're unable to perform a significant number daily activities without substantial help. Depending on their severity, conditions such as diabetes, Parkinson’s and Multiple Sclerosis are not considered life threatening by some carriers and could result in tremendous benefits for people with those conditions as a result.

In any case, life insurance alone shouldn't be considered adequate protection for people with pre-existing conditions. Huntley notes that those conditions only provide additional motivation to get someone's affairs in order and compose a will or form a trust to prepare for the worst.

“I’m not an attorney, but I would highly recommend for everyone to have a will or trust — or both,” he says.

“The will allows you to name guardians for children, establish health care directives and direct how your assets are to be distributed amongst your family,” Huntley says. “A trust saves the family a lot time and money, and allows the distribution of the estate to proceed without going through probate courts, and allows it to stay a private matter.”

— Written by Jason Notte in Portland, Ore., for MainStreet

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This article is commentary by an independent contributor. At the time of publication, the author held TK positions in the stocks mentioned.