The complexity of many types of life insurance make it hard to know if you’re getting good advice. Around 57% of adults in the U.S. own a life insurance policy, according to a joint study by LIMRA, a trade group, and Life Happens, a nonprofit insurance advocate. CNBC’s recent article entitled “Why some life insurance could prove risky for consumers” goes on to state that the sales standards governing how agents and brokers can recommend certain types of life insurance to consumers are not strict.
There are some types of life insurance that aren’t necessarily mind-boggling. For example, term insurance is pretty clear. This type of policy covers buyers for a certain period of time, such as 10 or 20 years, for an annual fee that’s locked in and which the purchaser knows at the time of sale.
However, permanent life insurance — also called as cash-value insurance — is more complicated. With permanent life insurance, a buyer is meant to keep the insurance policy, such as whole life and universal life, until death rather than for a set term. This type of insurance also has a side investment account that earns interest and dividends. The account is designed to cover annual premiums and other insurance costs, which typically increase each year with age. But in the event that an investment account underperforms expectations or insurance charges increase more than expected, a purchaser may have to pay more money to cover a shortfall or risk losing the coverage altogether. Remember that a policy that may look fairly inexpensive today, may not be the case later in life.
It’s also important to note that state life insurance regulations frequently don’t require insurance agents to fully disclose the risks to the public. Of course, insurance companies promised that they’ll disclose the risks to buyers in the contracts they sign. However, the fine print can be more than 100 pages long.
Insurance agents are also typically permitted to recommend life insurance that will pay them a higher commission, rather than suggesting a policy that may be just as good but pay the agent less or no commission. While not every life insurance agent is misleading the public, the regulations aren’t in the buyer’s favor, say consumer advocates. Each state regulates many different aspects of life insurance, like advertising, disclosure, licensing and unfair trade practices.
State insurance regulators say that there were over 4,000 individual cases of wrongdoing by life insurers or insurance agents in 2019, according to data from the National Association of Insurance Commissioners. That’s compared with the nearly 138 million life insurance policies owned by Americans as of year-end 2018, according to ACLI.
As a reminder, you should only buy insurance policies that you understand. Be sure to ask about and be aware of risks, like potential increases in future premiums and other elements of a life insurance policy that could be changed. You should also consult with an experienced estate planning attorney to be sure that the amount of life insurance you’re considering fits into your overall financial and estate plan.
Reference: CNBC (January 19, 2020) “Why some life insurance could prove risky for consumers”