Is Life Insurance a Scam?
If you’re in the process of trying to manage your finances and set up a nest egg for your family, you’ve probably considered life insurance. But with conflicting opinions about the validity of some life insurance policies, you may be wondering if life insurance is a scam that you should just avoid purchasing.
In this article, we’ll explain what life insurance is, why you should or shouldn't purchase it and how to catch common life insurance scams before it's too late.
The truth about life insurance
Life insurance as a concept is not a scam. A savvy buyer should understand the different types of policies available and gain clarity about what makes the most sense for their personal situation and their life insurance beneficiaries. Being well-informed will help you recognize the warning signs of someone trying to take advantage of you.
Life insurance is a type of insurance that pays a death benefit to the policyholder’s beneficiaries — whether that’s a spouse, children, business partners or charities — in the event of death. It exists in two distinct categories: permanent life insurance, such as whole or universal life insurance, and term life insurance.
Term and whole life insurance have some principal differences, but generally speaking, term provides protection for a specified period of time, which could be a period of years (common terms include five, 10, 15 or 20 years) or until the policyholder reaches a specific age. If the policyholder survives past this period, the monetary benefit is not paid but the policy can, in some instances, extend or be transferred to continue coverage.
On the other hand, permanent life insurance — like whole and universal — is designed to provide coverage for your entire lifetime. This type of plan doesn’t expire with coverage extending until the policyholder’s death, and it accrues a cash value alongside the death benefit. However, because the permanent life insurance guarantees the policyholder or beneficiaries will receive proceeds, these types of policies come at a higher cost compared to term life.
Both types of coverage are viable options, and neither in and of itself is an insurance scam. But if you’re looking into life insurance for beginners, you may be wondering why some people think life insurance is a scam. Unfortunately, as with many aspects of modern society, there are bad actors who use life insurance scams by preying on people's fears and worries about protecting their families if they die. While it’s untrue that life insurance itself is inherently a scam, it’s important to be on the lookout for scam artists.
Signs you may have come across a real life insurance scam
If you're worried that life insurance is a scam, there are steps you can take to gain peace of mind. While both whole life insurance scams and term life insurance scams exist, the telltale signs are the same. The following section details some of those indicators you should be aware of.
Aggressive sales tactics and misleading marketing
One of the biggest clues that you’re dealing with a scam insurance company is the use of aggressive sales tactics and marketing meant to mislead you. Life insurance carriers rely on policy sales and premiums to generate revenue, but a reputable life insurance company won’t use unfair or inaccurate ploys to coerce you into signing up for their coverage.
Be on the lookout for any policies that seem too good to be true, promise unrealistic results or don’t provide you with ample time to make a decision. For example, an insurance agent may promise an enticingly low-premium plan without telling you it's for a lower amount of coverage than you expected. Legitimate life insurance representatives are often paid on commission, but because they’re in the business of working with people and supporting customers, they should keep customers’ best interests in mind.
Hidden fees and confusing policy terms
Is insurance a scam overall? No, but you could be dealing with a life insurance policy scam if you uncover undisclosed fees or policy details that don’t make sense. While in the beginning you may be familiar with every term or process, you should generally be clear on what you’re signing up for when you fill out a life insurance application. If anything is unclear, ask your agent; they will gladly help you understand.
You should also understand the costs you’ll incur. You’re expected to pay regular premiums to maintain coverage, but there typically aren't additional costs outside of that. If an agent surprises you with fees beyond the premium payment or asks you to pay the premium to them directly instead of to the insurance company, the chances are high that it’s not a legitimate insurance plan.
Dishonest life insurance agents and illegal practices
If a life insurance company’s representative won’t give you straightforward answers or if they provide information that seems too good to be true, they may be running a scam. Pay attention to the premium costs and policy details. Importantly, comparing quotes across multiple companies can help you determine what is a realistic cost and amount of coverage.
Additionally, if anything seems like it’s happening outside of the law, take heed of activity that could possibly be a scam. Life insurance is a regulated industry, and its brokers must adhere to laws and regulations so legitimate brokers won’t risk doing anything illegal.
Reasons not to buy life insurance
There are some situations in which life insurance may not be a necessity For instance, if you have limited financial resources, do not have dependents or if you have sufficient savings or investments to cover future expenses, you may want to forego a policy. The following section provides additional details.
You're struggling with limited financial resources
If you're in a difficult financial situation, struggling to pay for daily expenses and are unable to save for the future, purchasing a life insurance policy may not make sense. That’s not because life insurance is a rip-off but because your best bet is to funnel your income into regular expenses instead of premium payments. While planning for the future is important, meeting your family’s daily needs should take precedence.
You have neither dependents nor significant financial obligations
People without dependents may not see life insurance as a good investment. Life insurance aims to provide death benefits to surviving family or business partners in the case of your death. If neither of those cases applies to you, a policy might not be a good fit for you.
Similarly, if you lack significant financial obligations, there may be no benefit to a life insurance payout. With few expenses to cover, there’s no need for a large payout upon your death, and therefore no need to secure life insurance benefits.
You have sufficient savings and investments
Another reason you may want to avoid signing up for a life insurance policy is that you have ample funds elsewhere, such as in savings or investments. Life insurance benefits are useful to cover expenses your family inherits or incurs upon your death, such as unpaid debts or funeral expenses. But you can avoid paying for life insurance coverage if you are sure there is money readily available to your heirs in the event of your death.
Paying life insurance premiums would prevent you from paying off high-interest debt
Life insurance premiums vary depending on your age, your health and the type of policy. While policies can be fairly inexpensive, especially if you’re looking for the best life insurance for young adults, they’re not free. So if you’re also paying off high-interest debt, you should focus on a debt management plan.
If your debt remains at the time of your death, the responsibility of paying it will likely fall to your dependents. High interest rates also lead to higher payments over time, so your best financial plan is to pay off significant debt before considering a life insurance policy. By funneling extra money into your debt management plan, you’re protecting your financial health and that of your dependents in the future.
Is life insurance necessary for everyone?
Before pursuing a policy, you need to ask yourself whether or not you really need life insurance. Every instance depends on individual needs, and some may determine that paying for coverage is a waste of money. Life insurance is not necessary for everyone. You can do without life insurance if the death benefit won’t be needed to support family members or business partners after your passing.
When life insurance might be right for you
There are many situations in which purchasing a life insurance policy makes sense. The best life insurance policies will ensure your family is taken care of in the event of your death, so if you have dependents and don't have significant funds saved elsewhere, life insurance could be the right choice. The following section details why life insurance might be a good fit for you.
Your loss of income would significantly impact your loved ones
Life insurance benefits are set up to provide financial coverage to your family in the event of your death. This is especially important if you are your family’s main provider of income. Money won’t make up for missing a loved one, but having a cushion to help with bills, funeral costs or other expenses can make an immense difference.
You have outstanding debt and major financial obligations
Similarly, life insurance payouts can be used to satisfy outstanding debt or other obligations in your name. Rather than leaving your family to cover your debts, you can be certain they receive money from your life insurance policy to alleviate those financial obligations. This will allow them to help clear those costs without taking on undue hardships.
You have significant assets and wealth to pass along
Although it’s true that holding significant financial assets can mitigate the need for life insurance, don’t write it off entirely. Having life insurance can also be an important part of estate planning. You can pay into a whole or universal policy and know that the payout will funnel that money to your beneficiaries in the future.
Life insurance can also help if you have plans to leave a specific asset to one heir. You can keep your wealth fairly distributed by earmarking the life insurance payout for other beneficiaries.
You want to supplement your retirement income
In addition to relying on life insurance to take care of your dependents, you can use life insurance to support you in retirement. There are a few ways to do this, including using cash value life insurance or purchasing annuities with life insurance riders.
Cash value policies like whole and universal life insurance accrue value over time, allowing you to access that money during retirement as a source of income. While the majority of your monthly premiums go toward funding the death benefit, a portion is separated into a cash account. You won’t pay taxes on any growth that occurs, and when you access the funds you can do so tax-free. Any loans you take out against those balances are also tax-free but will accrue interest.
Annuities, which are designed for retirement income, may already be part of your retirement plan. Many annuities include the option to add a life insurance rider, which means you can easily include life insurance as a supplement to your retirement funds.
Summary of Money's is life insurance a scam
Determining whether or not life insurance is a scam requires a nuanced understanding of what life insurance is, when it’s useful and how it can benefit you. However, it’s important to be vigilant and know the signs of potential scams. If you’re faced with aggressive sales tactics, misleading marketing, hidden fees, dishonesty or illegal behavior, be sure to do your due diligence.
For legitimate life insurance, there are numerous factors to weigh when considering a policy. Life insurance may not be necessary if you don’t have dependents or financial obligations, if you have an ample financial cushion or if you need to use your money for more pressing expenses. A life insurance policy could benefit you if your death would financially burden loved ones or business partners, if you have outstanding debt, if you have assets to pass along or if you want to produce income during retirement.
The decision to purchase life insurance is a personal one. By understanding the key differences between legitimate policies and potential scams, you’re now well-positioned to make an educated decision to ensure the future financial health of your family or business.