I’m sure you’ve seen them…sometimes they’re ads on the radio or TV that say “we got soandso a half million dollar policy for just $12.50 a month, even though he’s 73 years old and in terrible shape!”; sometimes they’re tucked away in the correspondence from the credit union, a little less blaring but nevertheless implying that a great deal of life insurance can be had at very low rates.
Curious about whether these are out-and-out scams, or teaser rates, or “your mileage may vary” (and it does–considerably) come-ons, or the genuine article.
I’m putting this here rather than in GQ because I kind of suspect answers may vary. Specifics welcome.
If someone could chime in/piggy back on the question to give basic life insurance advice in general, that would be great. I know the general difference between term and whole life (the former is closer to car/home insurance; the latter is an investment of dubious quality). But that’s a horribly oversimplified approach.
In our experience, Colonial Penn is very close to the genuine article. Their chief drawback is the continuously trying to push policyholders into buying a bigger payout. Which, of course, would mean a higher monthly premium.
I’m not sure any of these are scams. They tend to fall into two categories, I think:
The Colonial Penn style insurance covers older people for relatively small amounts. My mother in law had one of these and I did the math on it. Basically, if she didn’t die pretty quickly, she had a scenario in which she’s paid something like $12,000 premiums for a 20,000 death benefit. In her plan, premiums actually stopped being collected after a while and I think the benefit was paid out at age 100 even if she lived. These plans work largely because people don’t understand actuarial tables. They say “I’m 65 and life span is only 75, so I’ll probably cash in.” The thing is, actuarial tables say that 50% of people aged 65 will hit 85 and about 25% will hit 95. The insurance company thinks “Can we invest 12,000 in premiums so that we have 20,000 in assets after 20 years? Of course we can. Ka-ching!”
The more standard term life policies usually cite younger people when they give sample rates, and they cite only a 10-year term. The odds that a 45-year-old dies in the next ten years is tiny, so it really is possible for them to have large benefits at low cost. Anyway, having quoted a young healthy guy, they’ll let you know that it’s still an option for the elderly on their death beds, but they probably don’t quote that one.
With both types of policies, they’re also counting on people to cancel the policy before benefits are paid out. I forget the number, but I seem recall that something like 90% of term life policies are discontinued before the term is up.
Watch out for boasts that say the insurance costs only pennies “per unit.” The insurance company defines the unit, and it might be $100 for someone who’s 65, $12.35 for someone who’s 75 and 10 cents for someone who’s 80.
They don’t say that. Not a half million dollar policy. They say he got insurance with no health check for $12.50 a month. That refers to a minimum unit of said insurance, generally $1,000. If you want a $20,000 policy, you can do your own math. It’s very expensive insurance while pretending not to be.
Before I do. Colonial Penn is crazy expensive. Don’t buy it. Their term is increasing premium and their whole life is modified benefit which means you don’t have real coverage for 2 years. There are thousands of better options. Almost all of them with both better benefits and better prices.
As to the quoted question. Term life is, fundamentally, temporary life insurance. It’s designed to be available to you for a short period of time. There are tons of good reasons to have term. But you should only buy it if you actually need it and drop it when you don’t anymore.
Don’t buy increasing term. It’s one of those things that seems like a good idea but typically ends up costing you more. Level payments are usually (not always, in fact let’s just assume that nothing I am saying is ever always) going to be better for you unless you are only intending to have the policy a very very short time.
Some times term comes with extra bells and whistles like a return of premium or living benefits. These might be right for you but they are more expensive. Also, if you are even reasonably healthy always get a policy that has you take a physical. The more strict the underwriting the cheaper your policy. With term you usually want cheap.
Whole life is NOT AN INVESTMENT. Anyone with an insurance license who says different in the state of Pennsylvania has committed a felony. Whole life is permanent insurance. Suitable for estate transfers, final expense planning and… Sigh, occasionally tax shelters. But it’s not an investment. Fundamentally it is designed to last you your whole life. There are a lot of flavors of whole life, some of them very good particularly if you are looking for wealth transfer options.
There is a third type if policy called Universal life which I won’t get into, just know that if someone offers it to you be damn sure that THEY know what they are doing. Universal life can be great, but it can be disastrous. Proceed with caution.
Interesting stuff; thanks for the responses. I could have sworn the commercial phrase I was recalling did include a specific amount of insurance, not simply “units,” but of course that’s what they would want me to come away with; not at all sure I can trust my memory on this one!
I’m astonished that so many term policies never actually collect. Is it because people just drop the policies before they die, because people tend to outlive (some of) the necessity for life insurance? or is there something else going on? I know my dad had a small term policy of sorts through his employer, but it was no longer in effect when he died as he had retired the year before. I suppose if that sort of thing is included (work-related policies), then a lot of them would go unclaimed.
I asked the original question partly out of ordinary curiosity, and also partly because I’m in that “increasing premium” category for life insurance–what seemed like a pretty good deal for term insurance back in my early thirties seems increasingly less so twenty-plus years later, with the premiums increasing as I age. (I get this one through a professional organization). So, I’m thinking about other options. Again, thanks; happy to hear more (if there is more)…
I’m surprised the number is that high, but not terribly so. Term is designed to cover short-term (hah!) risks. I’ve got a couple of policies that I’ll be letting lapse, as I no longer need to cover college and other expenses for the kids (who all now 21+), and there should be plenty of money to support my wife and her next husband in something resembling style without it.
You also have to consider that it is difficult to get a term policy that will cover you into your 70s, it’s almost impossible to get one that covers you in a meaningful way into your 80s. Any given person has something like a 90% chance of living to age 82. While there are some term policies that will cover you that long they are the exception. So that wipes out most term policies based on life expectancy alone.
FOTF had a life insurance policy that she paid into monthly for decades. When we finally did some research we found out that she had reached her pay in limit years ago which was capped at some ridiculously low amount, and they were still accepting her checks even though she had completed her pay-in.