Actuaries vs. Accountants - FIGHT! Evaluating life insurance quotes?

November 11, 2023 2:51 AM

I understand the principle of life insurance: You pay premiums and in exchange you get a lump sum when you die and also a growing cash value you can borrow against. Fine. But how can I tell whether a particular life insurance quote is "good" or "poor" value? I understand that there are actuarial aspects (how old I am, how good my health, etc), but also financial ones (how big the premium, how large the death benefit and cash value). Also fine. But now what?

In order to evaluate the quotes, should I be comparing the policy payout to the returns I'd get if I invested the premiums in stocks and bonds instead?

Should I be trying to figure out how many investment years it would take me to reach the value of the death benefit?

Or is this a case where the industry is owned by so few providers that it is a captive market, so there is no real competition and all the quotes are similar?

I've googled how to evaluate life insurance, and all I got was listings of providers and their reputation, or calculators that get you to input your demographics and then spit out yet another life insurance quote (assuming you surrender your contact info and the soul of your unborn).

But I have not yet seen info on how to evaluate the quotes that you get in the first place: Other than one is better than the other (lower premiums, higher payout), how good is it in the first place?

If a slick salesman in a shiny suit proposed an investment in a stock, a crypto shitcoin, a mutual fund/ETF, a gold mine or a Ponzi scheme, I could at least look at it and determine if it was good, bad or too good to be true. Can someone help me do the same with life insurance quotes?

posted by Bigbootay. Tay! Tay! Blam! Aargh... to Work & Money (8 answers total)

Dealing with reputable companies, the products themselves are pretty standard. The hard and tricky part is how an insurance matches your life circumstances.
posted by SemiSalt at 4:35 AM on November 11, 2023

should I be comparing the policy payout to the returns I'd get if I invested the premiums in stocks and bonds instead?
No, Investment and insurance are not really comparable, stocks and bonds are (relatively) high risk - high return, insurance is low risk - low return.

The investment portion of a whole life policy typically will not perform very well (by design) particularly when inflation is high. Most people are better served with simple Term insurance and a separate savings/investment plan.
posted by Lanark at 6:27 AM on November 11, 2023 [2 favorites]

Consumer reports used to have ratings of term life insurance companies and products (not sure about now). Some products were significantly cheaper.
posted by H21 at 6:41 AM on November 11, 2023

Some products were significantly cheaper. The worst sort of [life-]insurance is one which doesn't pay out when required because the company has gone tits up. In this [.ie] country, major motor insurance corpos have collapsed in 1983 PMPA, 2011 Quinn, 2014 Setanta. That's all to do with regulatory failure but the unfortunate clients, and everyone who pays premiums, were on the hook anyway. Also what is the history of bait-and-switch with upward cascading premiums in life insurance?
posted by BobTheScientist at 7:23 AM on November 11, 2023

Best answer: I understand the principle of life insurance: You pay premiums and in exchange you get a lump sum when you die and also a growing cash value you can borrow against.

This is true of whole life insurance, which is a confusing combination of investment and life insurance. It's generally speaking, not a good financial investment. The marketing around it is predatory to convince you otherwise (because it makes more money for the insurer) -- check out this comparison chart. All of those things are true, but "temporary coverage" "no cash value" "rent policy" all sound bad, but probably aren't!

Term life insurance is the basic form of life insurance: I will pay some small amount of money every month/year, if I die within the next 20 (or whatever) years my beneficiaries will get a payout. The general use case for term life insurance is to take care of dependents in the event of your untimely demise. If you either don't have dependents, or your dependents are not actually that financially dependent on you -- you likely don't need someone to get paid in the event of your untimely demise.

Whole life is the same thing, except it will pay out whenever you die, not just in the next 20 (or whatever) years -- and you can cash out without dying, if you choose. Sounds great, except you pay for the privilege: Premiums are significantly higher and performance is no better than investing your money in any other way. Plus cashing out can be subject to fees, penalties, etc.

The TLDR: If you're looking for a financial investment, you can do a lot better than a whole life policy (pay your own premiums into an index fund or even a savings account). If you're looking to provide for dependents, term life insurance is significantly cheaper.
posted by so fucking future at 7:48 AM on November 11, 2023 [2 favorites]

Best answer: Make sure you know the difference between term vs whole life insurance. My understanding is that term life insurance companies make money when their clients stay alive throughout the term (which is what usually happens!) Since they pay out rarely, they can offer large payouts in exchange for small premiums. You are getting the peace of mind that your dependents will be ok financially if you die while they are still dependent on you. Whole life insurance always pays out, so they only make money by charging fees or skimming a portion of your returns, so they are comparable to any other low risk investment, like savings bonds.
posted by Ausamor at 7:53 AM on November 11, 2023 [3 favorites]

Response by poster: Well, that was fast! Thanks, everybody!
posted by Bigbootay. Tay! Tay! Blam! Aargh... at 10:15 AM on November 11, 2023

I have had life insurance through work, which is nice. But I'm divorced, and if something happened to me, my child would have been with his dad and would have had Social Security until age 18. So I never bought extra.

Whole life must have big commissions, it gets pushed hard.

Your state's insurance commission can help you know if any companies are not financially stable; they're in the Attorney General's website.
posted by theora55 at 11:15 AM on November 11, 2023