Updated January 20, 2020.
You're in the market for a life insurance policy because you want to protect your loved ones or even yourself financially. Life insurance policies are a significant investment, so it's important to understand what your life insurance policy options are, where you can go wrong, and how to distinguish between a good life insurance company and a bad one.
Life insurance advice varies based on your situation. Things like age, health, family size, and financial situation affect how much and the kind of life insurance you’ll want to buy. Below are some of the worst life insurance advice people have received:
Many employers offer a group term life insurance policy as part of their benefits package. It’s a great idea to opt into this benefit, but don’t put all of your eggs in one basket.
Lingke Wang, co-founder of Ethos, says “Some of the worst life insurance advice people routinely get is that their employer-provided life insurance policy is enough. Life insurance as part of a benefits package is not enough to replace lost future income. Getting a term life insurance policy separate from an employer is quick, inexpensive, and can be accomplished online in just a few minutes. When you change jobs or if you get let go, your life insurance isn't portable. Getting a term policy on your own is a smart financial move.”
While a term life insurance policy can be a great option to start with if you are on a tight budget, locking in a low premium for a permanent life insurance policy may be a better option for long-term planning.
Sam Price, Independent Agent and owner of Assurance Financial Solutions, says “I married at the age of 31 when I was the healthiest I've ever been. My adviser at the time recommended I start my life insurance with ten years of term coverage rather than locking in an amount for an extended period of time to take advantage of my youth and good health. That was to reconsider when my wife and I wanted to start our family.
The problem though is that many people begin to see their first health issues in their mid to late 30s. By the time we started our family some six years later, I had been diagnosed with asthma and could no longer qualify for preferred rates. My life insurance now costs me about 50 percent more than I could have been paying.”
Another reason term insurance may not be the best choice is because it’s temporary.
Anthony Martin, owner and CEO of Choice Mutual, says “There are various reasons to want or need life insurance. Some of these needs are permanent, such as the final expense coverage. It makes no sense to buy a term policy to cover this permanent need. The term policy will statistically be long gone when death occurs, thus not accomplishing the objective.”
Some people think of permanent life insurance as an investment that is an asset to their retirement plan. Permanent life insurance can accrue cash value from investments over time, which can make higher premiums worthwhile.
David Bakke, insurance expert at Money Crashers, says “One of the worst pieces of advice I've ever been given is that a whole life insurance policy is better than a term life policy, because in most cases, the numbers don't add up.”
James Heidebrecht, owner of Policy Architects, agrees. He says, “Although there are instances where whole life is a fantastic tool for high net worth individuals to preserve wealth, these are few and far between. Approximately 30 percent of people let their whole life policy lapse in the first three years because they can’t afford it. As a result, they lose all the money they’ve invested and are left uninsured.
Buying term and investing the difference in an index fund is probably a better option for most people considering whole life.”
Martin disagrees. He says, “It's good situational advice but horrible general advice. What should be said is “If you are disciplined saver and investor, and you have a temporary need or liability to cover, then buy term and invest the difference." The truth is: almost nobody is a good saver, so nobody actually saves the difference.”
It’s easy to focus on the monthly cost of a life insurance policy and overlook the coverage being purchased.
Bakke says, “Some say the amount of coverage doesn't really matter, as long as it is big. Truth be told, you need to dig down into the numbers and determine an amount that is enough, but not too much, so you protect yourself and don't overpay.”
Another way to keep from overpaying is to look at several insurance companies and policies. You can then compare the life insurance quotes, coverage offered, and insurance policy features.
“Coverages, limits, and deductibles do matter, and they do fluctuate amongst providers. Folks wanting insurance should be sure to check around,” Bakke says.
While it is true that you can lock in lower premiums at younger ages, the fact that you are older than you once were should not necessarily deter you from considering and purchasing life insurance.
Ketan Kapoor, CEO and co-founder of Mettl, says “Once I was told to think about life insurance well before a certain age. The person elaborated on how you can’t have life insurance past an age limit. But, in my opinion, age shouldn’t be the reason you don't invest in yourself. If a risk can present itself anytime without looking at the age, an insurance policy must be bought for cushioning irrespective of age. Also, everyone succeeds at different times in their life to be able to have enough for life insurance, so age must not act as a barrier.”
Now that you're armed against the bad advice, you can read some good advice or continue reading to learn about what characteristics signal a bad life insurance company.
Buying life insurance can be a tricky process to navigate. As you determine the best way to approach life insurance for yourself and your loved ones, you’ll want to make sure that you work with trustworthy and dependable companies and avoide the worst life insurance companies.
Here are five things to watch out for:
Financial strength ratings companies evaluate insurers’ finances and score their strength based on the evaluation. These ratings indicate a company’s financial stability, which is very important when you’re buying life insurance. Depending on how much life insurance you buy, death benefit claims can result in large cash payouts. You don’t want to worry about your life insurer folding or declaring bankruptcy.
The most common ratings agencies are A.M. Best, Moody’s Investors Service, and Standard and Poor’s (S&P). Each company has its own ratings scale. Not all insurers are rated by each agency, so be aware of the ratings scale differences.
The top ratings from A.M. Best are A++, A+, A, and A−.
The top ratings from Moody's are Aaa, Aa, and A.
The top ratings from S&P are AAA, AA, and A.
Most insurance companies share their current ratings on their websites. If you’re having trouble finding that information online, you can ask a company representative to share that information.
If you’re working with an independent life insurance agent or agency, learn more about which companies they work with before you buy to make sure that you’re considering reliable companies.
If you’re considering purchasing life insurance from a new company, you need to find out why buying a policy from them is a financially wise choice because it has had less time to demonstrate its longevity and commitment to policyholders.
Does the insurer have insurance on all of its life insurance policies? How would your policy be affected if the company folded or closed? If the insurance company does not have good answers to these questions, take your business elsewhere. Someone else can be their guinea pig.
Many life insurers have been in business for over half a century. Longevity as an insurance company demonstrates good financial planning and reliability. Look into a life insurer’s history to learn more about how it has weathered financial crises and changes in the economy. Pay attention to how the insurer prioritized policyholder claims with its business interests.
Information on a life insurance company’s history is available on the company’s website. And, while information provided must be true and accurate, it can be difficult to find negative information directly from the insurer.
Doing some digging on other sites and checking news sources will help you uncover any lawsuits. Understanding the issues in the lawsuits will help you know what to look out for when working with a specific insurance provider. Some lawsuits are more significant than others, so use good judgement as you evaluate the company.
If you’re working with a life insurance agent or agency, you can still look into the history of the companies you’re considering. To get a better sense of how trustworthy the agent or agency is, you can look at customer reviews or gauge trustworthiness based on agency structure and your impression of your agent.
Some life insurance companies are mutually owned. This means the company doesn’t have to consider shareholder interests when making decisions. The shareholders are the policyholders. Insurers that are mutual companies are really only concerned with what is best for policyholders. When mutual companies do well, they pay dividends to policyholders.
There are some advantages to choosing a mutually owned insurance company. However, if a company is privately owned, it’s not necessarily a red flag. It just means that the company operates differently. This information is important to understand because it can help you decide how you want to proceed with an insurance company.
If you’re working with a life insurance agency or quote service, you need to understand how they operate. Do they sell client information to all their clients or do they keep your information confidential? You should also understand how life insurance agents are paid. Are they salaried or commissioned? If they’re paid commission, you may be upsold on an insurance policy or not be told all of your coverage options.
Again, these things aren’t necessarily red flags if they’re the only negative aspect of an agency that you can find. Rather, realize that you may need to proceed with caution while working with this company.
If you’re finding some unsuitable aspects of the company structure alongside other red flags, choose a different company or agency to work with.
Customer reviews give you excellent insight into the customer experience. If a company has several bad reviews, pay attention to what they say. Are the issues raised common to the insurance industry or specific to each reviewer? Has the company or agency responded to poor reviews?
Life insurance isn’t just about the purchasing process; it’s about how a company handles client policies in the long term. If clients complain about customer care, misinformation, difficulty filing claims, or insurance companies failing to pay claims, that’s a signal that a company isn’t trustworthy.
If there is an overwhelming number of bad reviews and a very low customer rating, you know that the insurance company or agency do not offer good customer satisfaction. Look for another company or agency to work with.
As useful as reviews are, there are some pitfalls to understand. Some review sites suppress bad reviews. Others may only publish bad reviews to get a company to work with them. Companies will occasionally pay for people to leave reviews, and sometimes they’ll also pay people to leave fake reviews.
You’ll want to make sure that you’re getting the best information possible on the customer experience, so check to see how review sites handle reviews:
Best Company has a review verification and moderation process to ensure that reviews on our site come from real people and reflect the true customer experience.
Ultimately, it comes down to your own experience and feelings about the insurance company. Once you decide to meet with a company or agency, notice how the insurance agent or company representative treats you.
Answering these questions when you start working with a company will confirm your earlier research or help you realize that you need to find a different insurance company to work with.
Thinking through your situation, determining your life insurance needs, and knowing how to spot red flags in agencies and companies will help you successfully navigate the purchasing process and make a wise, longer-term decision for yourself or your loved ones.