If you find life insurance shopping confusing, you’re not alone. A new study calls 19 million Americans “stuck shoppers” of life insurance, because they believe life insurance is valuable and necessary, but they find shopping for it confusing and overwhelming.The joint study, by insurance trade organization LIMRA and Maddock Douglas Research, lays the blame on insurers, saying their communications lack clarity and relevance for consumers. The study says that a key factor in the “stuck shopper dilemma” is communications that “lack authenticity.” It defined six elements that make up authentic communication, including use of everyday language, use of realistic images, interesting, warm and comforting messages, credible sources and relevance to the audience.
The majority of consumers surveyed said they did not know how to define several important terms life insurers often use in their marketing communications; others mis-identified these terms. Here are the definitions of the most important life insurance terms:
Premiums: The amount you pay for your insurance policy. Most insurers allow you to pay premiums on a yearly, quarterly or monthly basis.
Death benefit: The amount a life insurance policy will pay to the beneficiary named in the policy if the person whose life is insured dies. Also known as the policy’s face value. You can name a person, such as your spouse or child, or an institution, such as a favorite charity, as your policy’s beneficiary.
Permanent life insurance: There are two basic types of life insurance, term and permanent. Term insurance limits coverage to a specific term, such as five years, 20 years or a specific age. At the end of the term, the insurer can raise your rates or refuse to cover you if your health has changed. If you live beyond the term of your policy, your policy will pay no benefits.
Permanent insurance provides lifelong protection. Premiums are generally higher than for term insurance, but they remain fixed for the life of the policy. Your coverage remains in place regardless of your health status, as long as you continue to pay your premiums. All permanent insurance has a face value (death benefit) and a cash value.
Cash value: A portion of the premiums you pay for permanent life insurance goes toward paying for the death benefit, and another portion gets credited toward a savings component, the cash value. With a basic permanent life policy (whole life policy), your cash value grows at a rate of interest specified in the policy documents, called the guaranteed value. With universal life, your cash value grows according to an external index, such as Treasury bills.
The cash value in your life insurance policy grows tax-free, and once your cash value reaches a certain amount, you can withdraw or borrow funds on a tax-free basis as well. This feature makes permanent life a useful tool for saving toward long-term goals, such as paying for a child’s education or paying down a mortgage at retirement.
Guarantees: When you buy a basic “whole life” permanent life policy, the insurer guarantees the premium payments and death benefits will remain level, and guarantees that your cash value will grow at a specified minimum interest rate.
Underwriting: When you apply for life insurance, an insurance company employee called an underwriter calculates your risk of death, or mortality, based on your age, gender, health status and other factors. Using that information, he/she considers the risk your business would present, decides whether to offer you coverage, determines the appropriate premium, and writes a policy to cover you.
Rider: An insurance policy rider is an attachment that modifies the coverage in your policy. A rider can add coverage (additional benefits) or take away coverage by excluding coverage for certain conditions or circumstances. Common riders include a living benefits rider (explained below) and a waiver of premium rider, which will waive all your premium payments if you become totally disabled. This allows you to continue your coverage at no cost when your medical condition would probably prevent you from obtaining coverage.
Living benefits: Some life insurance policies will pay your policy’s death benefit (full or partial) to you while you are still living, rather than to a beneficiary when you die. Living benefits arose out of the AIDS crisis of the 1980s, and allow terminally ill or chronically ill individuals to access the value of their policy. On the downside, using living benefits means your beneficiary/beneficiaries will not receive the financial protection of the policy’s death benefit.
Annuity: An annuity is a contract with a life insurer that guarantees to provide periodic payments for the term you select, whether it’s your life or a specified number of years. Payments can begin immediately or at a future date. A fixed annuity provides equal payments for the term of the annuity contract. Earnings accumulate tax-free until you withdraw money. When you buy a variable annuity, your premiums go into subaccounts that are invested in stocks and bonds, as in a mutual fund. Payments vary depending on the performance of these stocks and bonds. With either type, your earnings accumulate tax-free until you withdraw them.