Test Your Knowledge

A national study by LIMRA (an insurance industry association) reported in early 2013 the results of following ten question life insurance knowledge test given to 4,000 Americans. Less than 1 % answered all ten questions correctly, and 55% answered less than half the questions correctly. LIMRA claims that the main reason people don’t buy life insurance is that they find it too confusing. Could be, but they also need to consider the possibility that people don’t like talking about it, don’t like the people who try to talk to them about it, and never spoke with anyone who tried to explain the pros and cons of all the options, as opposed to just trying to sell them something. See how you do on the test—the answers are below. And below that is my commentary on the “official” answers, which I hope will help you realize that selecting the right policy is very nuanced, since they vary greatly, and how insurance fits into your financial picture is as important as what type of policy you choose.

 
 
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OFFICIAL ANSWER: No.

LOUIS' ANSWER: Most life insurance payouts are income tax free. There are some exceptions. Surrenders may be taxable. Some contracts are specifically designed to be taxable. Unless precautions are taken early enough, some payouts may be subject to estate tax. It is better to resolve these issues when the policy is taken out—they can be hard to change later.

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OFFICIAL ANSWER: NO.

LOUIS' ANSWER: Not only does your life insurance not go with you, depending on your age and medical condition, you may not be able to replace it with an individual policy (or not be able to afford an individual policy) and your next employer may not offer group coverage. Think of work provided life insurance as a bonus, and don’t count on it being there later. After all, you probably won’t die during your working years.

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OFFICIAL ANSWER: YOU.

LOUIS' ANSWER: Variable policies gained in popularity when the stock market soared upwards. They offered more attractive returns than traditional cash value policies because their hypothetical illustrations were better. Unfortunately, many purchasers did not understand that, and many hypothetical outcomes turned out to be purely hypothetical. These policies are still offered today. Consumers still don’t understand them. Your agent needs to explain these to you very carefully. You probably don’t want to buy one, unless you love taking risk, which raises the question of why you are buying insurance in the first place, since insurance is designed for people who want to reduce risk.

OFFICIAL ANSWER: Term.

LOUIS' ANSWER: Term is pure insurance, designed to provide you with a set payout if you die within a certain number of years. But that is not the only consideration when choosing between the two types of policies.

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OFFICIAL ANSWER: No.

LOUIS' ANSWER: The reason is to assign you to a risk class.

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OFFICIAL ANSWER: Yes.

LOUIS' ANSWER:That’s the basics. But it also creates tax-exempt wealth, provides creditor protection of assets, tax-free growth, safety, and disciplined savings.

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OFFICIAL ANSWER: No.

LOUIS' ANSWER: Insurance is a highly regulated industry, probably more than any other. State departments of insurance make sure that every company is actuarially sound. If one threatens to fail, it is sold to another company, which honors the policies. You cannot find one person who has submitted a claim and had it rejected because there were no funds to pay it. That is why you buy the least expensive term insurance that you can find—company strength is irrelevant (unless you plan to convert it to a permanent policy later). Insurers offering some types of insurance, however, are allowed to raise rates if the policies become underfunded. This most often happens with long-term care insurance. In this case, price alone is not the better way of choosing a company.

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OFFICIAL ANSWER: Whole Life. 

LOUIS' ANSWER:Part of what you pay goes to savings, and building up cash to keep future premiums level.

OFFICIAL ANSWER: Whole Life.

LOUIS' ANSWER: That’s why I call term insurance “death insurance”—it only pays out if you die. Cash value permanent insurance is “life” insurance—you eventually get to use the money while you are alive.

OFFICIAL ANSWER: Term.

LOUIS' ANSWER:Only buy term if you definitely don’t want coverage after the term is up—it gets too expensive.