Is life insurance a scam?

Unfortunately, this is a common question and concern. It stems in part from the nature of life insurance, or any insurance, really — in essence, you pay for coverage in case you need it. But if you don’t need it, you don’t necessarily get anything for your monthly premiums.

Or at least it seems that way. After all, if you don’t get in a car accident, you don’t get anything in exchange for your auto insurance premiums. If you don’t get sick, you don’t necessarily receive anything of value in exchange for your health care premiums. And with life insurance, if you don’t die, you (and your loved ones) won’t get anything back for the money you spent during the years of your coverage.

But thinking like that misses the point. You pay for insurance and receive the peace of mind that comes from being insured.

You might not have a car accident, but what if you did? You would be covered by your auto insurance. With health insurance, you have coverage in place in case you get sick, but you also have it so you can go to the doctor before you get sick, and identify any potential problems through a regular exam.

And with life insurance, you’re paying for the comfort that comes with knowing that, if you were to die, your loved ones would receive a meaningful amount of money that can be used for just about anything — from rent or mortgage payments to groceries and clothes to burial expenses. For most people, this coverage is in place to help pay for things in case you’re not around to pay for them yourself. (And hey, if you outlive your policy, good news: You’re still alive.)

So no: Life insurance is not a scam. But to understand more fully why it’s not a scam — why, in fact, it’s a key part of financial protection for you and your family — keep reading.

In this article:

What is life insurance?

Let’s step back. Life insurance is a type of contract between an individual and an insurer. In exchange for regular premium payments, the insurer agrees to pay a lump sum of money to the policy’s designated beneficiary (or beneficiaries) upon the policyholder’s death.

Life insurance provides financial protection for the policyholder’s dependents in the event of that person’s death.

Who needs life insurance?

If you have someone who depends on you to pay for things, life insurance is a good idea. Think of your partner or spouse or your children. Or potentially your aging parents, or a sibling who depends on you for support. Even a charitable organization that means a lot to you could be listed as a beneficiary on a policy.

Another consideration is if you have debt, from something like a student loan or a mortgage. Who would pay those off if you weren’t around? A life insurance policy can help you make sure you don’t leave behind a legacy of unpaid debt.

You might wonder, then, what types of life insurance are available. In general, there are two common types of life insurance: Term life insurance and permanent life insurance, including whole life insurance.

Term life insurance provides coverage for a set period of time, typically anywhere from 10 to 30 years. Many people choose a term length that covers the duration of their mortgage, the years until they expect their children to become financially independent, or the remaining time they expect to be in the workforce. (Or a combination of those three.)

The idea is that these are the years when you’re earning money and covering someone’s expenses. If something were to happen to you during those years, your loved ones would suffer financial hardship. After those years have ended, your family would still suffer from your loss, but would be capable of taking care of themselves financially.

Because it’s intended to cover the years when you’re relatively young and healthy — and therefore less likely to die — term life insurance is often the most affordable option.

Permanent life insurance, including whole life insurance, is just that: Permanent. This type of coverage lasts until you die. Because of that, you will likely pay a higher monthly premium for the same amount of coverage. (Permanent life insurance policies may also accrue cash value, though using the cash might come with tax implications.)

No matter what type of policy you choose, so long as you keep up with the payments, you will have coverage you can count on until the policy expires.

What can a life insurance death benefit be used for?

Most life insurance policies pay a death benefit if you die while covered. There is basically no limit on how your loved ones can spend this money, which usually arrives as a tax-free lump sum. Here are some common examples.

Everyday expenses

Clothes. Food. Rent or mortgage. These are essentials, and they don’t pay for themselves.

Living without you would be difficult enough; living without your salary would only add stress to your surviving loved ones. The death benefit provided by your policy can be used to make life less hard.

Final expenses

Many Americans don’t realize just how expensive a funeral or cremation ceremony can be. According to data from the National Funeral Directors Association, the average funeral may cost upwards of $7,000. Life insurance can be used to cover these final expenses, such as funeral and burial costs.

Paying off debts

If you have a balance left on your mortgage loan when you die that your family cannot continue to cover, your lender can take control of your house. They will usually sell the home at the current market rate to recoup some of the losses caused by your debt, leaving your family to find a new place to live.

If you have credit card debts or a car loan, your family might inherit these financial obligations, too. Again, imagine the challenges your family would face in paying these off without you (and your salary) to help. A life insurance policy would help provide the financial protection those loved ones would need to surmount those challenges.

Life insurance ratings

So now that you understand what life insurance is and what it can be used for, you might have concerns that, when it’s time for your life insurance policy to pay out, your insurer might not have the money to do so.

That’s understandable — after all, buying a policy worth potentially millions of dollars, that can last for decades or even the rest of your life, is a big commitment. You want to make sure you commit to the right partner.

When selecting an insurance provider, it’s essential to consider each company’s financial ratings. These ratings are important because they provide insight into an insurer’s financial stability and reliability. Ratings are assigned by independent rating agencies, which evaluate insurance companies based on several factors, such as financial strength, claims-paying ability, and overall stability.

Some of the best-known ratings agencies for life insurance companies include AM Best, Standard & Poor’s, Moody’s, and Fitch Ratings. These agencies assign letter grades to indicate the financial strength and stability of the insurance company.

A life insurance company’s financial ratings are important because they provide consumers with a way to evaluate the insurer’s financial strength and reliability before purchasing a policy. By choosing an insurer with a high rating, consumers can have greater confidence the company can pay out claims when needed and their beneficiaries will receive the full policy benefits. A company with a higher rating is less likely to experience financial hardship in the future, which may nullify the payout your beneficiaries are entitled to.

Haven Life is a subsidiary of MassMutual, an insurer with over 170 years of history, and high ratings from the major agencies (including a top rating, A++, from A.M. Best). The term life insurance policies offered through Haven Life are issued by MassMutual or its subsidiary C.M. Life Insurance Company.

The advantage of Haven Life is that you enjoy the benefits of a modern insurance agency (such as a completely online application process, and rates determined by tech-forward actuarial models) with the backing of a time-tested industry giant.

Life insurance and regulation

You still might wonder about scams and fraud. Which brings us to one final reason why life insurance is not a scam: Regulation.

Both state and federal laws regulate the life insurance industry. Each state has its own insurance department that oversees insurance companies operating within its borders. And the National Association of Insurance Commissioners (NAIC) is a national organization that provides guidance and support to state insurance departments.

At the federal level, the insurance industry is regulated by several agencies, including the Federal Reserve System and the Securities and Exchange Commission (SEC). The Federal Reserve System regulates insurance companies that are part of bank holding companies, while the SEC regulates insurance companies that issue variable life insurance or other securities products.

In addition to state and federal regulations, the life insurance industry is subject to industry-specific standards and guidelines, such as those established by the NAIC. These standards cover various topics, including financial reporting, product design, consumer protection, and market conduct.

Overall, the regulatory framework for the life insurance industry is designed to protect consumers and ensure insurance companies are financially stable and can pay claims. Life insurance regulations also reduce the number of life insurance scams.

Final thoughts on life insurance

It’s worth noting that every life insurance policy has some sort of contestability period — that is, a period of time (often a year or two) when your death will automatically trigger some form of investigation. This is to prevent fraud by the insured — for example, hiding a terminal illness when purchasing a policy. So long as everything is on the up-and-up, this might delay payment, but it shouldn’t prevent it.

In general, if you are truthful on your life insurance application (particularly about your health history), and you pay your monthly premiums, your life insurance policy will pay out when you die.

And while you have plenty of options when the time comes to get a policy, Haven Life offers some of the most affordable rates you can find, not to mention a fast and convenient online application process. Get started with a free online life insurance quote today.

Our editorial policy

Haven Life is a customer-centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.

Our editorial policy

Haven Life is a customer centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.

Our content is created for educational purposes only. Haven Life does not endorse the companies, products, services or strategies discussed here, but we hope they can make your life a little less hard if they are a fit for your situation.

Haven Life is not authorized to give tax, legal or investment advice. This material is not intended to provide, and should not be relied on for tax, legal, or investment advice. Individuals are encouraged to seed advice from their own tax or legal counsel.

Our disclosures

Haven Term is a Term Life Insurance Policy (DTC and ICC17DTC in certain states, including NC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001 and offered exclusively through Haven Life Insurance Agency, LLC. In NY, Haven Term is DTC-NY 1017. In CA, Haven Term is DTC-CA 042017. Haven Term Simplified is a Simplified Issue Term Life Insurance Policy (ICC19PCM-SI 0819 in certain states, including NC) issued by the C.M. Life Insurance Company, Enfield, CT 06082. Policy and rider form numbers and features may vary by state and may not be available in all states. Our Agency license number in California is OK71922 and in Arkansas 100139527.

MassMutual is rated by A.M. Best Company as A++ (Superior; Top category of 15). The rating is as of Aril 1, 2020 and is subject to change. MassMutual has received different ratings from other rating agencies.

Haven Life Plus (Plus) is the marketing name for the Plus rider, which is included as part of the Haven Term policy and offers access to additional services and benefits at no cost or at a discount. The rider is not available in every state and is subject to change at any time. Neither Haven Life nor MassMutual are responsible for the provision of the benefits and services made accessible under the Plus Rider, which are provided by third party vendors (partners). For more information about Haven Life Plus, please visit: https://havenlife.com/plus

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