RISCARIO INSIDER

January 26, 2013

TEST YOUR LIFE INSURANCE LITERACY

Hurry while the link is still active.

There’s a quick 10 question multiple choice test of your life insurance literacy. It’s from LIMRA, which does research for life and health insurers. You don’t need to register or provide any personal information. No agent will call.

Click here to test yourself now

[If the link stops working, click on the questions to the right and the answers below]

How did you do? The rest of this post consists of “spoilers”.

Findings

The questions are relatively easy but only 30% of the 4,000 respondents passed. That means 70% failed. Less than 1% got all the questions right. (Yes, you may congratulate me whenever you like.)

When test results are dismal, who really failed? The students or the teachers?

The Top Three

You’ll find the correct answers in the graphic to the right (click on it to enlarge).

People generally understand

A life insurer invests the money from buyers to pay claims (68% right | 32% wrong)
Group life insurance ends when you leave your job (59% right | 41% wrong); see two types of insurance you cannot own
Term life insurance is for temporary needs (52% right | 48% wrong); see buy or lease

People generally didn’t know that

Life insurers collect medical information to identify pre-existing conditions when a policy is purchased (18% right | 72% wrong); see the pitfalls of mortgage life insurance, which has post-claims underwriting
If a life insurer goes bankrupt, the policies stay in force and the benefits remain (25% right | 75% wrong); see what happens if my life insurer dies?
The life insurance death benefit is tax-free (31% right | 69% wrong); see the overlooked advantages of universal life

Odd Design

true/false or false/true? (click to enlarge)

The way a test is designed influences the results.

Normally, the answer choices put True before False. You’ll find that in the Microsoft Office templates and a Google image search. Penn State explains how to construct a True/False test and gives help in spotting flawed designs.

For some reason, LIMRA puts False before True. Who’s ever heard of a False/True test? Also, questions with negatives are more complicated to answer than direct statements.

For instance, here’s the first question (which 69% got wrong):

Beneficiaries do not have to pay taxes on the death benefit from a life insurance policy: False/True

The following may be clearer:

(1) Beneficiaries pay tax on the death benefit from a life insurance policy. True/False
(2) The death benefit from a life insurance policy is tax-free. True/False
(3) The death benefit from a life insurance policy is taxable. True/False

What do you think?

Next Steps

“With life insurance ownership at an all-time low, it is important that the industry not only overcome consumers’ lack of knowledge about life insurance but address the misinformation that is out there confusing them and possibly having a negative impact on their image of the industry."
— Jennifer Douglas, LIMRA Associate Research Director

The public needs help. Where can they turn? This week’s 2013 Edelman Trust Barometer ranks the financial sector as the least trusted in the world for the third year in a row.

Podcast 204

direct download | Internet Archive page | iTunes

PS How would insurance advisors do on this test?

January 19, 2013

HOW TO AFFORD THE INSURANCE YOU NEED

If insurance were free, how much would you get? [I heard that at a seminar.]

You’d probably get as much as the underwriters would approve based on your physical and financial health. Since cost is a factor, you've got to prioritize. You may skip some forms of insurance, or reduce the amount you buy.

How do you find the money to pay the premiums?

Types Of Money

We mentally put money into buckets. This for groceries, that for vacation. Don’t touch the beer money. We end up with conflicting goals such as topping up your RRSP or paying down your mortgage (Globe and Mail, Feb 2012).

We might spend "found" money such as lottery winnings, bonuses and perhaps tax refunds with less care. Easy-come, easy-go.

Yet money is money. Knowing this lets us stretch our savings by using one pot for more than one purpose.

Universal Needs

You probably have life insurance, especially if you have a family. Inexpensive term coverage is widely available.

There are bigger risks.

We can face a critical illness or disability and survive. Since the probabilities of getting stricken are relatively high, the premiums look high compared with term life insurance. The easy solution is to skip getting coverage. You're winning ... until you're not.

Untapped FUNDS

You probably understand that saving for retirement is important. We can’t rely on governments. We might not have guaranteed pension benefits from work.

What if your health impedes your journey to a financially-secure retirement? If you get a critical illness or disability, you risk higher expenses and less income. You might be unable to work again. You could take some of the money earmarked for your retirement to buy insurance for critical illnesses and disability. You're then protected while you're working.

With permanent life insurance, you get lifelong protection and an envelope for tax sheltered growth. Maybe you put some of your savings here for access later.

Get Your Money Back

If you’re convinced you’ll have a claim, the insurer doesn’t want to cover you. If you don’t think you’ll have a claim, buying insurance may look like a waste of money. We can’t tell what will happen.

What if you could get your money back if you didn’t make a claim? You’d lose the investment growth on the money but returns are unpredictable anyway.

Some critical illness and income replacement plans refund your premiums if you cancel your policy at an age like 65 (assuming you haven’t had a claim). You now have another form of retirement savings. The money comes from the insurer's investments and other buyers who didn’t have the patience to wait.

With life insurance, you can’t get a return of premium when you retire but can at death.

You do pay more to get your premiums refunded. Because of the poor investment environment, the option is becoming more expensive or disappearing.

Ideal For you

Unless you have money for everything, you might want to combine pots for related goals like getting to retirement. You won't get money back from your car or home insurance. You can with insurance on your health and life.

The best insurance is what remains at the time of a claim. [I also heard that at a seminar.]

Podcast 203

direct download | Internet Archive page | iTunes

PS Review your situation with an advisor you trust and be wary of schemes that look too good to be true.