What Old School Insurance Sales Reps Won’t Tell You
August 01, 2014I will admit that I own life insurance…lots of it. If a meteor were to fall from the sky and incinerate me today, my kids would benefit tremendously from a financial standpoint. They’d miss the wisdom (yeah, that’s what we’ll call it…) that I could pass down to them over the next 50+ years but they’d be OK financially.
I say this because I don’t want this to be construed as an anti-insurance blog. Life insurance is very important but it also has limitations that some people who sell it don’t always tell you are limitations. That’s why when I read this article about 10 things life insurance agents won’t say, a part of me thought “I’ve known agents who have freely told people about this” and another part of me thought “I’ve met more who wouldn’t say these things.”
There are things in this article with which I disagree but more with which I agree. Remember that if you read the full article to keep in mind that this is but one perspective. So, with a bit of humor, here are some tip-offs that you might not be working with an old-school insurance salesman:
You may not be working with an old school salesman if he has said that you have too much life insurance! Seriously, how many times would an agent tell you “you should really buy less insurance from me?” The bad news is that you may overpay during your lifetime for insurance and those funds could have been used for other purposes.
The good news is that your heirs won’t complain about receiving a bigger inheritance. I know that I probably have too much insurance on my life but I am not about to cancel any of my policies right now. It’s a cost that I’m willing to bear so that my kids, should I not be around, will have a nice start in life.
You may not be working with an old school insurance salesman if he says that you shouldn’t buy life insurance on your children. Life insurance is typically bought with the intent to replace the income of the purchaser. Unless your child is some kind of pop star, chances are that there isn’t much income to replace. (And if your kid is a pop star, please don’t let them turn out like Justin Bieber or Lindsay Lohan!) Most of the time, a very low cost rider could be purchased to cover the cost of a funeral for a child at a price below a whole life policy premium for the child.
The flip side of this is something I saw in my life. My middle child is a Type 1 diabetic and he may not be insurable in the future. Had I bought a permanent life insurance policy for him (I didn’t) when he was younger, acquiring a policy in the future might not be an important challenge.
You may not be working with an old school salesman if he has said that you’d be better off in the long run with your prior firm’s 401(k) rolling to very low cost mutual funds in an IRA with Vanguard, T Rowe Price, Fidelity, etc rather than in a variable annuity. More and more research is being done to show the importance of low fee structures on future investment performance. Fees are a major drag because of the hurdle that they impose on a portfolio.
Variable annuities can have fees well in excess of 2 ½ – 3% per year. Most of those fees go into insuring the annuity and providing a host of benefits, most of which you’ll never need. Fortunately, there are firms introducing low cost annuities and the cost of some of these policies is coming down. Some are still loaded with high fees but the trend is going in the right direction.
You may not be working with an old school salesman if he has said that your whole life policy won’t end up paying for itself or that the cash value won’t build up as quickly as you might think. For many permanent life insurance policies, the initial years’ premiums usually go to pay commissions, expenses and fees of the policy and precious little goes toward building your cash value. And far too often, even after years of paying the premiums, the promise of a “vanishing premium” is not realized. Permanent life insurance has relatively high embedded costs and it takes years and years for the policy to build momentum and overcome the high initial expense load. In this time of low interest rates, that time and momentum may take even longer to work to your advantage.
There are a lot of other things that you might not hear an insurance agent say, and reading this article can give you a few more that I didn’t share. Keep in mind as you read this, that life insurance is (or should be) an important part of your financial life. Having the right expectations, knowing what you want out of insurance and working with an agent that you trust to operate in your best interests – not simply going for the highest commissionable product sale – are ways to ensure that when you insure, you make solid choices.