6 Myths about Buying Life Insurance

Let's talk about your death.

Not much of a sales pitch, is it? Yet that's precisely the body under the sheet we're delicately avoiding when we consider buying life insurance.

"They call it life insurance but it's really death insurance. After all, you'll never live to collect," says Judith Hasenauer, principal at Blazzard & Hasenauer, P.C., a Florida law firm that advises insurance companies. "That's why it's often said that life insurance is sold, not bought."

Because we tend to shy away from our own mortality, certain myths have grown up around life insurance, several of them promulgated by the life insurance industry itself. Myths such as the idea that life insurance is a good investment. You can't negotiate a better rate. Consumers receive full disclosure. And if you wait too long, a guaranteed-issue life policy will save the day.

We invited life insurance underwriter, analyst and author Tony Steuer, along with life insurance actuary, former Vermont insurance commissioner and Consumer Federation of America expert James Hunt to join Hasenauer in playing pinata with these overstuffed myths about life insurance.

Batter up!

You've seen guaranteed-issue life advertised by Gerber and others on cable TV and in AAA and AARP magazines. The ads promise that you won't be turned down, regardless of your health.

But if you're looking for a quick net-worth boost at death's door or a last-minute cash windfall for your heirs, you're unlikely to find it in a guaranteed-issue product.

"For the first two years, the death benefits are minimal," Hasenauer says. "That two-year window is the suicide period, the contestability window where the company would contest that the information you provided was not correct."

Then the benefits step up, but not by a lot. "They're not very big policies; you could never go and get a good estate planning-type policy," she says. "They're pretty close to burial-type policies -- just enough to get you in the ground and pay the minister."

The cost of these policies reflects their increased risk to the insurer. "They're crazy expensive," says Steuer.

If you're considering a guaranteed-issue product, Hasenauer recommends shopping around.

"There is a (price and benefit) difference between the three-question and the 10-question policy applications," she says.

"Life insurance is the last financial industry where compensation is not fully disclosed," says Steuer. Instead, it's buried so deep in the contract that it would take a forensic dentist to extract it.

That's by design. The insurance industry has long maintained that divulging the commission on whole life, which Hunt says can typically run 85 percent of first-year premiums with annual renewal commissions of 7 percent for the next decade, would mislead or turn off those buying life insurance.

Despite this dated defense, disclosure is already required overseas.

"It's something that is going to catch on more and more in the (U.S.) life insurance industry," Steuer says.

Until it does, Hunt suggests two workarounds:

* Compare the first-year surrender value to the first-year premium. The closer the surrender value is to zero dollars, the more money is going into the agent's pocket. There's just one catch: You would have to have purchased the policy to get this information.

* Get a competing quote from TIAA-CREF, which sells direct policies without commissions. This will give you a rough idea of how much commission your policy contains.

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