If you’re like many consumers, you see life insurance as a big mystery. You know you probably need it but aren’t exactly sure how it works—other than that it pays money to your next of kin when you die. In fact, there’s much more to life insurance than a death benefit. And it’s not all that mysterious, provided you know the right people to talk to.
We found one of those people. Andrew Mais, insurance commissioner of the State of Connecticut. Commissioner Mais has plenty of experience demystifying complicated subjects. He’s a graduate of Yale University, previous member of Deloitte’s Center for Financial Services, former director of the New York State Insurance Department (NYSID), research team leader, author of white papers on insurance issues, and provider of expertise to the Government Accountability Office (GAO).
Mais agreed to an extensive discussion about life insurance, how it works, what consumers need to know to protect their families and themselves, and where to go for information and help. Our edited conversation follows.
Investopedia: Let’s start by taking a look at the big picture. From your perspective, what is insurance? What does it accomplish for society?
Mais: To me, insurance is a way for society to be able to get things done. And I mean that in the very broadest sense. You go back to the Babylonians and the first record of insurance policies, which were for ships going out to sea. Insurance was a means to facilitate trade so one loss doesn't wipe everybody out. If you look at it as a way for people to take risks, it’s the engine of capitalism.
Within families, insurance is also a way to preserve wealth. You can go out to work, insure your house, your car, yourself. If something happens, your family's not ruined. If you get sick, you can be treated and continue to provide for your family.
If we move it across generations, insurance is a way to transfer wealth. That is a message that I think we need to get across more. If you have an insurance policy that you’ve built up with current dollars and, God forbid, you die, the proceeds go to your family so they can maintain their lifestyle. It’s a way of “paying it forward,” if you will.
Insurance minimizes the risk that people or businesses are going to be left at the mercy of whatever happens. It allows for a certain confidence that, no matter what happens, everything will be taken care of. That's the essence of insurance.
The Role of Risk
Investopedia: Can you expand a bit on the role of risk when it comes to life insurance? Obviously, insurance spreads out the risk. How does that work?
Mais: Life insurance spreads out risk in a couple of areas. It spreads it out over large numbers of people, over the participants. To a certain extent it also spreads out the risk over time. That’s because your needs change. As a kid in college, for example, I’m sure I wasn’t thinking about life insurance. I may have been thinking about Happy Hour, but certainly not about life insurance.
Once I had my own child and bought my own house, I realized the need for life insurance. Now that my daughter is grown, those needs have changed again. The purpose of that life insurance has changed. Consequently, I’ve bought life insurance over the years and part of that goes into the pool to help the person behind me, whether it's the next generation or my neighbor. So, when you talk about risk, with life insurance you are spreading that risk out across people and, I would submit, across generations, across time.
Understanding Permanent (Whole) and Term Insurance
Mais: Sure. Think of term insurance as a function of time. Term life insurance is for a specified number of years, such as 10 or 20 years. It could be the length of your mortgage, for instance, or until your kids are out of college. You’ve got that coverage for that time and you're going to be paying for that time. There’s no accumulation of value. It's simply straight insurance. Most term insurance is renewable at the end of the term. Term life insurance can be a great alternative because it is less expensive for the most part than permanent life, which accumulates cash value.
With permanent or whole life you will be paying into that, I'm going to generalize a little bit here, your entire life. There are such things as a single premium plan or a plan that eventually pays for itself but has cash value. It builds up that cash value during your lifetime.
Typical Provisions, Riders, and Clauses
Investopedia: Looking at a typical life insurance policy, what does it cover? What doesn’t it cover? How much flexibility do you have in putting together a policy? Finally, what might cause the company to cancel your policy?
Mais: At the most basic level, life insurance will pay a death benefit, whether you die by accident or by sickness. Some companies are adding a disability rider to a whole life plan. If you become disabled, the entire amount or a portion of the amount that you're covered for the whole life plan could go toward your care. You've got more flexibility with whole life, period. And the premiums are usually straight across. In terms of what life insurance won’t cover, that is state specific, but in Connecticut there’s a two-year contestability period during which suicide is not covered. After that suicide is covered.
In terms of cancellation, not paying your premium is probably going to be the single most important thing for most people throughout the policy. During the contestability period is where companies have concerns about fraud. For instance, people will say they don't smoke when they do. Now, if the insurance company finds that out—and it's relatively easy to find out these days—that could be a reason to cancel the policy. Also, policies tend to have certain exclusions. If I go skydiving, for instance, it may not cover me for that. You should always go back to the policy, make sure you know what's covered.
Markers of a Good Life Insurance Company
Investopedia: What do you see as important markers of a good insurance company? This is from the viewpoint of the consumer. Just basically what should people be looking for?
Mais: There are two things that I would argue are important: solvency and customer conduct. There are really two questions you want to make sure of, A, that the insurer has the ability to pay your claim, and, B, that the insurer has the willingness to pay your claim.
With solvency there are various ratings that you can look at to see how strong a company is, to see the financial strength of that company, and to be comfortable that it will be able to pay a claim. You could be buying a life insurance policy today that, if you’re lucky, won’t be paid for another 60 or 70 years. You need to have a company that has good management, that's shown a track record that you are comfortable will pay off its debt.
With customer conduct, I would say you also look at your state insurance department consumer complaint releases. I mean, a company can make money by not paying claims. But that is certainly not what we as regulators would tolerate and not what you should be looking for. You want a company that's easy to do business with, that's straightforward, that you can depend on. Insurance is a promise to pay. You are paying now. They will pay when you need them.
Addressing Challenges of Race, Gender, and COVID-19
Investopedia: There's so much being discussed now about some of the challenges life insurance companies face regarding, race and gender discrimination and of course COVID-19. What can you say to consumers about these challenges and how they are being handled by regulators such as yourself, the National Association of Insurance Commissioners (NAIC), and the life insurance industry as a whole?
Mais: Life insurance says it's an industry that is, by its nature, discriminatory because you're looking at risk-based pricing. However, it is our duty as regulators to make sure it is not unfairly discriminatory. And as regulators, you mentioned the NAIC and our Race and Insurance initiative. That's really important because we do have a system with built-in historical biases, a system that we have to make sure is not being perpetuated.
You can't make a decision, for instance, based on the race of an individual. Right? But that should also mean that you can't make that decision based on a proxy factor that would indirectly tell you the race of the individual. That's the kind of thing that we have to look at these days in terms of challenges. And it's important.
For life insurance, probably the single biggest COVID-19 concern has to do with testing and how accurate it is who was tested and should the results be used in a life insurance application.
I decided that in Connecticut, as of now, insurance companies are not allowed to ask COVID-19 questions on the life insurance application.
Now, if you are experiencing symptoms, if you're in the hospital, that's going to be part of your medical record that they will be able to see. But just because you got tested, just because you may have thought there was a reason to get tested, they can't ask you that. They can't ask if you if you have or have had COVID-19. And until we know the long-term effects and until we know the effects across the board of COVID-19, I think it's only fair to consumers to restrain the insurance industry that way.
Where to Go for Advice and Help
Investopedia: You've talked about evaluating a company based on complaint resolution by checking with the state insurance department. What about just getting advice or answers to general questions when it comes to life insurance?
Mais: One of the things that I find a little frustrating that you just can't get across to people is this: We (regulators) will help you if something happens. You have a problem with an insurance company, we’re here to help. But we can be so helpful upfront. The people you're talking to have probably spent most of their lives working in this industry, dealing with insurance companies.
So, as you go to buy insurance, if you have questions, ask. We've got people who love to talk to you about insurance, which—if you're at a cocktail party—we may not be the people you want to hang out with. But if you're looking for info, you come to us because it's so much easier. We've got publications and info on our websites. This is where I think your state insurance departments are just so strong, so helpful and can do so much for consumers.