Most American adults own life insurance, yet the buying process can be perplexing and pose traps for the unwary — and cause financial problems years down the road.
Around 57% of adults in the U.S. own a life insurance policy, according to a joint study by Limra, a trade group, and Life Happens, a nonprofit insurance advocate.
But the sales standards governing how agents and brokers can recommend certain types of life insurance to consumers can be lax. And the complexity of many types of life insurance could mask potential abuse and make it difficult to know if you're getting good advice.
While insurance companies say current rules ensure buyers get advice that's in their best interests, some financial advisors and consumer advocates argue that the rules are too loose.
"It's almost unregulated in terms of the duty owed to the consumer," Larry Rybka, chairman and CEO of ValMark Financial Group, said of the life insurance market.
"We sell thousands of financial products," Rybka said. "Life insurance is the most complex financial product with the most moving pieces of anything we sell."
Not all forms of life insurance are necessarily mind-boggling. Term insurance, for example, is fairly straightforward. It covers buyers for a certain period of time, say 10 or 20 years, for an annual fee that's locked in and the consumer knows at the time of sale.
Some online portals, like Policygenius and SelectQuote, can help compare term-insurance rates among different companies.
But permanent life insurance — also known as cash-value insurance — is more complicated.
Consumers are meant to hold this type of insurance, such as whole life and universal life, until death instead of a set term. Such insurance comes with a side investment account that earns interest and dividends. The account is meant to cover annual premiums and other insurance costs, which typically increase each year with age.
However, if an investment account underperforms expectations or insurance charges increase more than expected, a buyer may be forced to pay more money to cover a shortfall or risk losing the insurance altogether.
In recent years, several insurance companies have been sued by policyholders faced with this exact lose-lose scenario. Transamerica, for example, settled its lawsuit for $195 million in 2018.
A policy that may appear cheap now may not be so later in life.
A healthy 55-year-old, non-smoking male looking for a $1 million life insurance policy can expect to pay between roughly $3,100 and $4,000 annually for a 20-year term policy, according to a ValMark Financial Group analysis. The same buyer can expect annual premiums of between $20,000 and $37,000 for whole life insurance.
Current life insurance rules, which are set by the states, often don't require insurance agents to fully disclose the risks to consumers. While insurers say they disclose the risks to buyers in the contracts consumers sign, the fine print can extend to more than 100 pages long.
Individuals can easily be caught unaware.
"I think consumers just don't understand how the contracts work," said Barry Flagg, president and founder of Veralytic, a life insurance research and ratings provider. "Agents present the absolute best case of how this will work out, without helping customers understand how things could change."
Insurance agents are also generally allowed to recommend life insurance that will pay them a higher commission instead of a policy that may be just as good but pay the agent a smaller — or no — commission.
This isn't to say all life insurance agents are misleading consumers. But the rules aren't in a buyer's favor, according to consumer advocates.
Life insurers disagree their standards are lax.
States regulate life insurance on several fronts — such as advertising, disclosure, unfair trade practices and educational materials — which amount to a "robust regulatory framework," said Bruce Ferguson, senior vice president of state relations at the American Council of Life Insurers, a trade group.
Consumers also generally have 10 days from date of purchase to get a full refund. And there are relatively few life insurance complaints from consumers, Ferguson said.
State insurance regulators confirmed more than 4,000 individual cases of wrongdoing by life insurers or insurance agents in 2019, according to data from the National Association of Insurance Commissioners.
By comparison, Americans owned around 138 million life insurance policies as of year-end 2018, according to ACLI.
"From A to Z this is one of the more heavily regulated products," Ferguson said. "And regulation continues to evolve."
A New York law that takes effect in February, for example, requires agents to make life insurance recommendations in buyers' best interests and without an eye to financial incentives like commissions. Consumer advocates call it the most stringent insurance rule of any state.
The CFP Board, a non-profit group that sets rules in the field of personal financial planning, in October implemented a similar rule for all financial advice.
Consumers should only buy policies they understand, regulators and consumer advocates say. They should also ask about and be aware of risks, such as potential increases in future premiums and other elements of a life insurance policy that could change.
Consumers can reach out to their state insurance department if they have questions or concerns about a life insurance agent. Some agents who are also registered stockbrokers may also have an online disciplinary record maintained by the Financial Industry Regulatory Authority, a self-regulatory organization, which they can consult to review any past customer complaints.