Life insurance is just one of those things that we don’t really want to believe that we need – as a collective human-race that seems to be a common trait. Which, of course, is understandable; after all, when you purchase life insurance you’re essentially planning ahead to when you won’t exist anymore and your loved ones will. It’s a thought that some of us handle better than others.
“They call it life insurance, but it’s really death insurance. After all, you’ll never live to collect,” ponders Judith Hasenauer, an Underwriter for CL (Chartered Life), “That’s why it’s often said that life insurance is sold, not bought.”
At the end of the day, though, this thought doesn’t help anything. Life insurance isn’t about us, it’s about them, our loved ones. In order protect their future well-being, we have to put our own mortality and fears on the back-burner and consider what’s best for them – and what’s best for them is the financial stability that life insurance will provide.
Of course, there’s a few stigmas surrounding life insurance that like to play off of our natural sense of worry, our modern paranoia of scams, and our already innate aversion to the idea of life insurance. It’s important to understand where the real truths are, and while the life insurance industry in the United States is imperfect, you can be smart about your purchase and obtain a policy that is actually important to obtain despite a few pitfalls in the system.
To assist in providing informed information, I’ve collected some commentary from Tony Steuer – Director of Financial Preparedness for United Policyholders – and a Consumer Federation of America expert, James Hunt. Here we’ll dive into three common myths of life insurance with their expert opinions.
“Agents are always upfront about what their commission is.” – MYTH
“It’s a real quagmire,” states Steuer. “Life insurance is the last financial industry where compensation is not fully disclosed.” This is true – not all agents are good agents; there is plenty of scam out there to be aware of, and life insurance companies do believe that if they divulge commissions, it will cost them a sale.
Unfortunately, this is mostly only a problem still here in the United States – most insurance companies from other countries are more and more jumping on the “full disclosure” band-wagon; the U.S. is sure to follow.
Until it does, should you just decide that life insurance is a scam and bail on it? Absolutely not! Instead, Hunt suggests that you do the following:
- Closely examine what the policy determines your first-year surrender value to be; now, compare it to the first-year premium. If the surrender value is close to zero, your agent is hitting a major pay day and therefore, it’s wise to cover your bases and shop around. This is something you typically wouldn’t discover until after the policy is purchased, signed, and delivered.
- Always obtain a competitor’s quote – specifically from TIAA-CREF, a commission-less company that offers direct policies. See a price difference?
“Life insurance is a solid investment opportunity.” – MYTH
“I liken life insurance to the casino industry,” remarks Steuer. “How do you think they get these big, flashy buildings and these solid financials? Not by giving you this really great deal.”
According to Hunt and Steuer, the insurance companies seem to try to dress up life insurance as an investment opportunity more and more every year, which is why financial experts who oppose life insurance gain so much traction with their audience. When financial experts boast that there are better “investments” to be had, they’re not wrong – but that doesn’t mean that you shouldn’t purchase life insurance, it just means that you shouldn’t be looking at it as an investment. It should be added in addition to investments.
Policies that try to sell themselves as investments miss the entire point of being an investment. “The problem is, 40% or 50% of the buyers drop out within 10 years and never get a good return on their money,” explains Hunt. “Buy term life insurance and stick the savings in your 401k instead.”
“Low cost! No medical exam! Guaranteed-issue!” – MYTH
Individuals who have a substantial amount of medical history tend to get taken in by this one more often than not; luckily, the laws have changed substantially on what life insurance companies can and can’t refuse, so the days of the guaranteed-issue policy are numbered – good riddance.
“For the first two years, the death benefits are minimal,” Hasenauer states. “That two-year window is the suicide period, the contestability window where the company would contest that the information you provided was not correct. They’re not very big policies; you could never go and get a good estate planning-type policy; they’re pretty close to burial-type policies – just enough to get you in the ground and pay the minister.”
And “low cost” they are not – “They’re crazy expensive,” states Steuer. “And statistically, less than 10 percent of people will qualify for the best available rates that are offered.”
As with all things insurance-related, it’s best to shop around. “There is a price and benefit difference between the three-question and the 10-question policy applications,” advises Hasenauer. Life insurance is an important purchase, it’s a necessary purchase, but it’s also necessary to play it smart and weed through all of the sales pitches to find a real policy offered by a company with integrity.