Tuesday, September 1, 2009

Life insurance advice gone wrong

I was cruising the headlines recently to see which reporters are most in need of a little life insurance education and came by this fine piece written for the Sun Sentinel. The worst part of it is that the author has an email address on Kiplinger's domain, ugh. I could write her a long email, but that wouldn't be as much fun as parading it around in public. Besides, financial writers who don't know enough about their topics is a sickness that needs to stop. I write as a public service. You're welcome.

The first problem I see with this life insurance article is that the author splits it up into divisions by product categories. This is a pretty basic way to do it that enhances misconceptions about the "types of life insurance". Most life insurance experts will be able to tell you that all types of life insurance are variations on each other, share many similarities, and often you can use one type of life insurance to solve the problems that another is designed to do better. Life insurance is not a world of neat categories. It is all arbitrary nonsense that only serves to confuse the public about the reality.

This is a nit-pick, but when she says, "tax-free death benefits," she ought to say "potentially tax-free death benefits". For a little more on taxes and life insurance, I suggest the author read up a bit. It is usually tax free, but not always.

I'll skip a few more picky points to get to the juice. "Cash-value policies, such as whole and universal life, don't expire." Wrong. They do expire. Even old-school insurance agents will tell you there is a contractual expiration period for most policies, especially whole life. A permanent life policy would certainly expire if it did not have enough value to sustain the death benefit. In fact, I have seen this particular scenario over and over.

Permanent life policies (the all encompassing term for whole life, universal life, etc) can expire for a number of reasons - even if you make the planned premium on time every month. The dividend from the company may go down or disappear. The interest rate you expected to get wasn't reality. The internal charges of mortality costs and administration may have gone up. Or any combination of these.

Another possible reason why whole life and universal life insurance can lapse is because of a bad combination of misinformation. The policy owner reads one article in their local newspaper that says these policies are great because they can't expire. Then they read another one by an against-the-grain financial muckety muck who says these policies are great because you can borrow the cash value from them. Upon calling customer service (because we all know chances are their agent has probably left the business or gone to another company), they are told the truth - that they don't really have to pay back any of the loan. Of course, the policy holder does have to pay back the loan with interest - if they want the policy to continue. But that was just a detail.

Scratch that part about reading another article. In the same Sun Sentinel article, the author speaking about life insurance loans, clearly states, "but you don't have to pay it back." If it weren't for her journalistic exemption, she would be liable for putting this bad combination of advice in print.

So in case I haven't made it abundantly clear, yes, permanent life insurance policies can expire. Making your life policy as permanent as you once thought it was after messing it up with bad advice like this can often be expensive.

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