Making Life Insurance Less Mysterious

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If you're like most people, life insurance is a great mystery to you. You know you'll definitely need it, but you're not sure how it works—other than the fact that it gives money to your heirs when you pass away. There's a lot more to life insurance than just a death benefit. And, if you know the appropriate people to talk to, it's not all that mysterious.

We were able to locate one of those individuals. Commissioner of Insurance for the State of Connecticut, Andrew Mais. Commissioner Mais has a lot of experience debating difficult topics. He is a Yale University graduate, a former member of Deloitte's Center for Financial Services, the former director of the New York State Insurance Department (NYSID), a research team leader, the author of white papers on insurance issues, and a consultant to the Government Accountability Office (GAO).

Mais agreed to an in-depth talk about life insurance, including how it works, what customers should know to protect their family and themselves, and where they can get more information and assistance. The following is an edited transcript of our talk.

Defined Insurance

Investopedia: Let's begin by looking at the larger picture. What is insurance, in your opinion? What does it achieve in terms of societal benefit?

Mais: Insurance, in my opinion, is a method for society to get things done. And I mean this in the fullest sense possible. You can trace the origins of insurance policies back to the Babylonians and the first recorded insurance policies for ships at sea. Insurance was created to facilitate trade by ensuring that a single loss did not wipe out the entire company. It is the engine of capitalism if you look at it as a method for people to take risks.

Insurance is also a means for families to protect their assets. You are free to go to work, insure your home, car, and yourself. Your family will not be wrecked if something goes wrong. You can be treated and still provide for your family if you get ill.

Insurance is a means of transferring wealth across generations. That is a message I believe we need to spread more widely. If you have a current-dollar insurance policy and, God forbid, you die, the proceeds go to your family to help them maintain their standard of living. It's a means of "paying it forward," to put it that way.

The Importance of Risk

Investopedia: Could you elaborate on the function of risk in terms of life insurance? Insurance, obviously, spreads the risk. What's the deal with that?

Mais: Life insurance helps to disperse risk in a few ways. It disperses it among a big group of people, the participants. It also spreads out the risk across time to some extent. This is due to the fact that your requirements alter throughout time. I'm sure I wasn't thinking about life insurance when I was in college. I wasn't thinking about life insurance, but I was thinking about Happy Hour.

I learned the importance of life insurance after having my own child and purchasing my own home. My daughter's needs have changed again now that she is an adult. That life insurance policy's purpose has shifted. As a result, I've purchased life insurance over the years, with a portion of the proceeds going into a pool to assist those who come after me, whether it's the next generation or a neighbor. So, when you talk about risk, when you talk about life insurance, you're distributing that risk across people and, I'd argue, generations and time.

Understanding the Difference Between Permanent (Whole) and Term Insurance

Investopedia: The different types of life insurance – primarily term and permanent – are frequently discussed among consumers. Can you explain the many types of life insurance and how they operate?

Mais: Of course. Consider term insurance as a time-based product. Term life insurance covers you for a set period of time, such as 10 or 20 years. For example, it could be until your mortgage is paid off or until your children have graduated from high school. You've got coverage for that period of time, and you'll be paying for it. There is no value accumulation. It's just plain old insurance. The majority of term insurance policies can be renewed at the end of the term. Term life insurance is a good option because it is generally less expensive than permanent life insurance, which builds up cash value.

With permanent or whole life, you'll be paying into it for the rest of your life, to generalize a little bit. There are single premium plans and plans that eventually pay for themselves but have cash value. It accrues cash worth throughout the course of your life.

Typical Clauses, Riders, and Provisions

Investopedia: What exactly does a standard life insurance policy cover? What does it not include? How much leeway do you have when it comes to putting together a policy? Finally, what are the chances that your insurance may be canceled by the company?

Mais: Life insurance, at its most basic level, pays a death benefit regardless of whether you die in an accident or due to illness. Some firms are include a disability rider in their whole-life insurance policies. If you become disabled, the full amount of your whole life plan coverage, or a portion of it, may be used to pay for your care. You have more flexibility throughout your entire life, period. In most cases, the premiums are also straight across. In terms of what life insurance won't cover, that varies by state, but suicide isn't covered in Connecticut for the first two years of contestability. Suicide is then discussed.

When it comes to cancellation, not paying your premium is likely to be the most critical factor for the majority of customers throughout the policy. Companies are concerned about fraud during the contestability period. People will say they don't smoke when they actually do. Now, if the insurance company discovers this—and it's quite easy to do these days—the coverage could be cancelled. In addition, plans frequently include exclusions. It might not cover me if I go skydiving, for example. Always check your insurance to make sure you understand what's covered.

Characteristics of a Successful Life Insurance Company

Investopedia: What do you consider to be the most significant characteristics of a good insurance company? This is from the consumer's perspective. What exactly should individuals be on the lookout for?

Mais: I believe there are two things that are critical: solvency and client behavior. There are two things you want to make sure of: A, that the insurer has the financial means to pay your claim, and B, that the insurer is willing to do so.

There are different grades for solvency that you may look at to determine how strong a firm is, its financial condition, and whether or not it will be able to pay a claim. You could be purchasing a life insurance policy now that won't be paid for another 60 or 70 years if you're lucky. You'll need a corporation with good management and a proven track record that you can trust to pay off its debts.

I would recommend that you check at your state insurance department's consumer complaint releases when it comes to customer conduct. In other words, a firm can profit by not paying claims. But that's not something we'd allow as regulators, and it's not something you should be searching for. You want a company that is simple to work with, reliable, and easy to communicate with. A promise to pay is what insurance is. You are now making a payment. They'll pay you when you need it.

Addressing Racial and Gender Issues

Investopedia: There's a lot of talk these days about the issues life insurance firms confront when it comes to racial and gender discrimination. What can you tell customers about these issues and how regulators like yourself, the National Association of Insurance Commissioners (NAIC), and the life insurance industry as a whole are dealing with them?

Mais: Because you're looking at risk-based pricing, life insurance is said to be a discriminatory sector by nature. However, it is our responsibility as regulators to ensure that it is not discriminatory in any way. You highlighted the NAIC and our Race and Insurance program as regulators. That's critical because we do have a system with built-in historical biases, one that we must ensure is not being perpetuated.

You can't, for example, make a decision based on a person's race. Right? However, this should not imply that you may make that judgment based on a proxy element that would indirectly reveal the individual's race. That's the kind of thing we have to consider in terms of issues these days. It's also crucial.

Where Can I Get Help and Advice?

Investopedia: You said checking with the state insurance department to evaluate a company based on complaint resolution. What about just getting some life insurance guidance or answers to some general questions?

Mais: One of the things I find frustrating is that you can't seem to get over to them that we (regulators) will assist you if something goes wrong. We can assist you if you have a problem with an insurance company. However, we can be really beneficial in the beginning. The people you're speaking with have most likely spent their whole professional lives dealing with insurance firms.

So, if you have any questions while purchasing insurance, ask them. We have folks that enjoy talking to you about insurance, which may not be the people you want to hang out with at a cocktail party. If you need information, though, you come to us because it's so much easier. Our websites provide publications and information. This is where I believe your state insurance departments are particularly powerful, helpful, and capable of accomplishing a great deal for consumers.

Note: The website of the National Association of Insurance Commissioners (NAIC) contains a variety of consumer information as well as connections to the websites of all 56 state and territorial insurance commissioners.