If you’re like me( or most people for that matter), it’s not that uncommon for you to say to yourself “if I only knew then what I know now, I would have done things differently”. Well, this is your opportunity to avoid some of most common mistakes people make buying life insurance.
Here’s your chance to be “in the know”, and avoid the 5 most common mistakes people make buying life insurance.
Follow the rules laid out in this article and you will be in better shape than 90% of all life insurance consumers.
1. Lying to Agent about Medical /Driving History
While it may seem like an innocent slip of the mind to not mention a prescription, hospitalization, or most often, a smoking habit, the consequences can be significant.
The first consequence is most likely that you won’t get away with it. The insurance carriers can access your medical records, prescription history, and even your driving record.
So lying to the agent only gets you an bad quote that has almost no chance of becoming an offer.
Being misquoted is just the start of what can go wrong when you are intentionally misleading.
Because different insurance companies have different underwriting rules for each condition (some are willing to make offers where others will not), it’s vital for an independent agent to know the true conditions he or she is working with.
If this sounds like an insurance agent whining about having his time wasted, you are partly right. However, the more serious result is to the applicant seeking coverage.
This is because, if an application is sent to a carrier that is a bad fit based on bad information (once the truth comes out) it may get graded substandard or even turned down.
A turn down or declination from one carrier can hurt a future application with another company that likely, would have accepted you.
The info gathered by the first company will be handed over to the to the Medical Information Bureau (MIB), this information (and maybe a note about a deceptive application) will be available to all insurers for 7 years.
Lastly, even if you get away with lying on your application and the company contests the benefit payment in court on the basis of a deceptive application, your heirs may find themselves in a position of having the benefit reduced to the premium payments you made plus interest.
Ultimately , the risks outweigh the potential gains.
- Misleading an agent will only get you a better quote not a better offer.
- Insurance carriers have access to your medical, prescription and driving history.
- Carriers may context payment of a benefit due to material fraud on the application.
2. Choosing Permanent Insurance for a Temporary Need.
The fight between proponents of Term v. Permanent insurance continues to rage. Unlike most partisans, I think there is a place for both. However, the two kinds of insurance are designed to serve very different situations.
If you are looking to protect against a a declining obligation (like a home mortgage) term insurance is the appropriate solution. It is also a far less costly answer for the term it is needed.
Very often, people looking for for life insurance are “sold” cash value insurance at the cost of insuring a real need. While there are several advantages to permanent insurance that make it a useful and appropriate retirement planning tool, it should never compete for dollars with insurance that covers a need.
When structured to do so, cash value insurance is designed as a living benefit savings tool with the minimal death benefit necessary to keep it legally designated as insurance. This can be a very useful financial tool, but it is never appropriate as true “insurance”.
Most rules have an exception or two, the exception here is Guaranteed Universal Life (GUL) . GUL is hybrid permanent insurance that doesn’t gain cash value and is priced between traditional whole life and term insurance.
When people use permanent insurance for temporary needs, generally they either cut corners on the benefit amount they need to cover true needs or they overextend themselves, and wind up walking away from the big cash value policy.
Life insurance buyers should should look at these two products separate and not in competition with each other. Cover the insurable need first and then consider if cash value life insurance is an useful arrow in your financial toolbox.
- Pure insurance is meant to insure a need.
- Non GUL permanent insurance should be structured for cash value not insurance need.
- Permanent cash value life insurance and term life insurance should not compete with each other for dollars.
3. Relying on Life Insurance Provided Through Employer
Having affordable life insurance through your employer is a great benefit. However, it should thought of as extra coverage , rather than yourmain life insurance. The reason is simply that at some point you will very likely change jobs.
After changing employers, you may not be offered life insurance at the new employer,and not be able to keep the insurance from the previous employer.
Most all group life insurance policies offer a conversion to permanent insurance for the individual leaving the employer. However, the terms are usually so expensive that no one takes up the offer.
So, in the worst case scenario, you leave your job after an economic downturn, are forced to take a position without group life insurance, and then find that your health won’t allow for inexpensive individual underwriting. So, you’d be forced to either pay far more than you had been paying or go without life insurance for your loved ones.
This situation came about often during the Great recession of 2007-2010. It would have have been avoided had folks not looked at their employer sponsored insurance as primary but rather “bonus”.
Many people in their thirties can get term life insurance that will last until retirement for the cost of a large pizza….and not have tobe concerned that the combination of a job change and age will make replacement unavailable.
- Employer sponsored life insurance should be thought of as “extra” and not primary life insurance.
- Employer sponsored life insurance does not transfer affordably to departing individuals.
- Healthy people in their early thirties can get life insurance that last until retirement for the price of a pizza.
4. Not Using an Independent Agent
The use of an independent Agent is an issue that I touch on all the time. While it may be a bit self serving , it is also the unquestionable truth.
Because insurance companies have different risk appetites, the only way to get the most competitive deal is to be able to access to nearly all of them.
If you have a “captive” agent ( an agent who works for one company and has a financial reason to send all business to that company) represents a carrier who is severe in rating a health condition you have, you are in a bad spot.
Whereas, an independent agent/broker would send your application to the company who looks most favorably at your condition, the captive will be forced to send the application to his carrier…and charge you for the service.
While some “captives” have a limited ability to use an outside brokerage, the truth is that the financial imperatives to write business with the “home” carrier often trump this option.
- Because different insurance carriers have different appetites for certain risks, access to more carriers will result in better pricing.
- So called “captive” agents have a financial incentive to send all applications to their home company.
- Only independent brokers have the freedom to offer the best deal at all times.
5. Not Taking the Exam Seriously
This is an easy one, but it gets fouled up more than you’d believe.
The paramedical exam that is a routine part of fully underwritten policies iis very straight forward. That is, blood draw, urine sample, weight from a portable scale and Blood Pressure (occasionally EKG). It is most often done in 20 minutes and you are back to your day.
Blood and urine samples provide a snapshot in time, so you cannot do a lot to improve things in a brief period of time. However, you can do surely hurt them for the “snapshot” taken.
The common culprits are:
- Working Out
- Excessive Alcohol
- Fried Foods
- Drinking Coffee
- Lack of Sleep
While living “clean” will not help much in the short run , avoiding these thing for a couple of days is a good policy.
….And a Bonus Mistake to Avoid
It may seem contradictory that this article spends a lot of time on the subject of avoiding mistakes and saving money, and then says don’t be too cheap.
If you are confused, I understand. Let me explain.
While I’m a firm believer in getting the best deal, the best deal may not always be about the absolute lowest cost. The truth is, defining the best deal depends on what you really need and what you get.
Simply put, policies are not all apples to apples comparisons. As mentioned earlier, life insurance companies view different risks differently. So unless you know your underrating grade with a particular company the pricing is not precise.
There are other considerations that affect pricing that may entice you to pay slightly more than the absolute lowest price. These include:
- Financial Ratings of the Carrier - Does the Moody’s or AM Best rating of the company matter to you? Are you willing to pay more for a higher rating?
- No Medical Exam Option- Some companies offer policies with no exam. Is avoiding needles,urine samples, and possible unknown results worth a few dollars a month?
- Riders/Conversion Options- Is the right to get more insurance without re-qualifying later of value to you? How about the right to convert a term policy to a permanent policy at a later date withno exam?
If these issues are important to you, then the definition of “best deal” changes from simply the least expensive. These are issues that can be addressed by an independent agent with access to multiple carriers.
- The “best deal’ takes more into account than simply cost.
- It may be worth paying slightly more if there is no exam or there is a strong permanent conversion product.
- Only independent brokers have the freedom to offer the best deal at all times.
If you follow the advice laid out here you will be in better shape than nearly everyone else in the life insurance market. For help in deciding exactly what you want with regard to amounts, term, exam, rider & conversion options, you will always have the most options with an independent agent.
James Tobin, CFP is the founder of the Life Insurance Help Desk. In addition to providing expertise on life insurance matters, he teaches ESL and is a news junkie. Mr. Tobin reside with his wife in Norwalk, CT