Life Insurance Misconceptions

A licensed insurance agent corrects misinformation about life insurance.

The more I scour the internet, the more misinformation I find about life insurance. Its everywhere. To make matters worse, much of this information is coming from supposedly reputable websites that search engines give prominent placement in their search results. There is a dearth of fact checkers out there when it comes to life insurance, so I decided to take up the challenge and become one of them. I’ve combated misinformation in the past, but I would use a single blog post to confront a single piece of misinformation. For this blog post I will do something different. For this post I will add content each time I find more misinformation. I imagine this post will become quite large. The best advice I have for people is to use an experienced agent for information. Don’t rely on the internet if you can help it. If you must use the internet, at least make sure the author is an experienced agent (like myself).

Children Owning Life Insurance On Their Parents

I read an article today that said it may not be preferable for adult children to own life insurance on their elderly parents. The article didn’t give any reasoning for this preference. I’ll give some good reasons for children owning life insurance on their parents. The first reason has to do with Medicaid spend-down. In order for Medicaid to pick up the tab, people must not have countable assets above $2,000. Most seniors, if they have life insurance, will have a permanent policy that has cash value, and cash value is considered a countable asset (the government makes an exception if the face amount is $1,500 or less). Just so I don’t scare a bunch of people, the cash value accumulation is very slow for policies with a low face amount. However, if you would like to remove all risk of being disqualified from Medicaid because of cash value, have your children own the life insurance policy. The government could care less how much cash value is in a policy if you don’t own the policy.

Another good reason for children owning the policy has to do with cognitive decline. Cognitive decline is a natural part of aging. Seniors may eventually lack the capacity to handle their own finances. If someone owns a policy, they automatically receive all financial notices related to the policy. If an adult child owns the policy, the child receives all notices. The person who receives policy notices should be the person best equipped to handle financial problems. Some policies may be structured in a way that someone other than the owner receives notices, but this is not the default option.

Perhaps the only deterrent for children owning a policy is the application process. Many insurers require both the owner and the proposed insured to sign the application. This may be impractical if the child lives far from the parent.

Permission To Insure

One article I read today said that someone wanting to buy life insurance on you must get your permission. First, minors are exempt from the permission rule. Second, the rule can be bypassed for adults if there is a power of attorney. I will say that very few insurance companies accept signatures from a power of attorney, so you will have to do your homework to find one. You’ll also want your agent to do his or her homework because there is extra paperwork involved. The insurance company may also want a compelling reason for using a power of attorney.

Exam Requirements

A recent article said that most term insurance policies require a blood and urine sample. Here is a more correct statement: there is an escalation of underwriting requirements depending on the rating class and the amount of coverage. Sometimes the coverage amount is low enough that no medical exam is required. Even when exams are required, it can be something as minimal as an agent taking a saliva sample. You won’t know what’s required until you speak to your agent. If you are going through a full paramedical exam for life insurance, the best thing is avoiding strenuous exercise before the exam. Strenuous exercise can throw off your vitals and make you appear very ill. People have been denied coverage over this mistake.

Buying Life Insurance Without An Agent

I’ve been seeing more and more advertisements lately that say you can sign up for coverage without talking to an agent. There is no harm in talking to an agent. In fact, many consumers make the mistake of not talking to an agent and simply going with the cheapest policy they can find. The cheapest policy is likely to be term insurance with no living benefits. Living benefits are important if you develop a terminal, chronic, or critical illness during your term policy. A cheap policy may also lack conversion privileges. However, if you are only looking for a death benefit (no living benefits) and you don’t care about conversion to a permanent policy, then you can safely buy term insurance without an agent. Be careful not to sign up for accidental death insurance. Consumers sometimes sign up for accidental death thinking that its term insurance.

Increasing Coverage

When asked how to increase life insurance coverage, one article said, “simply increase the coverage limit on your existing policy.” First of all, in my 8 years as a life insurance agent, I’ve never seen a whole life policy that allows an increase in death benefit. Adding coverage usually means a separate policy and more underwriting.

The Price For Coverage

I read an article today that made the oversimplified statement that more coverage means higher premiums. Insurance premiums are based on units of coverage, and each unit of coverage equals $1000 in benefits. Insurance companies use something called banding to determine the price per unit. For example, one band might be 3 – 50 units ($3,000 – $50,000 in benefits). The lowest bands have the highest price per unit. The highest bands have the lowest price per unit. In other words, someone with a $250,000 policy will pay less per unit than someone with a $50,000 policy. Think of it as a volume discount.

Should I Replace My Life Insurance Policy If I Find A Better One?

This post discusses the good and bad reasons for replacing a life insurance policy.

I read life insurance articles all the time. One article that I read said replacements are typically a bad idea. As an agent, I know there are legitimate and illegitimate reasons for replacing a life insurance policy, but I would never make a blanket statement that replacements are generally good or bad. That would be irresponsible. Let’s start off discussing legitimate reasons for replacing a policy.

When it comes to simplified issue whole life, underwriters don’t care about certain medical events such as heart attacks if the event occurred long enough in the past. In fact, someone can have a dozen heart attacks and it wouldn’t matter as long as he or she passes the time threshold (agents call this the lookback period). I’ll explain why the lookback period matters when considering a replacement. Let’s assume someone was scared into buying a life insurance policy because he or she had a heart attack less than a year ago. That person would be limited to modified whole life. Modified whole life (sometimes referred to as graded whole life) has a two or three year waiting period for full coverage. During this waiting period, the full death benefit is only paid out for an accidental death. Let’s assume a year passes and the same person can now qualify for ordinary whole life (no waiting period). Replacing a modified whole life policy with ordinary whole life is appropriate in this situation.

That last example was an obvious one. A less obvious choice occurs when the same type of policy with the same amount of coverage is considered for replacement because of price. Many agents will point out that a replacement starts a new contestability period. A contestability period is a two year period from the start of a policy in which the insurance company can investigate a death claim. The consumer risk associated with a contestability period is sometimes overstated. As long as the insured was honest on the application, there is nothing to worry about except for a slight delay in benefit payments as the insurance company investigates the claim.

If there is only a slight price difference between the old policy and new policy, a replacement might not be worth it. The small price difference won’t justify losing the time spent satisfying the contestability period. Also, a replacement means you’ll be cancelling the old policy, and there is a time investment with that process (granted its not a huge investment of time). Be wary of agents pushing for a replacement when both policies are of the same type and similar price. Agents typically receive more commission by doing replacements instead of extra policies.

Are you protected from bad replacements? Yes, the insurance industry has put some safeguards in place. One safeguard is a free-look period in which a replacement can be rescinded and a full refund issued on the new policy that was purchased. The agent is also required to give you literature that helps you be more informed about replacements. Below is a sample replacement form that is used for all replacements in the state of Texas.

First page of standardized replacement form used in Texas
standardized replacement form used in Texas – page 1
Second page of standardized replacement form used in Texas
standardized replacement form used in Texas – page 2

Finding the Best Life Insurance Agent

Learn what criteria is not important when searching for the right insurance agent.

As an insurance agent, I feel a sense of duty to combat misinformation in my field of study. I would say at least 90% of life insurance articles on the internet are oversimplified at best, and misinformation at worst. So I was pleasantly surprised when I found a good article. Most points I agree with, but there are some minor points that I don’t agree with.

The author spends some time letting people know how to check the credentials of an insurance agent. Checking credentials isn’t what I call normal behavior. For instance, I don’t ask real estate agents to show me their license. Likewise, I don’t ask doctors for their medical license. However, the paranoid individual is always welcome to check. I believe every state’s department of insurance has their own website providing agent license information and the companies an agent represents (here is the Texas website for agent credentials). Another reason for not worrying about an agent’s credentials is that every agent goes through background checks for every company they represent. If an agent has anything more than a minor traffic violation, that agent could miss the opportunity to write business for an insurance company. Insurance companies also don’t like agents with bad credit, but that has more to do with an agent’s ability to repay unearned commission.

The author mentions time pressure as a red flag. There are some good reasons why agents put time pressure on potential clients. One reason has to do with the old saying, “Time is money.” Some agents have to make a two hour drive to a potential client’s house (that’s a four hour round trip). Asking an agent to make a second trip isn’t being respectful of the agent’s time. Another reason for the time pressure is that some clients are chronic procrastinators. Many clients that I see have gone 60 or 70 years of their life without buying life insurance. They have successfully found ways to rationalize not getting insurance for all those years. Allowing a client like that to find more ways of delaying an insurance purchase is unethical. The agent has an ethical duty to push a little in order to get clients to do what is in their best interest. Medical doctors put the same pressure on their patients. However, if an agent is routinely using high pressure tactics, that usually means the agent is doing a poor job educating the client. The need for high pressure tactics seems to disappear when a client is properly educated. High pressure tactics also come with buyer’s remorse, which isn’t good for the client or the agent.

The Dangers of Life Insurance Cash Value

Nearly every life insurance blog I come across can’t avoid talking about the benefits of cash value when whole life is the subject of conversation. I’ve never heard an author discuss the dangers of cash value, which do exist. One reason for this lack of information is that so many authors give very basic, top-level explanations of a product. Countless websites recycle and regurgitate the same basic information about cash value benefits without taking a deeper dive into the potential harm. Another reason for this lack of information is that many authors are certified financial planners who usually only deal with high net worth clients. Their lack of client diversity gives them a narrow perspective for the use of a product. With that being said, let’s discuss the dangers of life insurance cash value.

Many seniors buy whole life policies that barely cover the cost of a funeral. Cash value is used to secure policy loans. If the insured dies before a policy loan is paid off, the unpaid portion of the loan is subtracted from the death benefit. If the policy barely covered the cost of a funeral, then any subtraction from the death benefit could severely jeopardize the purpose of the policy.

Cash value poses a problem for people of low income. Any unexpected expense becomes a financial emergency for this group of people, which causes them to look for a policy loan. If the premium was barely in the budget, the additional expense of a loan repayment may be too much. The most likely result of this scenario is a cancellation.

Best Whole Life Insurance

This article disputes what other authors say are the best whole life insurance companies. Learn why their list of best companies is flawed.

I have to admit I’m jealous of other websites that are given clout and authority by search engines despite their terrible advice. These websites don’t deserve the clout and authority given to them. One whole life insurance article touted New York Life and State Farm as two of the best life insurance companies. I will dispute this assertion.

New York Life has a particular life insurance product that is sold to seniors. This product is ridiculed by hundreds if not thousands of independent agents. Here is what makes it so bad: premiums increase every five years and the policy automatically cancels at age 80. So even if seniors on a fixed income can somehow afford the premium increases, the policy cancels just a year after their life expectancy. Yes, the policy is convertible to a permanent policy, but I suspect the vast majority of policyowners don’t attempt conversion until age 79, when they are greeted with an unpleasantly high conversion quote. What might not be explained well is the way conversion rates are calculated; they are based on the age of the insured at the time of conversion. Nearly everyone trying to get a permanent policy in their late 70’s or early 80’s will have to pick their jaw off the floor after reading the quotes. Seniors are much better off buying simplified issue whole life, where the premiums never change and the policy never cancels (as long as premiums are paid).

State Farm has many good things going for them, but competitive life insurance rates is not one of them. State Farm is well known for having some of the highest life insurance rates on the market. State Farm does have an impressive reputation for never missing a dividend payment, but I suspect that can be attributed to overpriced premiums. If companies charge too much in premiums, they will always have enough money to pay dividends. Non-participating policies (no dividend payments) seem to be the norm for companies with competitive premiums.