July 18, 2022 14 min to read
Insurance Brokers Won’t Tell You
Category : DISCOVERY
1. That agents won’t say
Before we torpedo that already capsizing assertion, let’s first dispose of the myth that you even “need” life insurance. Life insurance isn’t a need. It is a luxury. Food is a need. Shelter is a need. Love is a need. Life insurance is a luxury. People buy it because they want to. Unless they have to, to satisfy a business and/or loan contract or divorce decree. Life insurance needs analyses attempt to calculate your human economic value to your beneficiaries. Chances are that they wouldn’t need to replace 100% of that economic value. But don’t think the average life insurance policy in force today comes anywhere close, as you’ll see later.
As a holistic retirement planner, I stress test all my plans asking and illustrating, “What could go wrong?”:
- What if the market crashes again. And again?
- What if rates of return aren’t as good as we expect?
- What if inflation rears its head?
- What if one or both of you needs long term care?
- What if one of you dies?
- What if you lose your job?
- What if you don’t wait to age 70 to turn on Social Security?
The death of a high income spouse can be devastating. And in these days of dual income households, the death of either spouse can derail the most carefully crafted plan. Which is where life insurance comes in. Leading to why life insurance agents won’t say “You actually have too much life insurance”.
I fail to see how the author could possibly think his position is beneficial to his readers. I call it financial porn.
1.1. You actually have too much life insurance
Americans bought more than $1.6 trillion in individual life insurance coverage in 2013, according to the American Council of Life Insurers, a trade group. Overall, there was $11.4 trillion in individual life insurance policies in effect in 2013, up from $9.6 trillion in 2003, according to the ACLI’s annual fact book.
But of the 75 million American families who have a life insurance policy or related product, many may be buying the wrong kind. For one thing, about two-thirds of policies are “whole life” or “endowment” policies, which combine a “death benefit” (which pays money to your survivors if you die) with some kind of savings or investment mechanism. Whole-life coverage is usually more expensive than term life, which provides only a death benefit, and some financial advisers view whole life as an inefficient way to build savings.
Consumers have also been buying larger policies, even though fewer people are buying them. The average face value of the nearly 10 million new individual life policies purchased in 2013 was $165,000, up 29% from a decade earlier—a faster increase than the rise in average salaries over the same period, according to the Social Security Administration. Still, the total number of policies sold in 2013 was down 28% from a decade ago, when more than 13.8 million individual life insurance policies were sold.
The insurance industry argues that, if anything, most Americans have too little insurance. What’s the right amount of life insurance to have? There’s no cookie-cutter answer. Financial advisers say it’s generally a good idea for family breadwinners to have a policy big enough to pay off their mortgage. After that, it’s a question of whether your survivors will need to replace your lost income for help in paying for daily living expenses, and for longer-term goals like college and retirement.
1.2. We’d rather sell you investments than insurance
More recently, the industry and regulators have adopted new “suitability” standards for these products, which theoretically require agents to make sure they match buyers’ needs. But buyers should always ask their agent about the assumptions behind an investment’s advertised return.
Also, when selecting an insurance agent, its best to find out how long the agent has worked in a state: The longer the track record in one state, the better, as it means there’s a longer paper trail you can follow.
1.3. Your child doesn’t really need life insurance
Insurers often persuade parents to take out whole-life insurance on their children, selling the policies as savings vehicles to help pay for college or get them launched into adulthood.
But James Hunt, a retired life insurance actuary and former insurance commissioner of Vermont who now works with the Consumer Federation of America, says he tries to talk parents out of that move. Hunt says using the money to add to the premium of an adult who is the family’s chief breadwinner is a better investment of those pennies, especially as the adult gets older and into their peak earning years. Setting up a tax-deferred savings account or an investment fund will probably yield a better return as a savings vehicle for the child.
Also worth noting: The basic purpose of life insurance is to make up for the loss of a breadwinner’s income, so the likelihood that a family will have a financial need for the death benefit they would get in the event of the death of a child is relatively low.
1.4. This variable annuity is like a really expensive mutual fund
One of the industry’s most profitable and popular products is the variable annuity, which combines a death benefit, mutual-fund investing and the option for a guaranteed income in retirement. About $138 billion in variable annuities were purchased in 2014, almost two-thirds of total annuities sold, according to the Insured Retirement Institute, a trade group.
Insurers have long pitched variable annuities as a retirement-savings vehicle for people who max out their 401(k)s or IRAs. Like a lot of other insurance-investment hybrids, they can reap substantial commissions for the agents who sell them. But many consumers and financial advisers have complained about their complexity—and their costs.
Because of all the different components that go into an annuity—the income component, the investments, the death benefit, and of course, those commissions—their annual expense ratios can reach as high as 3% of the invested assets, far more than most people would pay in a traditional retirement plan or mutual fund. “The variable annuity producers still haven’t squeezed out enough of the costs,” says Hunt, the former insurance commissioner.
Investors who withdraw money earlier than they had planned often face high surrender charges–withdrawals from an annuity during the first 10 years of the contract can be assessed fees of as high as 8%, according to the National Association of Insurance Commissioners. And some savers who have begun living off the investments from variable annuities have complained their tax bills on the withdrawals were higher than they expected.
Some insurers sell “no-load” annuities, which have lower annual expenses, but often offer fewer features. But the bottom line, says Daily, is that most variable annuities are simply too complex for consumers (and even some advisers) to understand. “If you can’t understand how the product works, don’t buy it,” Daily says.
1.5. This whole-life policy won’t pay for itself…
One of the chief selling points of a whole-life policy is that the interest generated by its cash account can be used to pay the premium. But some consumers have found out that the “vanishing premium” promise didn’t come true—leaving them on the hook for unexpected payments to keep the policy from expiring.
The issue stemmed from the steady decline in interest rates in recent decades, says Hunt; the decline in yields hurt the ability of insurance companies to use cash balances to pay premiums. “All of a sudden, policyholders were getting phone calls from agents saying they needed to make more payments,” he says.
1.6. and you’ll have to wait years to build cash value
With a whole-life policy, you’re paying more than you would for a death benefit alone so you can build up savings. You can borrow from the “cash value,” and eventually cash it in.
But in practice, a customer can own a whole-life policy for years without building any “cash value.” That’s because most of the premiums in the first couple of years go to cover the agent’s commission, underwriting and marketing expenses, says Daily. It’s like paying interest only on a home loan and not paying down the principal.
Daily and Hunt say it’s often better for buyers to pay extra during the first couple of years so the policy builds value immediately.
1.7. Our regulators can be toothless
Unlike banks and big investment firms, which are largely regulated at the federal level, insurance companies are largely regulated by states. The NAIC, a federation of state commissioners, helps them coordinate regulations, but has no enforcement authority of its own.
For consumers, this situation is a mixed bag: State insurance commissioners can slap agents with a loss of a license, for example, but they don’t have as much power to affect the practices of nationwide companies. And agents who do get slapped sometimes just set up shop across state lines under a new name or new business title.
The ACLI, which represents large nationwide life insurance firms, says it’s committed to working within the state regulatory system. But it has also advocated for some insurers to be given the option of federal regulation, which they say could be preferable to the patchwork of state regulators. Consumer advocates say that wouldn’t necessarily be better for consumers in states where regulators are already tough.
1.8. Someone could fake your death and collect on your benefits
Some tips to protect yourself: Never give an insurance agent the power of attorney; review your insurance contracts and policies regularly to ensure that the beneficiary is who you intended it to be; and beware of phone calls, emails, or official-looking correspondence claiming your life insurance policy has been canceled due to nonpayment and a credit card payment is needed to reactivate it.
1.9. If you die, we’ll pay your boss
It sounds like the premise of a detective novel: Your boss takes out an insurance policy that pays your company if you die. But many companies do it, in part to cash in on related tax breaks, and in part to collect the death benefits if an employee dies.
The NAIC says that employees need to be notified when an employer takes a policy out on them, and that the employee shouldn’t be penalized if they refuse to participate.
1. 10. Our long-term care coverage isn’t so great (for you or us)
For some older people, it may make more sense to plan to pay long-term care bills with a reverse mortgage, or with savings. Still, “It is extremely difficult for people to do the kinds of calculations needed to determine if [long-term-care insurance] is a good deal for them,” said Jeffrey Brown, a professor of finance at the University of Illinois who has studied such policies. “When people face a highly complex decision, don’t have the information and cognitive skills needed to do the analysis, and nobody is providing them with education about it, then it may be that the path of least resistance is to do nothing.”
2. Need to know some hidden truths
Sometimes, buying insurance can feel like you are being ripped-off your hard earned money. The reason is because you spend years paying premiums so that you can be protected when an unfortunate event occurs. But when you eventually file a claim, you are given the run around and treated like a beggar.
2.1. It is all about the commission
Forget whatever your insurance agent tells you, he/she is in it for the commission and would always put his own interest above yours. In the first year that you buy an insurance product and pay premium, an insurance agent stands to earn up to 20-60% of the value and would continue to receive commission for every year that you continue to pay premiums.
Therefore, the next time you ask an insurance agent to recommend the best insurance policy for you, keep in mind that he would recommend the one with the best commission rates and not necessarily the best product for you. Don’t be mad, he has to feed his family too.
2.2. Insurance premiums hardly ever drop
To persuade you to buy, an insurance agent would probably tell you some crap about the possibility of getting your premiums reduced in subsequent years. Well, that’s mostly sales talk because your premium is likely to continue to increase and may never drop. Sorry, but he has to make sales.
2.3. Bad credit score equals high premiums
Well, have you ever thought of how your credit rating can hinder your chances of getting a credit facility? Well, you probably haven’t because you have no intentions of borrowing money anytime soon.
Very well then but are you also aware that your credit history is taken into consideration when setting your premium; and a poor credit history would mean that you have to pay higher premiums? You are not aware? You see, your insurance agent should have told you but he didn’t want anything that would discourage you from buying the policy so, he chooses to be silent about it.
2.4. We hate to pay claims
Insurance agents come to you with sweet mouths persuading you to buy insurance products and preaching to you about the dangers of not having insurance coverage. What they refuse to tell you however, is that insurance companies do not like to pay claims. The major way an insurance company makes profits is by paying fewer claims so, when you file a claim, they would try to look for holes and gaps in your claims in order to avoid payouts and reduce the number of payouts in a year.
2.5. I have no control over claims
Don’t take guarantees and assurance from an insurance agent. When an insurance agent tells you stuffs like “I can guarantee that you would be paid if you ever have to file a claim” Please, take that statement with a pinch of salt; why?
The reason is because it is not in his place to decide on issues related to claim settlements. Majority of insurance agents don’t even work directly with the insurance companies. Their role is like that of a marketer so, they sell and earn commission. Every other information they give you apart from information regarding the policy you are buying, may not be entirely reliable.
2.6. I have a sales target to meet up with
Insurance agents come to you bearing good tidings of insurance and trying to sell you additional products which are ‘beneficial for you’ but what they won’t tell you is that selling you those additional products or add-ons as they would call it, is their own way of trying to meet up with their sales target and earn more commission so it’s mostly never about you.
2.7. You can negotiate
Insurance agents often do not inform their customers that there is room for negotiation. There is actually room for negotiation for reduction in premium rates but that would mean a reduction in the agent’s commission so you just might not get to hear about it. But when next you want to buy an insurance product, try to negotiate; premium rates are not set in stone.
2.8. I don’t understand all the terms and conditions of this coverage
Have you ever bought an insurance coverage, thinking that you know all the terms, conditions and clauses and then when it is time to file claims, you find out that you were not aware of some terms of the contract? Well, insurance agents are mostly salesmen and sometimes, they have limited information about the products they sell.
It is now left for you, the buyer, to do your due diligence, ask questions and conduct investigations before you buy an insurance policy because relying solely on your insurance agent’s information may not get you all the information that you need.
2.9. Umbrella coverage would save you some money
Another thing that your insurance agent might not tell you is that lumping all your insurance policies together would save you a lot of money. If you have to insure your house, your car, your business, your life and all other assets separately, it would cost you way more than buying an umbrella policy which would cover all of your assets.
2.10. This is how your premium would be decided
Insurance agents might not tell you all the factors that are considered in deciding your premiums such as your age, your medical history, your job, credit history, job stability and a couple of hundreds of other variables.