10 Things Life Insurance Agents Won’t Say: Thing #5

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Posted Oct 11

Thing #5- This whole-life policy won’t pay for itself”  is next in my series of responses to “10 Things Life Insurance Agents Won’t Say” by Daniel Goldstein “Personal Finance Reporter” for MarketWatch.

Historically, this was a legitimate problem.  You’ll notice Mr Goldstein’s lawsuit examples are over ten years old.  There was a time when the industry routinely illustrated long term interest rates of 12%, which of course imploded.    Computing power and competition have dramatically changed the industry.  The key, though, is the assumptions the agent uses in your illustration.

First, there are still powerful disincentives for agents to properly quote and structure policies (unless they are legal fiduciaries, which is rare).  The highest commission rates are paid on premium expense.  I’ve seen as high as 110% of first year premiums.  The excess cash contributions pay as little as zero %.  If cash accumulation and/or paid up coverage are your main goals then it is irresponsible to quote anything other than maximum premiums (that is as much cash as possible with as little premium as possible), regardless of how that affects the commission.

Secondly, the best policies now have no-lapse guarantees, a response to those imploding years when we had to go back to our clients asking for more premium dollars to keep their policies in force, at a time when those premiums were expected to “vanish”.  It is indeed now possible for us to say, “this policy will pay for itself”.

Finally, virtually all states require illustrations to show worst case scenarios.  If the worst case doesn’t work, then you are assuming some risk that things won’t turn out as expected.

So how do you protect yourself?  Insist on comparison among at least three of the top insurers in your state before choosing a policy.  Then ask, “What’s the worst that could happen with this policy?”