Why is Life Insurance All a Blur?

I decided to go searching out real life insurance questions from other sources and answer them here – as if you asked me personally. You’re welcome.

This week’s question comes from Radiance02 on twitter, who has an Alpha Romeo in her background. She asks “Why is looking at life insurance all a blur?!?”

This may not seem like a technical life insurance question to some of you. I mean, I can feel some of your eyes rolling, but it’s important. And the question does have technical underpinnings, which I’ll get to right away.

Here’s the thing, the reason getting life insurance quotes is confusing is because:

1. there is too much information to sort through
2. none of it is easy to compare
3. none of it can currently be compiled in the same place

I don’t care what industry you are talking about, that will make comparing quotes difficult.

Too much life insurance information has to do with the fact that there are over 500 life insurance companies in the US, according to Ebix Life. Each one of these companies has its own suite of products to choose from. So let’s say that conservatively amounts to 1500 life insurance products to choose from. Now most of these life products can be configured in a few ways with different options, riders, and payment scenarios. I’m serious when I say this could easily be 15000 life insurance choices to choose from.

Well, Radiance02, your job is to help your mom pick one life insurance choices from 15000. Which 14999 won’t you choose?

Quote information is hard to compare because so much of it is driven by lingo the life insurance companies developed. Like any technical field, life insurance developed its own series of linguistic short-cuts to describe concepts that would otherwise be lengthy. That’s one reason why shopping for NdFeB magnets has always been hard for me. It gets too technical too quickly.

Unfortunately, real people are the ones who need to make life insurance buying decisions. Real people who have no idea what life insurance companies are talking about when they try to differentiate between “death benefit” and “face amount” or “cash value” and “cash surrender value”. Our industry needs to do a better job of talking human if we want real people to buy life insurance.

Life insurance comparisons are hard to make because you can’t compare all of it in the same place. I may have written about this before, but no insurance agent or agency can compare all life insurance quotes on an apples-to-apples basis. No agent can be appointed with all 500-some life companies. And even if they could, keeping up with all the changes and subtleties of underwriting would be a daunting task. There is currently no way to compare all (what did we decide?) 15000 life insurance choices for your mom.

Sorry Radiance02. And I’m sorry this response wouldn’t fit on Twitter. Hopefully now you understand why none of it makes sense.

Your best bet is to get quotes from different agents after you and your mom decide what your goals are.

What type of life insurance should I get, whole life or term life?

One of the most ancient questions in the history of the life insurance industry is if you should get whole life or term term life. The first thing to realize is that this question might be a little shallow. The next thing to keep in mind is that it might not matter. I’ll explain more later…

But first, a quick history of life insurance. The first life insurance policy was written in 1583 in London. It was a type of term life that we would call “annual renewable term”. Each year, you would pay a small sum in exchange for the coverage. The following year, you could either pay another sum for another year or decline the life insurance.

It was very simple, but the problem with this type of life insurance is that each year, as you got closer to death, the sum for life insurance coverage became more and more. In an attempt to keep the premium amount level during the entire life of the insured, different types of permanent life insurance were invented.

For the most part, permanent life insurance became the primary type of life insurance people would use for the benefit of their family and to cover their debts. This may have been partly due to the fact that the life insurance industry at the time lacked transparency and a wide variety of choice and competition.

After the American Civil War and through the industrial age, increased innovation, marketing, and changing attitudes and economies resulted in an increase in life insurance sales.

Eventually, folks began to like the simplicity of term again. And with the information age and the internet, a few companies began to spring up in the 1990’s that made comparing life insurance easier than ever. Although the system wasn’t perfect, it was a heck of a lot better than before.

So back to the original question of what type of life insurance you should get. Well, nobody knows. And if they pretended to tell you based on a simple question with no background information, that dogmatic stance will not always help you out. The fact of the matter is there are many more types of life insurance than just two – a point I wanted to make by going through the history of life insurance. And all types of life insurance are variations on each other because they use the same concept of displacing risk. That is why the question “should I get whole life or term life?” is too simplistic.

But the good news is it might not matter. Because all types of life insurance are variations on a theme, many of them could be used in flexible ways to solve your goal. So figure out your goal first.

Ask yourself, “Why do I need life insurance?” Make your answer specific. Now that you have your goal, go hunting for the solution. If you keep your goal in mind, you do not have to worry about the tools, only the end result.

Can an occasional smoker get non-smoker life insurance?

Here is an oldie but goodie from the life insurance question archives. Many people wonder if they can get non-smoker rates even though they smoke occasionally – or maybe they smoke a cigar or chew tobacco. The answer, as with many things, is complicated. Yes, but not always yes.

To illustrate the point about tobacco users getting non-smoker life insurance, I’ll get a little biographical. Back when I was an insurance agent the first time, I couldn’t see around this problem. If you smoked, used in any way, or brushed up against a tobacco leaf in the last 12 months, you were a smoker. When the company rolled out a new underwriting policy, I changed my tune. Now I thought anyone could get non-smoker rates, under the right circumstances.

See, even though I wasn’t a captive agent at the time, I was a “career agent” and sent almost all my business through that company unless I had a darn good reason not to. I remember talking to a friend who still worked there a year after I left. He asked me to help him on a case. And when I found a significantly better deal for his client, he didn’t take it because he wanted the production credit with the primary company. A lot of agents are in a similar situation. They may have access to a number of companies, but they have blinders on to what the rest of the world offers.

Then I left there and became the go-to-guy for other agents like I once was. At this time, I worked for a company that had high-level contracts with about 20 companies and I was an agent to agents. I quickly learned how small my world was. Giving non-tobacco rates to smokers and tobacco users was not unique; it wasn’t innovative. Non-smoker life insurance quotes for smokers was a well-worn niche of some well-established companies that I never bothered to know about.

Not only could smokers get non-smoker rates with the right life insurance companies, but there were plenty of other underwriting niches too. Some life insurance carriers liked heart conditions; others liked lung conditions. Some companies gave better rates for people with high blood pressure. I was surrounded by a growing list of niche facts for each company I now represented.

Although we tried to convey this knowledge to the brokers who worked with us, the information was too deep and we didn’t know their cases as they came in well enough to send them the exact right message. Not only that, but 20 life insurance companies is not that great. It’s more like a greatest hits album – good for some but not all.

I eventually moved back to being an agent again, free to find the life insurance niches that I wanted to. An when I was back in the field and had access to even more life insurance carriers, I still missed opportunities to find the best deal for smokers because I was surrounded by too many options again. Plus the information about tobacco users getting nonsmoker rates is always changing.

That’s why I tell people, whether you are getting life insurance quotes because you want a nonsmoker rate even though you use tobacco or for some other reason, try to get quotes from at least three different agents to compare. Only then can you feel confident you found the right one for you.

What taxes do I have to pay on life insurance?

Here’s a common question I see about life insurance. There are a few different ways to interpret this, but perhaps the most common way it is meant is this: A relative, friend, or business partner recently died and left the life insurance money to me; do I have to pay income tax?

The answer is generally no. The only exceptions to this are in business situations where the premiums were deducted as a business expense. So if you are a widow or widower who was named the beneficiary of a life insurance policy, you do not have to worry about paying income taxes on it. Of course, it is always a good idea to have a talk with an accountant who can come in handy. Personalized financial advice can come in handy during a trying time and an unusual circumstances.

Now that we know the answer is usually no, I’ll spend the rest of this article discussing two uncommon events when life insurance is taxed. I do not want to confuse with this advice, but perhaps demonstrate that if you are not sure about your situation, you need advice beyond what you can find for free on the internet.

Situation 1.Corporate-owned buy-sell life insurance

Suppose you are a business owner who decides to sell part of your business to another person. Now you are owners together and there is probably some value in the partnership because you both contribute to the business on a regular basis. The problem arises that if one of the two of you dies, the business will suffer (for any number of reasons).

You heard about one of these fancy buy-sell agreements online that might solve the problem, so you go talk to your lawyer who drafts up some documents to make sure the business stays between the partners and not their subsequent estates. But now that you create that agreement, where would you get the money to buy out your partner’s share of the business? Are you going to get a bank loan to fulfill your obligation right after a significant contributor to the business died? Probably not.

The simplest and cheapest answer is life insurance. So after you get personalized life insurance quotes for the two of you, you decide (along with your accountant) that an entity purchase buy-sell or stock purchase plan works best. This way, the business gets to deduct the premiums as it pays them, your accountant tells you. And since neither of you really plan on dying, tax deductions sound like a good trade-off.

The problem is that now that your partner is dead and the business has the life insurance to buy the stock from his estate, the business will now be taxed on that amount. Ouch. That stings because the life insurance benefit could be substantial and you owe tax on the entire thing.

Situation 2. Very large estate that includes life insurance policies

Now let’s assume you have a very large estate (I won’t specify the size to avoid dating the article because this is a moving target and also because with some basic planning with an attorney you might be able to reduce the size). Among other assets like cars, real estate, and investments, you also own your life insurance in your name. If your estate is large enough to be taxed for state death taxes or federal estate taxes, then all the assets in your estate (including your life insurance policies) will be taxed the same way. This could mean a loss of 20%, 30%, or more.

Of course, there is an easy way to avoid this tax on your life insurance and reduce the size of your taxable estate at the same time. Go talk to a lawyer about it today. You cannot do life insurance planning after you are gone.

Is life insurance taxed?

For most of us, we don’t have to worry about the tax man making an extra visit for the life insurance money when our loved ones pass on. But like anything else in life, there are a few exceptions to the rule. If you still are not sure about your situation, seek personalized financial advice from professionals to help guide you through this maze.

Top Life Insurance Companies

I won’t get all sappy about who I am. If you are really interested, you can read this blog. But needless to say, I have some experience with life insurance. I am also active in various forms in life insurance forums.

One of the most common questions I see asked is “What are the top life insurance companies?” The answer is that it depends on if you mean in absolute terms (like the life insurance company with the highest annual revenue) or if you mean something that is harder to decide (which life insurance companies are best for me).

For absolute terms, there are many resources available like your state’s department of insurance. You can search in Google for “department of insurance (your state here)” and they will almost always be in the top three results. You can also check with the American Council of Life Insurers for their most up to date fact book.

Still, I realize that most people don’t concern themselves with financial or accounting statistics when they choose a life insurance carrier. As long as it is with a stable company, you just want to know who is the best for you.

This is a much more difficult question to answer because there are over 520 life insurers in the US and Canada. Picking the top 10 is difficult because of the sheer number of companies to choose from. Moreover, each one of us is different from the next. So the top 10 for me will probably be different than the top 10 for you.

To make matters even more confusing when choosing the best life insurance companies, none of us knows the rates of all companies available. And if there was someone who claimed to know the rates for all those companies, they wouldn’t have access to qualification criteria, so they may be showing you the wrong quote from companies they are not actually licensed to represent. Whew.

If you followed all of that, you certainly understand by now why it is difficult to create a top 10 list of life insurance companies in the US and Canada. Objective measurements don’t matter to most of us and everything else is subjective. Perhaps the best thing you can do is get life insurance quotes from many agents to compare. Only then could you understand which life insurance companies are the best for you.