8/1/2013 9:00 PM ET|
6 worst myths about life insurance
Life insurance isn't the most glamorous thing you can purchase, but it is one of the most important. Be sure you know fact from fiction.
Let's talk about your death.
Not much of a sales pitch, is it? Yet that's precisely the body under the sheet we're delicately avoiding when we consider buying life insurance.
"They call it life insurance but it's really death insurance. After all, you'll never live to collect," says Judith Hasenauer, a Chartered Life Underwriter, or CLU, and principal at Blazzard & Hasenauer, P.C., a Florida law firm that advises insurance companies. "That's why it's often said that life insurance is sold, not bought."
Perhaps because we are so averse to contemplating our own mortality, certain myths have grown up around life insurance. Myths such as: Life insurance is a good investment. You can't bargain for a better rate. You can always expect full disclosure of commissions. And a guaranteed-issue life policy will always come to the rescue if you wait too long to purchase coverage.
We invited life underwriter Tony Steuer, the director of financial preparedness for the insurance consumer group United Policyholders, along with a life insurance actuary, former Vermont insurance commissioner and Consumer Federation of America expert James Hunt, to join Hasenauer in playing pinata with these overstuffed life insurance myths.
Myth No. 1: I don't need to worry about my health
You've seen those low-cost, no medical exam, guaranteed-issue life policies advertised. The ads promise that you won't be turned down, regardless of your health.
But if you're looking for a quick net-worth boost at death's door or a last-minute cash windfall for your heirs, don't count on a guaranteed-issue product.
"For the first two years, the death benefits are minimal," Hasenauer says. "That two-year window is the suicide period, the contestability window where the company would contest that the information you provided was not correct."
The benefits may step up after the contestability period, but not by much. "They're not very big policies; you could never go and get a good estate planning-type policy," she says. "They're pretty close to burial-type policies -- just enough to get you in the ground and pay the minister."
The cost of these policies reflects their increased risk to the insurer. "They're crazy expensive," says Steuer. "And statistically, less than 10 percent of people will qualify for the best available rates that are offered by insurance companies."
If you're considering a guaranteed-issue product, Hasenauer recommends shopping around.
"There is a (price and benefit) difference between the three-question and the 10-question policy applications," she says.
Myth No. 2: Agents always disclose their commission
Want to know exactly how much commission your agent is making on your life insurance policy?
Good luck finding out.
"It's a real quagmire," says Steuer. "Life insurance is the last financial industry where compensation is not fully disclosed." Instead, it's buried so deep in the contract that it would take a forensic dentist to extract it.
That's by design. The insurance industry has long maintained that divulging the commission on whole life, which Hunt says can typically run 85 percent of first-year premiums with annual renewal commissions of 7 percent for the next decade, could kill the sale.
Despite this dated defense, disclosure is already required overseas.
"It's something that is going to catch on more and more in the (U.S.) life insurance industry," Steuer says.
Until it does, Hunt suggests two workarounds:
- Compare the first-year surrender value to the first-year premium. The closer the surrender value is to zero dollars, the more money is going into the agent's pocket. There's just one catch: You would have to have purchased the policy to get this information.
- Get a competing quote from TIAA-CREF, which sells direct policies without commissions. This will give you a rough idea of how much commission your policy contains.
Myth No. 3: Life insurance is a good investment
Life insurance, a good investment? Total fantasy, says Steuer.
"I liken life insurance to the casino industry," he says. "How do you think they get these big, flashy buildings and these solid financials? Not by giving you this really great deal."
Each decade, the industry seems to dream up another sound financial reason for you to "invest" in life insurance. In the 1980s, it was the tax advantage of single-premium life policies, which quickly evaporated when the wealthy started flocking to them as tax havens. Recently, corporate-owned life insurance suffered a similar flash and regulatory crash.
Hunt predicts the current sales pitch touting the tax deferral on the cash value buildup within permanent life policies will turn out to be just wishful thinking for many.
"The problem is, 40 (percent) or 50 percent of the buyers drop out within 10 years and never get a good return on their money," says Hunt. His recommendation? Buy term life insurance and stick the savings in your 401k instead.
Next time you hear the siren song of life insurance "investing," Steuer says turn up your iPod to drown it out.
"Insurance is insurance; it's not an investment vehicle," he says.
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Myth No. 4: Medical underwriting is just a formality
Yes, life insurers like to downplay the medical exam, and for good reason: They don't want you to know how seriously they take your health. After all, you'd want to make sure a horse can run before you bet on it, wouldn't you?
Hasenauer says it stands to reason that the larger the policy amount (think: bet), the more thoroughly your health will be scrutinized.
"If you're buying a million-dollar policy, you're going to go through a full medical exam by a doctor of the insurer's choice," she says.
This information is collected by MIB Group, an insurance industry trade group, and insurers use it to assess your risk. "As we go down the scale to smaller and smaller policies, we get policies that are written with questionnaires only and then they go to the MIB and get additional information there," Hasenauer says.
If you've ever applied for any insurance as a smoker, or if you use any nicotine products including a patch, you'll likely wind up in the smoker pool, even when you qualify for Medicare. Heck, some cancer survivors have a better chance of favorable rates than smokers do.
"There's a reason for it: It's costly!" Hasenauer says.
Don't try to hide it. "That's a misrepresentation that could put your insurance policy in jeopardy," she says.
Myth No. 5: Working with many agents saves you money
Should you shop for your life insurance through one agent or several? Can a one-company "captive" agent get you the best rates? How about your multiline home-auto insurer?
While situations vary, Steuer recommends working with one agent or broker who writes for a dozen or more companies, especially if you have health issues.
"Some companies just won't touch cancer patients; other companies will consider them on a case-by-case basis or they'll consider cancer survivors," he says. "Then sometimes there's a competitive advantage where your agent will say, 'Company A is willing to go standard (rates) on this. Will you consider going standard on it as well?' and set up a negotiation."
What about using several agents? "It doesn't work out well because then you have to interpret all the stuff that you're getting from the agents rather than hiring an expert to sort through it," he says.
How about using a captive agent? "That would be a major disadvantage because they don't have multiple underwriters," Steuer says.
That said, your home-auto insurer may not be a bad choice for those who want to keep all their policies under one roof.
"You'll probably pay 5% to 10% more in premiums," he says. But for some, that might be worth it."
Myth No. 6: It's life insurance -- you can't negotiate
Some life insurance agents cast themselves in the role of passive messenger, handing down the best offers from on high. Why? Because it works out to their financial advantage 99 percent of the time.
A dedicated pro knows how to use those best offers as a first offer and dig for even better terms on your behalf, just as they do when they negotiate with those same carriers for their own commission split.
For example, Hunt cites a technique called "blending" in which an agent will mix in some no-load or low-commission term life coverage that eventually converts to permanent insurance in order to increase the first-year surrender value of a whole life policy.
"If someone tries to sell you a full-commission $1 million policy with (zero dollars) surrender value in the first year, tell them you want at least 50 percent in the surrender column," Hunt suggests.
But Hasenauer cautions against letting negotiation turn into procrastination.
"Life insurance never gets cheaper; it's not like buying last year's iPhone. Life insurance will continually get more expensive as one ages. That's why it's important to insure now rather than later."
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I have been an insurance agent for 36 years. I have insured thousands of clients. I usually recommend term and then saving in a 401 K or IRA or any tax deferred account that will not make it easily available, so it will be there when they retire. The concept is simple your are protecting the continued income for your spouse and or children against a untimely death. Nothing more, Nothing less. You think our welfare program is a mess now.....Imagine a world without life insurance.
When my siblings and I turned 18, our parents would start a whole life insurance policy for us. They paid to start it and the first month. After that, it was up to us to keep it going - $100K death benefits.
One of my brothers died a couple of years ago leaving a wife, 6 kids and a whole lot of debt. He'd cashed in his policy years before for a couple thousand.
I talked to the rest of my siblings and they'd all done the same over time.
After paying in for 20 years I had them start taking the premiums out of the cash value and I shouldn't have to pay for it ever again.
I'm not saying that it is the way to go for everyone, just what I did.
I am a professional insurance agent,,,,you folks who don't deal with this need to stay out of comments and mind your business,,, I just had a friend who said he didn't need insurance,,,he had a heart attack
at 50 and passed,,,his new wife lost the house and took 3 years to pay off his funeral...now she lives with her mother,,,I see this every day,,,for those of you who say you don't need it or it's a ripoff,,,,you are idiots and need to stay out of something you know nothing about,,,,,I provide a service to my clients taking the worry of the family having to deal with their death and no money to pay for the funeral...my clients are happy when I leave and I've removed a worry from their minds,,,,,,again if you are an idiot stay out of something you know nothing about.
Why does the conversation always talk about buying Life Insurance OR investing? When we were 3 years old, we learned not to have all our eggs in one basket. BTW, I sell term, whole, and Universal Life. I'm not a fan of Variable Life insurance because I view permanent life insurance as a death benefit with an additional SAVINGS vehicle, not an additional INVESTING vehicle.
I will say this about whole life. No client with a 30 year old whole life policy has ever said they regretted buying it. At least 90 percent of them lament not having bought more. It's not glamorous, but it does exactly what it promises to do, every time, without fail. It's a great product, used in conjunction with your retirement investing plan. Many of my retirement or near retirement aged clients tell me their old whole life policies saved their bacon in the last crash/recession.
#3, no life insurance isn't an investment. But if you've got investments, you had better have life insurance, & a will. Especially if you make a huge amount of money in the market.
When you die, those securities are property, & your heirs can't touch them until probate, & any taxes are paid. The proceeds of a life insurance aren't taxable, & never will be. (Picture some legislator attempting to take the food out of the mouths of widows & orphans. Won his last election, ever.) Present proof of death, pay the taxes, take home the investment instruments.
Don't forget the will. Seriously, do you want the government to decide who gets your money when you're gone? Didn't think so.
I think the author of this article has taken his bad experience with an agent or insurance company and blown some things way out of proportion. I would like to see this person save up enough to pay for his final expenses and then leave his family sever years worth of income. In most cases we do not have the ability or will do this.
As a licensed Life and Health agent I have heard this before. I am reminded of one man who was incensed that his new young wife and mother in law wanted to have a policy on him incase anything happened. He started yelling at them, cussing a blue streak to me, his wife and mother in law and described in dirty detail that upon his death she would be in bed with the next guy that comes along. This was all done in front of his infant son.
There is a place and purpose for Life insurance. the author should know it
It really should be a requirement to teach in our schools: banking, investing, health insurance, life insurance, how to buy a house, what money we need to afford children, what our tax dollars are for and what instead they are being used for, etc.
I have to study and do research just to understand what you guys are talking about. I don't like being at the mercy of sales people not knowing if they are misleading me and I am real tired of the market crashing every few years.
We thought about taking our social security dollars early and investing that money in a life insurance policy for my husband. But the info we were given says the money will not be given to him if I die first. It doesn't make sense to pay thousands of dollars to give to me if he dies but he can't have it if I die. There has to be something better.
The other thing, my husband is my beneficiary. From what I understand, when I die he will get the remainder of my 401, 403, IRA's, bonds, pension, annuities, etc, and he won't have to go to probate for these investments. Am I wrong? I hope not because he will need this money just to live and pay bills. And probate is awful.
It's interesting. I just finished the Ethics portion of my life insurance license renewal and one of the things it specifies is not to bad mouth other portions of the financial industry. The requirements are QUITE specific in fact. I don't know where they found Hasenauer and Steuer, but neither of them are acting professionally or ethically in their comments about my industry.
15 to 20 year Level premium term for death coverage.
6 months of expenses cash on hand and I mean cash. NOT in a bank. Think AIG.
SAVINGS in REAL money. Physical Gold and Especially Silver. Silver is the key.
Pay off your debts and owe no man or entity.
Now you are living like Great Grampa and Gramma did!
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