Let's dispel those life insurance myths

I grant you that life insurance can be complicated, even mystifying. Some current and potential policy owners do their homework and get up to speed at least part of the way.

Others do not. Unfortunately, in too many cases the latter group draws uninformed conclusions about a myriad of life-insurance topics. The more common errors are often widely held. Let's refer to these as life insurance myths, and let's dispel some now.

Myth: You can haggle your way to a better deal.

Reality: There is no such thing in life insurance.

The life-insurance agent represents the insurer and offers what he or she is authorized by the insurer to sell. The provisions of the insurance policy and the price charged (the premium) are set by the insurance company. The agent has no authority to change the price. So, while one can dicker for cars, houses and flea-market items, there is no use in trying to haggle with life insurance.

In fact, life insurance companies have to file their policies and premiums with state regulators. And, for applicants who are similar in terms of age, sex and medical condition, the premium has to be the same. The insurer cannot discriminate in favor of one or another applicant, even if the insurer does a boatload of business with that applicant's agent.

Myth: Insurance is cheaper if bought online.

Reality: There is no Internet discount.

Again, because of the prohibition against discrimination, the policies and premiums offered online are the same as a local agent can offer if licensed with the same insurer. The only difference is that without the agent you do not get expert advice and ongoing, personalized service.

So, while the buyer may be eager to go online to avoid a local agent in order to avoid paying a commission as part of the premium, in fact the commission is already built into the online premium. The insurer simply does not pay commission for an online sale but instead increases its own profits. In the meantime, the buyer has foregone the expertise and guidance of the local agent in favor of an online formula calculation of his or her insurance needs.

The same flaw can be found in the purchase of life insurance from an 800 number. The stranger on the other end does not know the buyer and may have had training for all of two weeks before answering the phone. Maybe more. But the point is that the buyer does not know if the voice really knows his stuff or is just winging it. And the two will probably never speak to each other again.

Myth: You're borrowing your "own money" when borrowing against the cash value of life insurance.

Reality: The cash value belongs to the insurer, is held for only your benefit, and is used as part of the reserve to keep your future policy premiums moderate and to pay the future death benefit. While the borrowed cash is outstanding, the insurer cannot earn sufficient investment return to reach the targeted amount for the death benefit. That's why you're charged interest on the loan; the insurer has to make up for that loss of investment return.

Such life-insurance myths abound. Asking questions of well-trained, seasoned agents will keep you well-informed and less susceptible to misunderstandings.