Life Insurance: Can You Lose Money On Policies?

Life insurance is a financial tool that provides financial support to beneficiaries after the policy owner's death. While it offers peace of mind and has several advantages, it is not always the best investment for everyone. For instance, those without dependents or with tight budgets may find it unnecessary. Additionally, certain types of life insurance policies, such as universal life insurance, come with risks and challenges that can lead to financial losses. This includes the possibility of paying high fees, rising costs with age, and a lack of guaranteed returns, resulting in a negative impact on the policy's cash value. Understanding these risks is crucial before purchasing life insurance, as it can help individuals make informed decisions about their financial planning and ensure their investments are protected.

Unclaimed life insurance policies

How to Prevent Unclaimed Life Insurance Policies

To prevent this from happening, policyholders should inform their primary beneficiaries, as well as contingent beneficiaries, about the existence of a life insurance policy. If there are valid reasons not to inform the beneficiaries—for example, if they are young children—it is advisable to provide this information to the executor of your estate. When informing beneficiaries, it is essential to provide the name of the insurance company, the policy number, and what the proceeds of the policy are intended for.

How to Find an Unclaimed Life Insurance Policy

If you suspect that a loved one purchased a life insurance policy but never mentioned it, or you recently lost someone and believe there might be unclaimed benefits, there are several ways to search for unclaimed life insurance policies:

• Search for insurance policy paperwork, such as premium payment receipts or bank statements showing automatic deductions.
• Use a missing policy locator like the National Association of Insurance Commissioners' (NAIC) Life Insurance Policy Locator Service.
• Search for the insurance company by identifying it from the policy or through the state's insurance department.
• Check in the correct state, as the policy may have been purchased in a different state than where the decedent passed away.
• Search for a financial connection, such as an accountant, financial planner, or insurance agent who may have knowledge of the policy.
• Search unclaimed property files using databases like MissingMoney.com, endorsed by the National Association of Unclaimed Property Administrators (NAUPA).
• Contact the deceased's former employers, as some companies offer life insurance as part of their employee benefits packages.

The Unclaimed Life Insurance Benefits Act

The Unclaimed Life Insurance Benefits Act, enacted in over 30 states, aims to reduce the number of unclaimed policies and accelerate the process of discovering when a policy has matured. It requires life insurance companies to compare their records with the Social Security Administration's Death Master File to identify deceased policyholders and initiate a search for their beneficiaries. If beneficiaries cannot be found after a set number of years, the insurance company must transfer any unclaimed benefits to the state's Department of Revenue as unclaimed property.

Permanent vs. term life insurance

Life insurance is designed to provide financial support to your loved ones in the event of your death. It can also help with burial costs, living expenses, bills, and education. While it is a good way to ensure peace of mind for your family, it is not always a smart investment.

Permanent Life Insurance

Permanent life insurance covers you for life as long as your premiums are paid. It has an investment component that allows policyholders to accumulate a cash value, which grows tax-free and can be borrowed against or withdrawn. Permanent life insurance is generally more expensive than term life insurance, and the cash value is separate from the death benefit paid out to beneficiaries.

Term Life Insurance

Term life insurance, on the other hand, is temporary and covers you for a set term, typically between one and 30 years. It is often more affordable and provides a simple way to get coverage for a specific need or time period. Term life insurance does not have a cash value component, and if the insured person is still living when the term expires, the premiums that have been paid will not be refunded.

The type of life insurance that is best for you depends on your individual needs and circumstances. Permanent life insurance may be a good choice if you need long-term financial protection, want to create an inheritance for your heirs, or want a tax-advantaged way to save for future expenses. Term life insurance, on the other hand, may be better if you only need short-term coverage or are on a budget. It offers flexibility if your needs or circumstances change and is a good option if you have other financial assets to leave as an inheritance.

Life insurance as an investment

Life insurance can be used as an investment tool, but it is not the same as a traditional investment. The primary purpose of life insurance is to provide financial security for your loved ones in the event of your death. However, some life insurance policies have a cash value component that can be utilised as an investment.

There are two main types of life insurance: term and permanent. Term life insurance covers you for a set period, such as 20 or 30 years, and is generally more affordable. Permanent life insurance, on the other hand, covers you for life as long as the premiums are paid. It is this type of policy that can be used as an investment vehicle.

Permanent life insurance policies, such as whole life and universal life insurance, have a "cash value" component. A portion of your premium payments goes into this account, and the money grows tax-deferred. You can withdraw or borrow against these funds while you are still alive. This provides flexibility and can be particularly useful for retirement planning.

However, it is important to note that life insurance as an investment has its limitations. The growth rates tend to be conservative compared to traditional investments like stocks or bonds. There are also fees and charges associated with permanent life insurance policies, which can impact your overall return. Additionally, some policies have limited flexibility in adjusting premium payments or death benefits.

When considering life insurance as an investment, it is crucial to weigh the benefits against the potential drawbacks. Life insurance investments offer tax advantages, asset protection, and potential income streams. However, the returns may be lower than those of other investments, and there may be conflicts with other investment strategies. Consulting a financial advisor can help you make an informed decision about whether life insurance is a suitable investment option for your specific needs and goals.

Scams and disreputable companies

Life insurance is meant to provide financial security for your family in the event of your death. However, falling for a life insurance scam can have the opposite effect. While life insurance as a financial product is not a scam, some disreputable companies and individuals may try to sell you life insurance fraudulently.

Phishing

Scammers send an email that appears to be from a legitimate insurance company or broker, offering a payout. However, they will ask you to click a link and enter your personal information, which is then used to defraud you.

Identity Theft

Scammers steal your identity and use it for fraudulent purposes. They may call and ask if someone close to you has recently died, requesting your Social Security number to "expedite payment" from the deceased person's life insurance policy. Alternatively, they may claim there is an issue with your policy and need your personal information to fix it, or that your premium payments are overdue.

Fraudulent Beneficiary Changes and Additions

Scammers forge your signature on a policy to make themselves the beneficiary or trick you, usually an elderly family member who isn't of sound mind, into adding them as a beneficiary.

Exaggerated Sense of Urgency

Scammers use high-pressure tactics and create a sense of urgency to push victims to act before they have time to think. They may use aggressive language and claim that the offer is time-limited and will expire soon.

Insisting on Immediate Payment

Scammers demand not only an instant decision but also instant payment. They may pressure you to buy a policy immediately, even though purchasing life insurance typically requires completing an application and sometimes a medical exam.

Unsolicited Offers and Cold Calls

Be cautious of unsolicited offers and cold calls. Scammers may promise unbeatable deals and even have some of your personal data to create a sense of trust. They will try to get more of your personal information, such as passwords or PINs for your financial accounts.

Offers That Sound Too Good to Be True

If an offer seems too good to be true, it probably is. While good deals on life insurance exist, be wary of pitches for alluring policies from individuals you don't know. According to the National Association of Insurance Commissioners, if the premiums are more than 15% to 20% cheaper than the competition, it's likely a scam.

Typos and Grammatical Errors

Written materials, such as emails or texts, containing typos or grammatical errors may be a warning sign of fraud. Legitimate insurers and financial institutions typically present their products professionally and without errors.

Absence of Detail on Policy Exclusions and Limitations

Reputable insurance providers are explicit about what is and isn't covered. Be cautious if a representative or documentation is vague or unclear about the details of coverage.

Fake Life Insurance Companies and Agents

Some scammers create fake insurance companies and offer worthless policies. Even if the company is legitimate, the agent may be fraudulent. Warning signs include agents who advertise cheap policies on social media, insist on communicating only via email or messaging apps, and don't provide direct communications or documents associated with the actual insurance company.

Overselling a Policy

Life insurance agents often work on commission, so they may try to sell you a higher-priced policy than you need. They may add extras, such as a double-indemnity rider or a waiver of premium rider, which are unlikely to provide value for the additional cost.

Insurance Agent Fraud

In rare cases, insurance agents directly steal from clients. They may quote a premium for a policy they never set up or quote a higher premium than necessary and pocket the difference. Some agents target the elderly, assuming they will be more trusting, and may even claim to be connected to a reputable agency.

Identity Theft Scams

Scammers use life insurance as a way to gather personal information, which they then use to open new accounts and make purchases in the victim's name. They may contact you with various excuses, such as a relative has passed away and left you money, or that there is an issue with your policy or payment.

Universal life insurance policies

Universal life insurance is a type of permanent life insurance that offers flexibility to the policyholder. It allows the policyholder to adjust their coverage and premiums to meet their changing needs. This type of insurance is ideal for those who want to provide financial protection for their loved ones while also building tax-deferred cash value.

Universal life insurance is a permanent policy, meaning it covers you for life as long as premiums are paid. It offers the flexibility to raise or lower your coverage or premiums as needed. It also allows you to build account value that you can access during your lifetime. This makes it a good option for those who want to adjust their coverage and premiums to meet their changing financial circumstances.

There are two types of universal life insurance policies: Survivorship Universal Life and Joint Universal Life. Survivorship Universal Life covers two people and pays out the death benefit when the last person insured under the policy dies. It is commonly used by couples with large estates to pay estate taxes or to leave a legacy or charitable gift. Joint Universal Life also covers two people, but the death benefit is paid upon the first death of the insured. It offers an affordable way to provide permanent coverage for two individuals under one policy.

Universal life insurance can be used to help provide for a family's loss of income, mortgage costs, and educational needs. It can also be used for estate planning, special needs planning, and business planning. Additionally, the cash value component of universal life insurance can be accessed during the policyholder's lifetime, providing "living benefits" that can be used for various opportunities.

When considering universal life insurance, it is important to weigh the pros and cons. The flexibility of this type of insurance is a significant advantage, as it allows policyholders to adjust their coverage and premiums as their needs change. Additionally, the tax-deferred cash value growth can be beneficial for those looking to grow their wealth over time. However, it is important to consider the potentially high management expenses and agent commissions associated with permanent life insurance policies.

Frequently asked questions