By Brearin Land
Learn more about Brearin on NerdWallet’s Ask An Advisor
For a long time, people have been ill-served by unnecessary or overly expensive life insurance policies. Even now, the majority of folks in the market for life insurance are falling into the same old traps as the last generation.
That’s why I put together this list of things your life insurance agent will never tell you.
Commission fees drive up your costs
There is a reason 83% of consumers cite high cost as the reason they don’t purchase more life insurance: Chances are their experience with life insurance has involved being quoted products they don’t need.
You see, when you purchase an insurance product (life insurance, annuity, etc.), the agent is paid on commission. It is in the agent’s best interest to sell you a more expensive product, because it yields a larger commission.
For most people, whole life insurance is a bad idea
There is little to no fiduciary standard in the life insurance industry, so the quotes you receive are often from carriers with whom the agent has an affiliation or for policies such as “whole life” insurance that you simply do not need.
Whole life insurance covers you for the entirety of your life, and is pitched as an investment product because some of your premium goes into a pot that yields a guaranteed rate of return and from which you can borrow as needs arise. The problem is that the premiums are costly, the fees are high, and it’s inadequate as an investment or savings vehicle. My advice: If you are going to insure your family, insure your family. If you are going to invest your money, invest your money.
>> MORE: Explainer: The types of life insurance
You should buy term and invest the difference
Very wealthy people might benefit from whole life insurance because it provides some estate-planning benefits. But for the majority of people, a far better option is a term life insurance policy, which is cheaper and covers the person for a specified period of time, like five, 10, 20 or 30 years, or covers specific areas.
Purchase enough term insurance to allow you to sleep soundly at night. For some that means covering the mortgage, parental income while the kids are in school and/or the children’s college education.
Insuring the things that are most valuable to you is going to cost a lot with whole life insurance, and the investment portion comes watered down with high fees. Buy term and invest the difference.
The ‘cash value’ argument is hogwash
“But what about all that cash value?” This is the argument insurance agents make when they want you to buy a whole life insurance policy. The want you to think that buying the cheaper term life insurance is a bad idea because the premiums seem to disappear once you pay them, whereas with a whole-life policy, that money magically becomes an investment that builds cash value.
Wrong. Even with a whole-life policy a good portion of the premium is going to go “poof” and disappear. In fact, you can go years with a cash-value policy without building up any cash value at all. This is because so much of the initial premium dollars go toward the commission paid to the insurance company and agent.
I once did an insurance analysis for a client whose situation could only be described as a nightmare. Not only had his agent sold him a whole-life policy, but he was sold tiny expensive policies for every member of his family. As a result, nearly 10 years after the policies were purchased, there was almost no cash value to be found in any of them.
Paying annually or quarterly is probably a better deal
Agents will want to break your premium down into low monthly payments. They’ll want you to pay smaller amounts to make it more palatable, even if that leads to higher payments in the long run. They are paid their sales commissions upfront, no matter what payment schedule you choose.
To avoid this, always ask for the annual or quarterly rate and find out what kind of savings you can gain by paying the premium upfront. On average my clients save around 10% by paying more upfront.
You need to watch out for ‘sale and bail’
One of my family members recently had open-heart surgery and asked me to look into the relevant policies to make sure the family was covered in case anything went wrong. We were shocked to find that the life insurance was almost expired.
I set up a meeting with the insurance company. The company sold the policy to my family member almost 20 years to the day before the surgery and failed to give the client notice of when to convert the term policy to whole life — the old “sale and bail.” It goes to show that you cannot leave yourself at the mercy of life insurance companies. They may not give you a call when your policy is set to expire, and that could leave you in the lurch should you face a life-threatening event.
In general, the ability to find the best-rated carrier at the lowest price comes from shopping around. As I’ve said before, being stuck with one insurance company for coverage is a lot like shopping at your local car dealership: It’s never going to tell you that there is a better deal and a better car right up the road.
Brearin Land is a financial planner in Irvine, California, and the CEO of Irvine Wealth Management.
Image via iStock.
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