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Most Americans fail life insurance test

By Maryalene LaPonsie on April 24th, 2013

Life insurance remains a mystery to many Americans. Industry group LIMRA gave a life insurance IQ test to 4,000 individuals and discovered that most people are confused by policy basics.

Overall, 70 percent of those taking the survey failed the 10 question test. In addition, more than half of respondents couldn't even get five questions right. Less than one percent were able to get a perfect score.

"With life insurance ownership at an all-time low, it is important that the industry not only overcome consumers' lack of knowledge about life insurance but address the misinformation that is out there confusing them and possibly having a negative impact on their image of the industry," said Jennifer Douglas, LIMRA associate research director for strategic and developmental research., in a written statement.

Life insurance basics elude many consumers

The LIMRA test included six questions on basics and four on the difference between term life and permanent polices such as whole life. Consumers were quizzed on a number of coverage topics including whether life insurance benefits are taxable (they aren't) and which type of policy is best for short-term needs (it's term life).

The questions with the fewest number of respondents answering correctly were on the following topics:

  • Only 18 percent answered correctly and said 'false' when asked if life insurance companies primarily collect medical information to have documentation of pre-existing conditions in the event a claim is filed. In reality, most companies use the medical data to set the life insurance rates for a policy.
  • When asked if a policy holder loses their benefit if a company goes bankrupt, only 25 percent of respondents correctly answered 'false.' In fact, all 50 states, Puerto Rico and the District of Columbia have guaranty associations which pay for claims of companies that go bankrupt. However, each association may have payout limits.
  • Less a third of survey takers, 31 percent, correctly answered 'true' that beneficiaries do not have to pay taxes on a death benefit.
  • That same percentage - 31 percent - were able to correctly identify term life as the type of policy which may see premiums increase if kept indefinitely.

Life insurance policyholders more knowledgeable

Not surprisingly, those who own individual life insurance policies scored higher on the LIMRA IQ test. The group said other factors which seemed to correlate with increased scores include whether an individual had a higher level of education, had a greater amount of assets or viewed life insurance as important. Men and older individuals also seemed to score higher on the test.

To take the test yourself, visit the LIMRA website.

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