If you’re like many consumers, you view life insurance as a big mystery. You know you probably need it, but aren’t sure how it works – plus it gives money to your next of kin when you die. In fact, life insurance has much more than a death benefit. And it’s not all that mysterious, provided you know the right people to talk to.
We found one of those people. Andrew Mays, Connecticut State Insurance Commissioner. Commissioner Mess has vast experience in understanding complex subjects. He is a graduate of Yale University, a former member of the Deloitte Center for Financial Services, former director of the New York State Department of Insurance (NYSID), research team leader, author of white papers on insurance issues, and a provider of expertise to the Government Accountability Office. (GAO).
Mays agreed to a broader discussion about life insurance, how it works, what consumers need to know to protect their families and themselves, and where to go for information and help. Here is our edited conversation.
Investopedia: Let’s start by taking a look at the big picture. From your point of view, what is insurance? What does it achieve for society?
Mess: To me, insurance is a way for society to be able to get the job done. And I mean that in a very broad sense. You go back to the Babylonians and the first records of insurance policies were for sea-going ships. Insurance was a means of facilitating trade so one loss does not erase all. If you look at it as a way for people to take risks, it is the engine of capitalism.
Within families, insurance is also a way protect money. You can go out for work, insure your house, your car, yourself. If anything happens, your family is not ruined. If you become ill, you can be treated and you can continue to feed your family.
If we pass it on from generation to generation, insurance is the way transfer money. This is a message I think we need to get over more. If you have an insurance policy that you created with current dollars and, god forbid, you die, the proceeds go to your family so they can maintain their lifestyle. It’s a way to “pay it up front”, if you will.
Insurance mitigates the risk that people or businesses are left at the mercy of whatever happens. It allows for a certain confidence that no matter what happens, everything will be taken care of. That is the essence of insurance.
role of risk
Investopedia: Can you elaborate a bit on the role of risk when it comes to life insurance? Obviously, insurance spreads the risk. How does that work?
Mess: Life insurance spreads the risk in certain areas. This spreads it over a large number of people, over the participants. To some extent, it also spreads the risk over time. This is because your needs change. For example, as a kid in college, I’m sure I wasn’t thinking about life insurance. Maybe I’m thinking of happy hour, but certainly not life insurance.
Once I had my own child and bought my own home, I realized the need for life insurance. Now that my daughter is older, those needs have changed again. The purpose of that life insurance has changed. As a result, I’ve bought life insurance over the years and part of it goes to the pool to help the person behind me, whether it’s the next generation or my neighbor. So, when you talk about risk, with life insurance you’re spreading that risk to people and, I’ll pass it on from generation to generation, time to time.
Understanding Permanent (Whole) and Term Insurance
Investopedia: Consumers hear a lot about different types of life insurance – primarily term and permanent. Can you talk about the different types of life insurance and how they work?
Mess: Sure. Think of term insurance as a function of time. Term life insurance is for a specified number of years, such as 10 or 20 years. This could be the length of your mortgage, for example, or until your kids are out of college. You have that coverage for that time and you are going to pay for that time. There is no accumulation of value. This is just outright insurance. Most term insurance is renewable at the end of the term. Term life insurance can be a great option because it is for the most part less expensive than permanent life, which accumulates cash value.
With permanent or whole life you will pay in that, I am going to generalize your whole life a bit here. There are things like single premium plans or plans that eventually pay for themselves but have a cash value. It builds that cash value over the course of your lifetime.
Specific Provisions, Riders and Clauses
Investopedia: Looking at a general life insurance policy, what does it cover? What does it not cover? How much flexibility do you have in policy making? Lastly, what could be the reason for the company to cancel your policy?
Mess: At the most basic level, life insurance will pay out a death benefit, whether you die by accident or illness. Some companies are adding a disability rider to the whole life plan. If you become disabled, the entire amount or a portion of the amount you cover for a whole life plan may go into your care. You’ve got more flexibility with life, period. And the premiums are usually straight. What life insurance will not cover is state specific, but Connecticut has a two-year contest period during which suicide is not covered. After that suicide is covered.
In terms of cancellation, non-payment of your premium will probably be the most important thing for most people in the entire policy. Companies worry about fraud during periods of competition. For example, people will say they don’t smoke when they smoke. Now, if the insurance company finds out – and it’s relatively easy to detect these days – it could be a reason to cancel the policy. In addition, policies contain some exclusions. For example, if I go skydiving, it may not cover me for that. You should always go back to the policy, make sure you know what is covered.
Markers of a Good Life Insurance Company
Investopedia: What do you see as an important marker of a good insurance company? This is from the point of view of the consumer. Just basically what should people be watching?
Mess: There are two things I would argue: solvency and customer conduct. There are really two questions about which you want to be sure, A, that the insurer has Eligibility to pay his claim, and, b, that the insurer has Wish To pay your claim.
There are several ratings with solvency that you can use to see how strong a company is, to see the financial strength of that company, and to feel comfortable that it will be able to claim. You can buy a life insurance policy today which, if you are lucky, will not get paid for the next 60 or 70 years. You should have a company that is well managed, that shows a track record that you are comfortable will pay off its debt.
Along with customer conduct, I would suggest that you also check your state insurance department’s consumer complaint release. I mean, a company can make money by not paying claims. But it’s certainly not what we as a regulator would tolerate and not what you should be looking at. You want a company that is easy to do business with, that is straightforward, that you can depend on. Insurance is a promise to pay. You are paying now. They will pay when you need them.
Addressing the challenges of race and gender
Investopedia: There is a lot of discussion now about some of the challenges life insurance companies face with regard to race and gender discrimination. What can you tell consumers about these challenges and how they are being handled by regulators like yours, national…