Thinking about or shopping for life insurance isn't a fun prospect. The idea of a death and leaving your loved ones raises uncomfortable conversations regarding a contingency plan, making life insurance a touchy subject. This has spawned various myths about life insurance which can lead to poor decisions.
Here are the top 6 myths dispelled.
1. I don't need to worry about my health
False. There are low-cost, no medical exam, guaranteed-issue life insurance policies available; however, do not count on those options at the last moment. Insurance policies offer minimal benefits for the first two years because it's defined as the "suicide period" where the company can contest the information you provided was incorrect. The costs of these policies are substantially higher than other coverage options, and provide much less benefits.
Instead of considering a guaranteed-issue product, it's best to be diligent and study your options before making a buying decision.
2. Agents always disclose their commission
False. Life insurance is the last financial industry to fully disclose compensation rates in their contracts.Typically, 85% of first-year premiums in a whole life policy go to commissions, with 7% annual renewal commissions for the decade thereafter. The industry defense is that disclosing such numbers could kill the sale.
Until the US requires thorough disclosures, you can work around it two ways. The first option is to compare the first-year surrender value to the first-year premium. More money is going into the agent's pocket if the surrender value is closer to zero dollars. However, you will need to purchase the policy in order to do this. The second option is to get competing quotes from other policy types, such as term.
3. Life insurance is a good investment
False. Historically, life insurance companies have come up with several tactics to convince people of its investment value. In the 80s, it was the tax advantage of single-premium life policies, which disappeared quickly when the wealthy flocked to them for tax shelter. Recently, corporate-owned life insurance companies suffered a regulatory crash.
The best option is to buy term life insurance and invest your savings elsewhere. Insurance and investments are best handled in separate vehicles.
4. Medical underwriting is just a formality
False. Insurance companies downplay the seriousness of the medical exam for good reason: they take your health seriously, but don't want you to know about it. The larger the policy amount, the more your health will be scrutinized.
The insurer will have a full medical exam conducted by the doctor of their choice. The information is gathered by MIB Group, an insurance trade group, which insurers access in order to determine your risk.
Honesty is the best policy during the medical exam. It's not misrepresenting yourself because it could jeopardize your policy.
5. Working with several agents saves money
While situations vary, its generally better and easier to work with one agent or broker who represent several companies. This allows you to better view your options as different companies have different requirements, and having a multifaceted agent can help you navigate this much more efficiently. You may pay about 5 to 10 percent more in premiums, but it's worth it for some.
6. You can't negotiate life insurance
False. A seasoned and dedicated professional knows how to use initial best offers to find you better terms on your behalf. One of the techniques used by agents is called "blending" in an agent will mix in some no-load or low-commission term life coverage that coverts to a permanent policy in the future in order to increase the first-year surrender value of a whole life policy.
Be mindful to not let negotiation draw out into procrastination. Life insurance doesn't get cheaper as a person ages, which is why it's better to insure earlier rather than later.