It's a scenario that John Buenger encounters all too often at his independent insurance agency. People see an ad for life insurance on TV, but when they ask for more details, the policy isn't what they expected. "The fine print on these ads goes by so quickly that when people call in to get more information, the conditions are totally different versus what they had in mind," says Buenger, a senior financial manager and adviser at the Rice Agency (opens in new tab) in Hagerstown, Md.
On the surface, life insurance seems simple enough in that all products follow the same general setup: You pay the insurer premiums, and if you pass away, the insurer pays your heirs a death benefit. But there are different types of life insurance, and how the products differ isn't always made clear in a 30-second commercial. In fact, TV ads leave a lot of key information out of the picture. Here's a better way to get a handle on these products so that the next time you see an enticing ad for life insurance, you'll know whether it sounds too good to be true.
Know the Basic Types
The costs, features, contract restrictions and amount of time your coverage lasts vary based on the type of life insurance you buy.
Guaranteed issue. The most common TV ads are for guaranteed-issue life insurance policies, says Kelly Maxwell, owner of the insurance brokerage Seniors Mutual (opens in new tab) in Pflugerville, Texas. Because these policies have no medical exam or health underwriting, anyone can qualify for them easily. "Insurers can potentially set up a policy in five minutes over the phone," Maxwell says, with coverage lasting for life.
If you're reasonably healthy and willing to take a medical exam, there are cheaper options. In fact, even applicants with moderate health conditions, like high cholesterol, may qualify for a lower price after taking a health exam. Buenger ran the numbers recently for a healthy 70-year-old man and $10,000 of life insurance to cover funeral costs. The premium for the policy requiring a medical exam was $67 a month, but a guaranteed-issue policy charged $99 a month, nearly 50% more. Guaranteed-issue policies are often used to cover funeral costs because the amount of coverage you can buy is limited, usually up to a maximum of $25,000, whereas policies with a medical exam could insure you for six or even seven figures.
There are other drawbacks. Guaranteed-issue policies don't pay out a death benefit during the first few years. For example, a policy might state that if you die for any reason within three years after purchasing it, your heirs will only receive the premiums plus interest back, not the listed death benefit. "Insurance commercials tend to gloss over these downsides," says Rafael Rubio, president of Stable Retirement Planners (opens in new tab) in Southfield, Mich. "While there is a place for guaranteed issue when applicants cannot qualify for other policies, people who could meet life insurance health standards would receive a better offer by applying with a medical exam."
Term life. Life insurance that requires a health exam typically falls into one of two categories: term or permanent. Term is temporary life insurance. It lasts anywhere from one to 40 years depending on the term, with the quoted rate guaranteed only for the length of that term. If you outlive the term, the coverage ends.
Depending on the contract, you may be able to renew, but the premiums will cost more because you're reapplying at an older age when you may have more health conditions, too. "People will tell me they've had a policy for 20 years but are then forced to cancel because it's gotten too expensive," says Maxwell.
Permanent life. As long as you keep paying the premiums, permanent life insurance doesn't expire. The flip side is that because these policies are more likely to pay a death benefit, they initially charge more than a term life policy, roughly five to 15 times more at first. As a result, only smaller amounts of coverage may be affordable.
Permanent life insurance can also include cash value, letting you withdraw money from the policy while you're still alive. How the cash value grows and whether the premium remains constant depends on the type of permanent life insurance. For example, whole life charges the same premium for as long as you have the policy, and the cash value grows with a guaranteed return. A variable life policy, on the other hand, invests the cash value in market-based investments such as mutual funds, so the return isn't guaranteed. If the investments do well, your death benefit increases, but if they do poorly, you may need to pay more into the policy or lose the coverage.
Accidental death. As the name implies, these products only pay out if you die in an accident, such as a car crash or a fall down a flight of stairs, but not from a health condition, like heart disease or cancer. "These policies hardly ever pay out and the definition of accident gets smaller each year," says Maxwell. "People buy these products because the ads make them seem cheap -- and they are -- but customers don't realize the coverage restrictions."
Grandchildren life. Some commercials advertise a policy that can be set up for grandchildren or another family member who is younger than 18. The rationale for buying the policies is that you lock in a low price for these family members at a young age, ensuring they have coverage if they should develop health issues later that prevent them from buying their own policy.
Grandchildren life insurance policies usually include cash value and are often touted as a vehicle for young family members to build savings. But they're not the most effective way to do that. "The rates of return are quite low," says Rubio. "They are not a replacement for a college savings plan because there isn't enough time [for the money] to grow, even if an ad can make it seem like this is a useful purpose for these policies." Plus, you must keep paying the premiums to keep the policy going, which is not the best use of your retirement assets.
Be a Skeptic and Shop Around
Life insurance ads on TV tend to present information using the rosiest scenarios that are unrealistic for the average consumer. "When they give an example price quote, it's always for their super preferred rate: someone in near perfect health at an ideal weight who doesn't smoke," says Buenger, who estimates that only about 5% of applicants may fit that profile. If you're not a paragon of health, "that quoted $19.99 policy could actually cost you $50 a month or more," he says.
The ads also gloss over important shortcomings. For instance, they don't always make it clear that a policy premium is temporary, such as for a term life insurance policy, or that renewal rates will be considerably more expensive. Buenger also see ads misrepresent costs by quoting the price per unit, which is usually only $1,000 of life insurance depending on the company. "You might hear $10 per unit and think that's what you'll be paying, but if you want $10,000 of insurance that would cost $100 per month."
If you're in the market for life insurance, treat these ads with a healthy dose of skepticism, and forget about calling the hotline listed on the ad. The representative who answers will only be interested in selling you the advertised product and nothing else. You'll especially want to shop around if you are not in perfect health because companies rate medical conditions differently, which can affect the pricing. For example, one insurer may charge less for former cancer patients than another.
Although you can contact life insurers directly to get prices, websites like Policygenius (opens in new tab) and SelectQuote (opens in new tab) cite premiums from many companies at once. Independent agents and insurance brokers also sell policies from multiple companies. Unlike an agent who represents insurers, brokers represent consumers and work directly with them to find a suitable policy.
As part of any meeting, Rubio says "make sure the professional is going beyond just trying to sell a product and [is] actually getting to know your financial goals." The right product could be a life insurance policy or not.
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