Avoid this Type of Life Insurance
January 28, 2010 |
Featured
It was a compelling and simple pitch, and it came right after the new year with all those well intended resolutions still fresh in many people’s minds. The pitch was $1 will buy $50,000 worth of life insurance.
If you were thinking about getting life insurance, then the email you received from Oklahoma City-based Global Life and Accident Insurance might have caught your eye. With just a few clicks and no significant questions asked or medical exam required, you could cross get life insurance off your list, have provided your family with protection, and just made this week’s stupid investment.
Calling it a stupid investment is to highlight conditions and concerns that a security may not be the best choice for an average consumer out there. Legally and technically speaking, insurance is not an investment. However, many consumers do use insurance as an investment. It does involve the outlay of capital and the expectation of some form of return, which is financial protection for one’s family.
The Global Life policy, which was featured in several different places including the email that was blasted to American Online subscribers by the millions because the insurer is actually an AOL partner, demonstrates why even a simple term insurance policy can potentially be a poor choice for many consumers.
One of the major problems is this is a very simple insurance policy. In fact it’s about as easy as it gets in terms of what is available in the marketplace. All you need to do is click your mouse a few times and you instantly are covered, with hardly any questions asked at all.
The policy for term life insurance that Global Life is selling is very bare bones. There is no accumulation of cash value. That is one of the major reasons why it technically isn’t an investment. The policy is a straight forward type of protection: pay a premium and if you die your beneficiary gets paid. No medical exam is required and the company won’t reject you if you pay the first month premium of $1, and then the premium after that based on your state residence, age and other characteristics.
Having straight forward term coverage does have appeal. Without any investment or savings features to drive the cost of the policy up, your protection will remain intact as long as you keep your policy current by paying the premiums.
However, if you dig deeper into the policy you will discover that some of the fine print is not so appealing after all.
Whenever you purchase a life insurance policy that is one size for all, where an insurance company agrees to cover anyone who clicks on their email, or calls their telephone line, or answers their marketing pitch, the policy is going to be a high cost one. The actuarial assumptions and underwriting are that this isn’t the type of coverage you would agree to if you could enjoy significant savings elsewhere. Therefore the policy is priced and you are treated as though you have substantial health risks.
The policy offered by Global Life is term coverage. When you turn 80 years old the term ends. So if you live past the age of 80 your beneficiaries will get absolutely nothing. This differs from a policy that remains in place indefinitely for as long as the premiums are paid. What this also means is the death benefit is not guaranteed.
The policy in fact every month becomes less valuable but you still have to pay for the premium. The coverage offered by Global might be beneficial for a person who is in their fifties, however the closer an individual comes to reaching age 80, the odds of receiving a payout become less and less likely. Many individuals at that point will allow the policy to lapse.
None of these facts are mentioned in any of the paperwork. If you attempt to ask Global Life any questions about things such as the term’s length or cash value, you will probably discover just like I did when I tried to contact them, that the operators at the processing center will tell you that you need to call their customer service number for answers.
Then there is the issue of pricing.
Small dollar insurance coverage has a tendency to be expensive. Many insurance companies won’t issue policies with less than $50,000 of coverage. Oftentimes consumers will discover that they will be a lot better off buying double the protection. That is because the difference in cost between a $50,000 policy and a $100,000 policy are often fairly insignificant.
The coverage for the Global Life policy for a non-smoker male that was 50 years old had a monthly cost of $56.49. There are other insurance policies that I found with a cost of $48-$50 a month. The cost of buying insurance somewhere else would cost only about $100 a year. The $1 discount in the first month made up about half of the difference. Over time the difference would add up. Some inexpensive policies, more importantly, had cash value that built up which would guarantee a payout. That is the big difference.
The moral to our story is that purchasing life insurance is not a quick fix solution. Before buying any life insurance you need to read the terms of service very carefully. Purchasing life insurance should never be an impulse buy. Getting a free premium for a quarter or month should never get consumers to take their eyes off the higher lifetime costs of that insurance.
So before buying any life insurance be sure to check out all your available options. If it turns out that the broad sales pitch that you hear in a tv ad or get in an email is still the best option for you, when you finish your research the offer will still be available for you to take advantage of.
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