Especially the part where you die. Try to avoid that.
I discovered a life insurance policy that my dad had from his early twenties, and it originally had his father as the beneficiary (later updated to my dad’s offspring). The company was still in business, so I made a claim for my share of the $1000 policy. The company sent a packet of paperwork, which I filled and sent back. They promptly sent my $250 check.
Then they sent another packet of paperwork. And then another. I ignored these, but then yet another packet arrived. Wondering if perhaps my dad had other policies that I needed to claim, I called the insurance company. Was a bigger payday was coming? No, the was just the one policy and mistaken mailing of packets on their end. Yeah, I guess I am taking them at their word on that.
Reading the original policy and the application documents that my grandfather and aunt had filled out was interesting.
Exactly this. When my paternal grandmother passed away in 1991, and my father was going through her papers, he found the details on a life insurance policy which she’d had for decades, which had a value of something less than $1000.
But, yes, back to the OP’s question: the executor or next-of-kin, as well as the beneficiary, should be able to request the details of the policy from the insurance company.
Gonna disagree about companies being “scummy”. Will agree that they don’t want to pay claims. I worked for 20 years in Group Life/Health, and have long said that insurance companies don’t make money by paying claims, they make money by not paying claims.
That being said, the insurance industry is very very highly regulated. The rules on reserves for Life Insurance are very strict, meaning you have to keep enough cash in readily accessible forms to pay off if a high number of unexpected claims comes through. This gives confidence to the insured (that their insurance company won’t go belly up); it also forces the company to “save” money, which makes them money. Life insurance companies make more money on investment income than they do from fees, addons, etc. If you’re paying $100 a month on a policy, $2 might go towards commission (a whole lot more the first year, but let’s ignore that), $5 to cover expenses (someone’s got to process that premium; the CEO has to get paid; the accountants have to get paid; etc.), and $4 as pure profit to the company. The other $89 gets invested. If it’s a whole-life product, let’s say they’re getting 5% interest. They’ll credit your account with 4% interest and keep the additional 1% towards their profits. I’m just throwing some numbers out there - I worked Group life and health, meaning paid by your employer, not individual policies; it also means that the “life” was term life - you die while you’re employed, you get 2X salary; you die the day after you quit, you get $0. With Whole Life, you get an insurance portion plus an “investment” portion.
Because that would be illegal.
Like I said - the industry is very highly regulated. If your policy has a face value of $10,000, then they have to pay you $10,000.
Yeah, I was in charge of setting reserves on a bunch of low-value group-sponsored-whole-life policies. Values in the $1,000-$3,000 range (some as low as $300!); initially issued in late 60s; still active at the turn of the century. I’m sure there’s some of that still out there.
Great post, thank you. One additional way life insurance companies make money is also by term policies expiring, either via end of the term or cancelation. They keep the premium income, no longer have to support a loss reserve on that policy, life is good.
Limiting it to life insurance companies. Industry-wide they
Sell products that people don’t need to make themselves money. Whole Life (now Universal Life thanks to Phil Donohue). Let’s talk the return on the Universal part vs investing the money yourself. Paying them to borrow your own money.
Annuity products that maybe a dozen people on the planet should invest in.
Policies on children. What income do they have to protect?
Such policies are, as I understand it, primarily there to cover funeral expenses, as were some of the other low-value policies for adults discussed earlier.
In a UL policy, you get to choose the investment vehicles, which means you are responsible for when the policy goes underwater. In a WL product, the insurance company decides where to invest the proceeds.
See? Completely different!
But, seriously, there is a guaranteed death benefit with a WL policy which may not exist with some UL products. That’s one difference.
Pre-paid funeral expenses are cheaper. And if the child does not die in their first year, the probability of them dying is very low. Even if you account for first year mortality, the probability of your child dying before age 18 is under 1.03% And furthermore, funerals for children less then 3 years of age come at a significant discount.
You’d be better off throwing that money into a spyder or other market ETF and use it if they die otherwise give it to them on their 18th birthday if they are one of the lucky 98.97+%
The other big lie is insurability. This is my understanding so I’ll accept correction if wrong, but as a child you have a $1000 life insurance. You want to increase it to $30,000. You still need to take all of the tests to make sure you are insurable for the added $29,000 and if not, you’re stuck with only the $1K policy. I mean, I have insurance now but if I try to increase my policy to a $30 million payout and I have stage 4 cancer, they’re not going to say, “We’re going to lose millions but we have to say yes. You already have life insurance so you’re insurable.”
As the OP’s original question seems to be answered, it’s feeling like much of the rest of this perhaps belongs in a IMHO or Pit thread, titled “Why @Saint_Cad Hates the Life Insurance Industry.”
His concerns are valid, though. They can be addressed, but the most common answer is 'it truly depends upon the situations of all involved".
And the consideration which matters most are tax and estate planning considerations, which is where life insurance shines… but not really for the middle class who doesn’t need a WL policy to pay their estate tax bill or need one to create and distribute trust assets for beneficiaries.
@Saint_Cad asked about whole life policies for children: they are bought by well-heeled people who want to leave a grandchild some money without waiting to die: buy a 20yr paid-up WL policy for your grandkid, put that policy in a trust where the grandkid can’t touch it until age 45 and, depending upon the size of the initial policy, the guaranteed cash value of the policy will be far more than the initial 20 year payout.
Now does this make sense? ¯_(ツ)_/¯ But the fact remains that the life insurance industry has had over 150 years in crafting tax advantages for people who use their products, and these tax issues do matter when you are a high net worth individual.
One last thing: in addition to tax strategies paid for by the LI industry, the other main purpose of whole life is money laundering.
I have been trying to find a table I located about 5, 6 years ago which had a summary of how the proceeds in life insurance were paid out. But Google is now such a sales-oriented piece of shit that academic citations can’t even make the front pages. I will keep searching, but
From my memory…
$700,000,000 was paid out.
… $150,000,000 in death benefits
… $400,000,000 in cash value distributions
… rest miscellaneous.
Over 1/2 was cash value distributions. You pay $100k of dirty money in, take $50k of clean money out, no questions asked. Yeah, it’s a big haircut but it’s a very safe way to launder money into the country.