Some of you may remember the life insurance quiz I sent last year. It was designed by LIMRA, and the results weren’t pretty (LIMRA’s results, not mine); only about 30% answered seven or more of the ten questions correctly, while a majority answered five or fewer correctly. Based on those results, there is clearly a need for life insurance education within the general population.
Two recent incidents reminded me of this. In the first, I was introduced to a recently married couple (second marriage for both, he with children, she with none). After eliciting their objectives, I explained to them the different policies available, how each worked and how they could be used to help them accomplish their financial goals. As they were getting ready to leave, he said “Nobody ever explained it like that before.”
Really? Since he owned a policy, I asked him how he came to purchase it. He said he received a cold call from an insurance agent, and since his (first) wife was pregnant with their second child, he thought it was a good time to add to his group term insurance at work. When the agent asked him what his budget for the policy was, he said “as little as possible” and so the agent sold him a 20 year term policy.
The second incident was a referral who said he wanted a “7702 plan,” something he was introduced to at a seminar (read: sales pitch). 7702 refers to the section of the Internal Revenue Code (IRC) that defines life insurance. A policy must meet the parameters set forth in §7702 in order to receive the favorable tax treatment afforded life insurance.
The referral was excited because he was told that these “plans” are not subject to the contribution limits of 401(k) plans and are not subject to the minimum distribution rules of other qualified plans, but still enjoyed tax deferred growth.
In reality, there is no such thing as a 7702 plan per se; it is nothing more than a high cash value life insurance policy. Life insurance companies design this type of policy to approach, but not exceed, the limits delineated in §7702, thus qualifying as life insurance and thereby enjoying the preferential tax treatment accorded it by the IRC. My guess is some enterprising life insurance salesman dreamed up the label, presumably to equate it to the more widely known 401(k) plan, to help him sell more policies. (I wonder how he explained the exam requirement?)
The referral was considerably less excited after I explained all that to him, but why should he have been? All of the benefits that he liked were still present. How can it be that certain benefits attributed to a “fake” vehicle (a 7702 plan) generate excitement, but those exact same benefits provided by a life insurance policy generate apathy? Could it be that Juliet was wrong? At least in this case, the answer appears to be yes.