Is Life Insurance A Trick Or Treat?

Life insurance can be scary—you put your hard-earned money on the line to secure your family’s financial future in the event of your death.

The process can also feel daunting; 40% of Americans don’t have life insurance, but nearly 50% said they’d be more likely to buy it if the process were easier. Traditional application processes can take weeks, require medical exams, and are loaded with confusing jargon. Sales-commissioned agents, a standard across the industry, means the incentive is often to make a sale, not necessarily to do what’s right for their client.

But these barriers aren’t indicative of life insurance’s actual value; it’s one of the most selfless and important financial decisions a person can make.

So how do you tell the “trick” from the “treat” when it comes to life insurance? It comes down to understanding incentives and evaluating your needs. Here’s a look at three common “tricks,” and how to avoid them.

Trick No. 1: The ‘Bundle and Save’ illusion.

Many people assume life insurance is too expensive. So it can be easy to jump on any apparent money-saving opportunities. One common sell is the “bundle” offer from insurance carriers who say getting all insurance policies from them will help save you money on monthly premiums.

Neither convenience nor a small discount should stop you from shopping for your right policy. A discount on car or home insurance likely won't offset the cost of your life insurance policy, or even be what you really need. You’re more likely to find affordable, personalized options by evaluating several providers.

Treat No. 1: In reality, policies are less expensive than you probably think.

The “bundle and save” myth isn’t often worth it because life insurance isn’t all that expensive to start with. Forty-four percent of millennials, who are ages 28 to 38 in 2019, think life insurance costs more than five times what it actually does. On average, a $250,000, 20-year insurance policy would cost on average $30 a month for a healthy person between 25-40. Many policies cost even less than $10/month.

Bundles don’t often address if whether you’re a parent working to protect your children and spouse, or a younger individual who wants to safeguard their parents from assuming student loans. Ensure you pay for what you need and nothing more.

Trick No. 2: Buying the wrong policy.

There are two main types of life insurance: term and permanent. At a high level, term life insurance provides protection for a predetermined time frame at a fixed monthly cost (it can range from five years to 10, 20, 30 years, or more.) Permanent–which comes in a few forms, including whole life insurance—requires higher monthly premiums and provides protection for the entire life of the policyholder.

On its face, permanent life insurance policies may seem better. Longer protection = more benefit, right? But for most people, they aren’t the best option. About 30 percent of whole life insurance policies are surrendered within the first three years, and 45 percent are surrendered within the first 10 years—meaning you lose your coverage and everything you invested into it. This is because permanent policies have a cash value component, where part of the higher premium costs fund the cash value. In most cases, these higher costs and the fees associated quickly add up, so policies lapse and people lose what they paid into them. Additionally, you are paying more for the underlying insurance, which you might not need later on in life.

Treat No. 2: Instead, choose a policy based on your unique life circumstances.

Term policies are often the better option for people with debt or dependents, among others, because they provide protection only while you need it most, therefore saving you money long-term. Examples include while you’re raising children, with a partner who would need to pay off a mortgage or couldn’t pay rent alone, or have parents who would need to assume student debt payments. This isn’t to say whole life policies are never the right option, just that they often aren’t.

Trick No. 3: Thinking of life insurance as an “investment vehicle.”

The purpose of life insurance shouldn’t be to support your future retirement. It’s designed to financially secure your loved ones in the event of your death. The cash-value component of permanent life insurance can act as an investment you can borrow against, but it’s often an underperforming investment and savings tool. Repeatedly, many policyholders generally see really low levels of return—boosting the agent’s commission rather than helping you save meaningfully. There are smarter ways to invest outside of life insurance.

Treat No. 3: Instead, approach life insurance as an investment in your financial legacy.

Instead of an investment in your own wealth, the incentive of life insurance is providing protection for your family. The majority of Americans consider life insurance a necessity, yet 41% have no coverage at all. This coverage gap underscores a serious financial vulnerability for families: nearly 70 % of families could be bankrupt in three months if they lost their primary breadwinner.

As scary as life insurance can seem when you’re first considering it, the impact it can have on your family—and the longer-term ripple effect it can have for subsequent generations—is profound (and much scarier).

Thankfully, due to technological advances and a more consumer-centric market, it’s become easy to dodge old school tricks and outdated sales tactics. Take some time to understand what’s best for who you want to protect, and you’ll be able to leave the treat of a strong financial legacy for your family.