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.

Financial Planner Versus Life Insurance Agent

I recently ran across a blog article from a certified financial planner. In the article he described a situation where a 28 year old man with $5,000 in credit card debt and no heirs was sold a $200,000 whole life policy. The financial planner mentions term life as the best solution in this situation. However, his analysis relies on too many assumptions, including an assumption that disability will not occur. According to the US Centers for Disease Control and Prevention (CDC), 1 in 4 adult Americans will suffer from disability. The financial planner picked the cheapest term policy he could find when doing his analysis. The cheapest term policies typically don’t include living benefits. A living benefit provides an income stream to insureds if they become disabled. Cheap term policies may also lack valuable riders like the waiver of premium for disability rider, where the insurance company pays premiums for a disabled insured. People who become disabled are often unable to pay premiums, so living benefits are critically important. Don’t automatically go with the cheapest option.

I will agree with the financial planner that whole life wasn’t the best solution, but term life wasn’t either. A better solution would have been indexed universal life. With this type of policy, the insured could have paid the minimum premiums for a short time while he was paying down credit card debt. After the credit card debt is paid off, the insured can increase his premium payments (universal life offers flexible payments).

Another problem I have with the analysis is the assumption that sufficient funds will be available after a term policy expires, therefore a new life insurance policy won’t be needed. Even with careful financial planning, there’s still a chance of not having enough money. At the very least, people should fund their final expenses with a permanent life insurance policy. I’m not talking about a large policy; just something large enough to cover end of life expenses. If you don’t like the idea of paying premiums for the rest of your life, there is a special type of policy called limited pay whole life that allows you to pay off a policy in 10 years. After 10 years there are no more payments to make, and the policy stays in force forever.

Is the Most Popular Life Insurance the Best Option?

Life insurance ads often take a one-size-fits-all approach, emphasizing the use of one type of life insurance over any other. Since certain age groups typically only see ads for one type of life insurance, those products become more popular within their respective age groups. For instance, people under 50 will never see ads for whole life unless they see an ad intended for an older age group.

Life insurance solutions are often more complicated than the one-size-fits-all strategy shown in advertisements. I use a two policy approach for people under 50. For final expenses I recommend whole life, and for all other expenses I recommend term life (affluent consumers should look at universal life). The problem with term life is that it terminates at a designated point in time, and some expenses, such as the cost of a burial or cremation, never go away during a person’s lifetime. Therefore, it’s inappropriate to use term life for everything.

Here is the takeaway: popular is not always better. Insurance products are only popular because ads make them that way, and ads make them that way because they only have enough time to discuss one product. Insurance agents, on the other hand, have plenty of time to discuss multiple products, and how those products compliment each other.

Term Life for Seniors

Everyone wants the most coverage for the lowest price. However, you have to be careful with term life for seniors. The appeal of these plans is their initial price. They are often the cheapest option when first purchased. However, the premium rates are not locked in like whole life. Instead, consumers will experience a premium increase every five years. If the consumer can somehow afford all the price hikes, the policy automatically cancels at age 80, 90, or 95 (depending on the company). Whole life may be more expensive at first, but you will eventually save money with having a locked in rate. Meanwhile, your neighbor who has a term life product looks disappointed because a premium increase just showed up in the mailbox.

Be careful of slick advertising that spends most of its focus on price. That should be a red flag. A focus on price is a way to divert attention from the product’s disadvantages. Check out quotes for simplified issue whole life where you will see policies that don’t go up in price or cancel at a certain age.

Term Life Versus Whole Life

I roll my eyes every time I hear the phrase, “Buy term and invest the difference.” This strategy relies on two assumptions. The first assumption is that people are disciplined enough to invest the difference. The second assumption is a belief that investments will be profitable. Term life insurance is best for temporary needs such as mortgage protection and income replacement. Whole life, on the other hand, is best for funding a cremation or burial. In fact, small whole life policies are often referred to as burial insurance or final expense insurance.

Many people lose their term life policies because they experienced a financial hardship and couldn’t pay the premiums. Term life offers very little to prevent a nonpayment cancellation other than a 30 day grace period and a chance to reinstate. Whole life has automatic premium loans to pay premiums when you can’t. Premium loans are made possible by a policy’s cash value. Whole life has cash value and term life doesn’t.

There is a false dichotomy that says people should either have term insurance or permanent insurance. The best financial experts advocate a blended approach, where consumers own both types of policies at the same time. Many people find themselves in financial trouble when they exclusively use term insurance. In order for me to explain why, you first have to understand something about term insurance. Term insurance is meant to insure someone for a highly unlikely death. Death becomes more likely as people age. Insurance companies eventually stop writing term insurance after a certain age because death is no longer unlikely. Permanent insurance, on the other hand, is meant to cover everyone until they die. Death is a certainty in this case. The only thing in question is the expected age of death. Since people often need life insurance for their entire lifetime, and options for term insurance diminish as a person ages, permanent insurance eventually becomes a better option than term insurance. Unfortunately, if people exclusively use term insurance until it is no longer a good option, the cost of buying permanent insurance (whole life) might be unaffordable. That’s why you should buy term life and whole life at the same time.