Let's talk about your death.
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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 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% 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
ant 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% of first-year premiums with annual renewal commissions of 7% 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%or 50% 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 401(k) 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.
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 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% 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% 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."