Don’t fall for that life insurance ad on TV

It’s a scenario that John Buenger encounters all too often at his independent insurance agency. People see an ad for life insurance on TV, but when they ask for more details, the policy isn’t what they expected.

“The fine print on these ads goes by so quickly that when people call in to get more information, the conditions are totally different versus what they had in mind,” said Buenger of the Rice Agency in Hagerstown, Maryland.

On the surface, life insurance seems simple enough in that all products follow the same general setup: You pay the insurer premiums and if you die, the insurer pays your heirs a death benefit. But there are different types of life insurance, and how the products differ isn’t always made clear in a 30-second commercial.

The most common TV ads are for guaranteed-issue life insurance policies, said Kelly Maxwell, owner of the insurance brokerage Seniors Mutual in Pflugerville, Texas. Because these policies have no medical exam or health underwriting, anyone can qualify for them easily. “Insurers can potentially set up a policy in five minutes over the phone,” Maxwell said, with coverage lasting for life.

If you’re reasonably healthy and willing to take a medical exam, there are cheaper options. In fact, even applicants with moderate health conditions, like high cholesterol, may qualify for a lower price after taking a health exam.

Guaranteed-issue policies are often used to cover funeral costs because the amount of coverage you can buy is limited, usually up to a maximum of $25,000, whereas policies with a medical exam could insure you for six or even seven figures.

There are other drawbacks. Guaranteed-issue policies don’t pay out a death benefit during the first few years. For example, a policy might state that if you die for any reason within three years after purchasing it, your heirs will only receive the premiums plus interest back, not the listed death benefit.

“Insurance commercials tend to gloss over these downsides,” said Rafael Rubio, president of Stable Retirement Planners in Southfield, Michigan. “While there is a place for guaranteed issue when applicants cannot qualify for other policies, people who could meet life insurance health standards would receive a better offer by applying with a medical exam.”

Life insurance that requires a health exam typically falls into one of two categories: term or permanent. Term is temporary life insurance. It lasts anywhere from one to 40 years depending on the term, with the quoted rate guaranteed only for the length of that term. If you outlive the term, the coverage ends. Depending on the contract, you may be able to renew, but the premiums will cost more because you’re reapplying at an older age when you may have more health conditions, too.

Permanent life insurance, however, doesn’t expire as long as long as you keep paying the premiums. The flip side is that because these policies are more likely to pay a death benefit, they initially charge more than a term life policy, roughly five to 15 times more at first. As a result, only smaller amounts of coverage may be affordable.

Permanent life insurance can also include cash value, letting you withdraw money from the policy while you’re still alive. How the cash value grows and whether the premium remains constant depends on the type of permanent life insurance. For example, whole life charges the same premium for as long as you have the policy, and the cash value grows with a guaranteed return. A variable life policy, on the other hand, invests the cash value in market-based investments such as mutual funds, so the return isn’t guaranteed.

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