Making Life Insurance Less Mysterious
If you’re like most people, life insurance is a great mystery to you. You know you’ll definitely need it, but you’re not sure how it works—other than the fact that it gives money to your heirs after you pass away. In truth, life insurance is much more than just a death payout. And, if you know the appropriate people to speak to, it’s not all that mysterious.
We were able to locate one of those individuals. Commissioner of Insurance for the State of Connecticut, Andrew Mais. Commissioner Mais has a lot of experience debating difficult topics. He is a Yale University graduate, a former member of Deloitte’s Center for Financial Services, the former head of the New York State Insurance Department (NYSID), a research team leader, author of white papers on insurance problems, and a consultant to the Government Accountability Office (GAO).
Mais consented to an in-depth talk about life insurance, including how it works, what customers need to know to protect their family and themselves, and where they can get more information and assistance. The following is an edited transcript of our talk.
Examprestige: Let’s begin by looking at the larger picture. What is insurance, in your opinion? What does it achieve in terms of societal benefit?
Mais: Insurance, in my opinion, is a method for society to get things done. And I mean this in the fullest way possible. You can trace the origins of insurance policies back to the Babylonians and the earliest recorded insurance policies for ships at sea. Insurance was created to assist commerce by ensuring that a single loss would not wipe out the whole company. It’s the motor of capitalism if you look at it as a mechanism for people to take risks.
Insurance is also a means for families to protect their assets. You are free to go to work, insure your home, vehicle, and yourself. Your family will not be wrecked if anything goes wrong. You can be treated and still provide for your family if you get ill.
Insurance is a means of transferring money between generations. That is a message I believe we need to spread more widely. If you have a current-dollar insurance policy and, God forbid, you die, the profits go to your family to help them maintain their standard of living.
It’s a means of “paying it forward,” to put it that way. Insurance reduces the possibility of individuals or organizations being left vulnerable to whatever occurs. It provides a sense of assurance that, whatever happens, everything will be taken care of. That is what insurance is all about.
The Importance of Risk
Examprestige: Could you elaborate on the function of risk in terms of life insurance? Insurance, obviously, distributes the risk. What’s the deal with that?
Mais: In a handful of ways, life insurance distributes risk. It disperses it among a big group of individuals, the participants. It also spreads out the risk across time to some degree. This is due to the fact that your requirements alter throughout time. I’m sure I wasn’t thinking about life insurance while I was in college. I wasn’t thinking about life insurance, but I was thinking about Happy Hour.
I learned the need of life insurance after having my own kid and purchasing my own home. My daughter’s requirements have changed again now that she is an adult.
That life insurance policy’s purpose has shifted. As a result, I’ve purchased life insurance throughout the years, with a portion of the proceeds going into a pool to assist those who come after me, whether it’s the next generation or a neighbor. So, when you speak about risk, when you talk about life insurance, you’re distributing that risk over individuals and, I’d argue, generations and time.
Understanding the Difference Between Permanent (Whole) and Term Insurance
Examprestige: Consumers are often informed about the various forms of life insurance, namely term and permanent. Can you explain the many forms of life insurance and how they operate?
Mais: Sure. Consider term insurance as a time-based product. Term life insurance covers you for a certain period of time, such as 10 or 20 years. For example, it may be until your mortgage is paid off or until your children have graduated from high school.
You’ve had coverage for that period of time, and you’ll be paying for it. There is no value buildup. It’s just plain old insurance. The majority of term insurance policies may be renewed at the end of the term. Term life insurance can be a great alternative because it is less expensive for the most part than permanent life, which accumulates cash value.
With permanent or whole life you will be paying into that, I’m going to generalize a little bit here, your entire life. There are single premium plans and plans that ultimately pay for themselves but have financial value. It accrues financial worth throughout the course of your life.
Typical Clauses, Riders, and Provisions
Examprestige: What exactly does a standard life insurance policy cover? What does it not include? How much flexibility do you have in putting together a policy? Finally, what might cause the company to cancel your policy?
Mais: At the most basic level, life insurance will pay a death benefit, whether you die by accident or by sickness. Some companies are adding a disability rider to a whole life plan. If you become disabled, the entire amount or a portion of the amount that you’re covered for the whole life plan could go toward your care. You’ve got more flexibility with whole life, period.
And the premiums are usually straight across. In terms of what life insurance won’t cover, that is state specific, but in Connecticut there’s a two-year contestability period during which suicide is not covered. After that suicide is covered.
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In terms of cancellation, not paying your premium is probably going to be the single most important thing for most people throughout the policy. During the contestability period is where companies have concerns about fraud. For instance, people will say they don’t smoke when they do.
Now, if the insurance company finds that out—and it’s relatively easy to find out these days—that could be a reason to cancel the policy. Also, policies tend to have certain exclusions. If I go skydiving, for instance, it may not cover me for that. You should always go back to the policy, make sure you know what’s covered.
Markers of a Good Life Insurance Company
Examprestige: What do you see as important markers of a good insurance company? This is from the viewpoint of the consumer. Just basically what should people be looking for?
Mais: There are two things that I would argue are important: solvency and customer conduct. There are really two questions you want to make sure of, A, that the insurer has the ability to pay your claim, and, B, that the insurer has the willingness to pay your claim.
With solvency there are various ratings that you can look at to see how strong a company is, to see the financial strength of that company, and to be comfortable that it will be able to pay a claim.
You could be buying a life insurance policy today that, if you’re lucky, won’t be paid for another 60 or 70 years. You need to have a company that has good management, that’s shown a track record that you are comfortable will pay off its debt.
With customer conduct, I would say you also look at your state insurance department’s consumer complaint releases. I mean, a company can make money by not paying claims.
But that is certainly not what we as regulators would tolerate and not what you should be looking for. You want a company that’s easy to do business with, that’s straightforward, that you can depend on. Insurance is a promise to pay. You are paying now. They will pay when you need them.
Addressing Challenges of Race and Gender
Examprestige: There’s so much being discussed now about some of the challenges life insurance companies face regarding race and gender discrimination. What can you say to consumers about these challenges and how they are being handled by regulators such as yourself, the National Association of Insurance Commissioners (NAIC), and the life insurance industry as a whole?
Mais: Life insurance says it’s an industry that is, by its nature, discriminatory because you’re looking at risk-based pricing. However, it is our duty as regulators to make sure it is not unfairly discriminatory. And as regulators, you mentioned the NAIC and our Race and Insurance initiative. That’s really important because we do have a system with built-in historical biases, a system that we have to make sure is not being perpetuated.
You can’t make a decision, for instance, based on the race of an individual. Right? But that should also mean that you can’t make that decision based on a proxy factor that would indirectly tell you the race of the individual. That’s the kind of thing that we have to look at these days in terms of challenges. And it’s important.
Where to Go for Advice and Help
Examprestige: You’ve talked about evaluating a company based on complaint resolution by checking with the state insurance department. What about just getting advice or answers to general questions when it comes to life insurance?
Mais: One of the things that I find a little frustrating that you just can’t get across to people is this: We (regulators) will help you if something happens. You have a problem with an insurance company, we’re here to help. But we can be so helpful upfront. The people you’re talking to have probably spent most of their lives working in this industry, dealing with insurance companies.
So, as you go to buy insurance, if you have questions, ask. We’ve got people who love to talk to you about insurance, which—if you’re at a cocktail party—we may not be the people you want to hang out with. But if you’re looking for info, you come to us because it’s so much easier. We’ve got publications and info on our websites. This is where I think your state insurance departments are just so strong, so helpful and can do so much for consumers.