We would like to think of life insurance agents as trusted advisers whose only aim is to get us the right coverage.
But the nature of life insurance -– and the job of life insurance agents -– makes them something close to our natural enemy.
One easy way to prevent being taken advantage of is to find an independent agent. “Independent agents save you time and money,” said Chris Huntley, co-founder of JRCInsuranceGroup.com. “Rather than completing applications and medical exams with 15 of the best life insurance companies to see which one will approve you at the best rating, make one call to a qualified independent agent, who can place you with the most appropriate carrier based on your unique personal and medical history.”
In a lot of ways, what hurts us as consumers of life insurance actually benefits life insurance agents. Here are nine examples of what I'm talking about in a quick Life Insurance 101 article!
1. Their Income Is 100% Commission
Any time you're buying from a person compensated 100 percent by commission, your radar needs to be up and in perfect working order. Being on commission doesn't make a person evil. But it may change his or her perspective, as well as the type and degree of products that you will be introduced to.
If the agent is entirely on commission, he or she will then have a vested personal interest in selling you products that will result in you paying the highest premium possible and hence yielding the highest commission. It is also why when you fill out the form for an online life insurance quote engine you will frequently get calls from multiple agents within minutes of hitting submit. Each one is trying to reach you first so that they can get the sale.
2. You May Very Well Be Over-Insured
Whenever an agent evaluates how much life insurance you need to have, he will almost inevitably start with numbers that are larger than anything you'd ever imagine that you would need.
For example, it's not unlikely that the agent will suggest that you need to have life insurance equal to 30 times your annual income. If you are earning $100,000 per year, he may suggest — without flinching — that you will be adequately insured by a $3 million dollar insurance policy. After all, you will need to provide income for your family for the next 20 years, college educations for your children, the payoff of your mortgage and a comfortable retirement for your spouse.
He knows that it is unlikely that you will take a life insurance policy that large, but it's an excellent starting point — for him. After all, if he suggests $3 million but walks out of your house with an application for a $1 million policy, he wins. That's because he knew going in the door that you probably only wanted a policy for a couple hundred thousand dollars.
And you'd probably be right. After all, if you have other investments and your spouse is also well-employed, you will only need a fraction of the life insurance coverage that the agent will suggest. Most often, life insurance is only needed to settle final arrangements, medical bills, outstanding debts and maybe a few years of living expenses. Providing for your loved ones to live in luxury for the rest of their lives is an expensive you can't afford, nor need.
3. Whole Life Isn't a Good Investment — Or Even Good Insurance
Life insurance agents like to sell whole life insurance as the best of both worlds–- an investment program with life insurance coverage. In truth, it doesn't do either particularly well. The insurance benefit will be limited because the premiums are high. And since so much of the premium goes to pay for investment fees and the life insurance coverage, there is relatively little left over for investment within the plan.
4. The Cash Value of Whole Life Won't Benefit You for Years
Life insurance agents like to hawk the virtues of the cash value build-up in a whole life insurance policy. This is another myth. As a rule, it will take at least five years before you will have a cash value that is equivalent to the amount of money you paid in premiums into the policy. And maybe not even then.
5. “Buy Term and Invest the Difference” Really Is a Better Strategy
There is probably no slogan confronted by life insurance agents that is more irritating to them than this one. And that's because the slogan is true.
Since term insurance is so much less expensive than whole life, you can buy a lot more of it -– in fact a more reasonable amount for your needs. And the investment performance of mutual funds -– particularly index funds –- dramatically outperforms that of any insurance related investment vehicle.
Even if the combination of term life insurance and investment in a mutual fund is no less expensive than a whole life insurance premium, the money you will accumulate in the mutual fund — and the speed at which you will do it — make it a far superior investment to a whole life insurance policy. And you'll have a whole lot more life insurance coverage along the way.
6. We Don't Know About the Value of Long-term Care Insurance
From a consumer standpoint, there are two fundamental problems with long-term care insurance coverage:
- It's very expensive.
- It's not certain that you will ever need it.
Since people are living longer than ever, making a provision for long-term care has become a hot topic. Insurance agents know this, and they're exploiting the fear.
Emotions aside, most people don't need long-term care. And even if they do, it's often for a short period just before death. If there are other assets available, particularly retirement assets or a home with substantial equity, long-term care insurance with my be unnecessary.
And if it isn't ever needed, you will have spent tens of thousands of dollars over many decades funding an insurance policy that was never necessary. This is an important consideration when there are so many other priorities in your household budget.
Long-term care insurance is relatively new coverage, and it's not at all certain that it will survive the test of time. Some insurance companies have withdrawn long-term care insurance coverage due to the inability to predict future medical costs or the longevity of their clients.
7. Your Kids Don't Really Need Life Insurance
Life insurance agents love to sell whole or universal life insurance policies to parents of young children, stressing the advantages of the investment provisions of the policies. Those provisions, they argue, will help parents to provide funds for their children's college educations. But nowhere is the advice of “by term and invest the difference” more relevant.
You should have only enough insurance coverage on your children to pay for final expenses and uncovered medical costs. In most cases, a $50,000 term life insurance policy will get that job done with money to spare. There is no need to replace lost wages with a ridiculously large policy.
And as we've already discussed, insurance related investment vehicles are underperforming investments. You'll be far better off investing money in a mutual fund for your children.
8. There Is No FDIC Equivalent Back-Stopping Insurance Companies
This is a very relevant question – but seldom asked — since life insurance agents like to position themselves as investment advisers. The investments that they sell are almost always exclusively insurance products. However, there is no equivalent to the Federal Deposit Insurance Corp. that will back up the life insurance company in the event of investment failure.
There are arrangements within each state for companies to collectively backup a failed insurance company, but there is no apparatus in place to deal with a systemic failure such as the financial meltdown that hit the banks and financial companies a few years ago.
While this has obvious implications for the life insurance coverage that you pay for and expect to have, it becomes much more significant when you have a lot of money sitting in insurer-sponsored investments.
More Tips for Dealing With Life Insurance Agents
If you apply for life insurance, keep these four tips in mind from Jeff Root, a life insurance agent and founder of Rootfin.com. And again, they're not tips your agent will be likely to recommend.
- If you're not satisfied, ask for reconsideration. Life insurance underwriters will always offer the best possible rate class as permitted by their underwriting guidelines; however, if you're not happy with the life insurance company's offer, your agent can submit a “reconsideration request” and ask the underwriter for a better offer. Most agents don't even mention this as an alternative because of the extra work involved in drafting a letter convincing the underwriter why they should qualify for a better health classification.
- Ask for tentative offers. Consumers can get “tentative offers” from life insurance companies before applying for life insurance. Independent life insurance agents send your risk anonymously to various underwriting desks. Underwriters typically reply within 48 hours with a health classification in what we call a “tentative offer”. You can attach this tentative offer to the life insurance application, and the company you apply with must give you this rate unless you withheld any information from them. This is a must for people with health issues applying for life insurance.
- Shopping won't necessarily get you a better rate. Going from website to website won't result in finding better rates. However, each company looks at your health differently. It's your agent's job to fit your unique health situation into the underwriting guidelines of each company and then see who provides the best rates.
- Most applicants won't get the preferred best rate. Less than 5 percent of people who apply for life insurance can qualify for “preferred best.” Yet it's the No. 1 health classification quoted on websites.