Most life insurance carriers do a pretty good job with the core protection they are suppose to provide with your typical insurance coverage and we aim to focus on the best rated and most reputable companies. That being said, you need to always be your own advocate or at least have a trusted 3rd party life insurance agent like us to make sure you are making decisions in your best interest and not the carriers. An example of this has been seen over the last few years in terms of term life benefit payout options. Let’s look at what the situation was and how to protect yourself.

Life insurance carriers are generally pretty reputable but every now and then, some VP throws out an idea at the companies which probably sounds great in terms of keeping term life rates lower and increasing profitability but wreaks havoc on the carrier’s reputation to the public. This was such a case. Essentially, a few life insurance carrier’s started to offer what was occasionally the default payout option of keeping the life insurance benefit in an account housed at the insurance carrier. The verbiage regarding this payout option was confusing at best and it looked like you have physically had the life insurance benefit transferred to your ownership. It was crafted to look like a checking account that you could write checks from and ostensibly, you could write checks…even the full amount of the life benefit to yourself at anytime. The problem is that the marketing of this option partially made it sound you already had ownership of this money which is not entirely the case. Why does this really matter if you could write a check from that account at any time? A little thing called the time value of money comes into play.

Let’s say term life insurance benefits were triggered for $500K with you as the beneficiary. $500K is a pretty standard amount of coverage on the market to look at. You receive notification that looks like the money is now yours but it’s sitting in the carrier’s account. They pitch the ease with which you can write checks against this account even up to the full amount. Here’s the catch. The carrier is retaining the interest and/or investment from this money…not you. See, if the $500K is just earning simple interest at 4%, that’s $20K annually you are losing out. The carrier is getting this $20K. In fact, they’re probably getting much more since the funds are usually pooled with all the other co-opted benefit payouts and/or general life insurance premium reserves and it could be earning 8 to 10% on average. That’s now $40-$50K that you’re losing every year you keep it in that account. Obviously, this is not in your interest and you need to transfer those funds to your checking/savings/investment account as soon as possible.

As your life insurance agent, we’ll make sure to work with you including the payout option to look out for your interest. This takes into account plan selection, enrollment expertise, long term plan maintenance, and of course payout options. You can always come to us at the time of term life insurance benefit payout to make sure you have the right option. Don’t give extra money to the life insurance companies. They’re going to be alright.