Ten things your agent won’t tell you about life insurance

May 12, 2021

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Most of us have experienced unsolicited phone calls from telemarketing insurance agents. They are as welcome as having bitter gourd or neem leaves in our salad bowl. These agents need to straighten up their act, as the financial services industry will get better regulated sooner than later. According to Mr. S.K. a respected West Asia (W.A.) based banker, “Some life insurance products have given surprises to their buyers.” People do not like unfortunate surprises, especially in products that claim to provide security. To be forewarned is to be forearmed. These ten things need to be looked into.

1. “Life insurance illustrations are not worth the paper.”

Prospective life insurance buyers are given illustrations, which shows the insurance policy’s future benefits. Industry experts state, “a life insurance illustration which does not show the guaranteed final return should be torn.”

Mr. K.M., an Office Manager at a legal firm, in W.A., was sold a U.S. Dollar cash value life insurance policy (i.e. savings linked) based on a assumed yield of 10%, with premiums payable for 7 years. When the stated 7 years were complete he was told that, as the actual return is lower than assumed, he would have to pay many more years, to get the full benefits. 

To avoid surprises, insist on an illustration at the guaranteed rate of return with a specimen copy of the life insurance contract, before paying the first premium. Buy it only if you understand the life insurance contractual benefits and the charges involved.

2. “Children’s insurance (for meeting educational costs) is a bad bargain.”

Life insurance premium for children is cheap as their mortality rates are minimal, so most of the premium on “cash value” insurance such as endowment, whole life goes into a savings account.

Still, Mr. J.N.P. a retired actuary based in Zurich, Switzerland, states insuring children is not good. Children’s insurance is a terrible investment. Most of the first year’s premiums go to pay the insurance companies’ initial costs. After that, expenses consume upto 10% of your investments. What is left often earns only as much like a bank fixed deposit.

Be smart; ensure the family’s breadwinner. Then set up a recurring guaranteed bank deposit (PPF) for your children’s education. In the future most likely this will come ahead of a children’s endowment life insurance policy. Parents who are interested in shares may consider efficient index mutual funds.

3 “Active investors should buy term insurance.”

Insure to insure and save to save. Buy adequate life insurance for productive family members. Ask for demonstrably superior value term insurance (A 35-year-old man can buy $300,000 in 10 years term life cover for about $600 a year; the same $600 would buy only $40,000 in whole life cover)

Mr. M.D. an investment banker at an American financial services company, in W.A, bought term insurance for himself and his wife. He needs the life insurance Company, only for life insurance cover.

Businesspersons, who needs to protect their money from bankruptcy, persons who have limited interest or time in investing, men older than mid forty’s, may have a genuine need for cash value life insurance policies, like endowment or whole life.

 4. “Combination insurance products are expensive nonsense.”

Life insurance, linked with all types of riders (extras), may seem a good idea. Check out the accidental – death rider. For about $1 or $2 per U.S. Dollar 1000 of coverage, the insurance company promises to pay your beneficiaries double the face amount of a policy, if you die in an accident. Speculating on your mode of death, especially accidental death, which is relatively rare, is not good. If you must try your luck, buy Duty Free, Finest surprise lottery ticket instead. 

Break combination products into its parts, see whether you really need it. If you need them, see if you can get it at a cheaper rate from some other company. Discriminating customers should avoid combination products.

5. “Our charges are a trade secret.”

According to Mr. V.C. a investment consultant, in W.A, “typical offshore long term investment plans, hide charges under uncommon words like capital units, which are not fully explained during sales presentation.”

Unit linked life insurance can have a variety of charges disguised as; capital or initial units, bid-offer spread, unit allocation, administration charge, annual fund management charge, surrender or exit charges, etc. These charges will reduce your net returns. So buyers beware, the projected returns are imaginary; losing your principal is a theoretical possibility.

Mr. V.G. a chartered accountant and manager of a global information company, in W. A, received only six % net return, in six years on his unit-linked insurance plan. These unit-linked plans are sold based on “bikini illustration”, which reveals a rosy projection while concealing the full extent of the charges. Do you need a wealth warning with such illustrations?

6. “Our support is a joke.”

Deal only with locally registered insurance Companies. 

Mr. S.C. a marketing manager for a trading company in W.A. had to wait for 6 months and repeated international phone calls to receive an account statement of his life insurance policy bought from an offshore company not registered locally.

7. “Tell the truth while filling the proposal form.”

Insurance is based on “utmost good faith”. If you hide information about health matters (presence of COVID 19, diabetes, blood pressure etc., or reduce your body weight) while filling up the life insurance proposal form, you may benefit in the short term due to the insurance premium at normal rates.

However, your beneficiary’s claim to your death benefit, will be rejected if the company gets evidence that material facts were hidden while proposing for the life insurance policy. Will you be there to sort out the problem with the company?

8. “You have a free-look period.”

Life insurance companies protect their policyholder’s interest by giving them a free-look period, (typically 4 weeks) from the date the policy document is physically delivered to the policyholder.

In the free-look period, compare your policy document to the specimen policy given at the time of the sale. If there is any difference to the arrangements made, you should insist on changing it in writing to the insurance company. If the changes are not done to confirm the specimen policy, the customer has a right to surrender the insurance policy and get a full refund of the premiums paid.

A customer had paid a guaranteed single premium of US Dollar 5000. -For a life insurance policy, when the policy document was delivered it was wrongly worded, as a life insurance policy with yearly payments of US DOLLAR 5000. – For 20 years. So read your insurance document, when you receive it.

9. “Credit ratings are important.”

The rating agencies Moody’s AND Standard & Poor’s are the first line of defence against changes in claim settlement ability of insurance companies.

To protect your financial interests write to your insurance company, every year, asking for the unabridged, uneditorialised, rating report. Getting the monetary benefits from a bankrupt insurance company is time-consuming.

10. “I am your best friend, I love my professional fees, not necessarily in the same order.”

Treat your life insurance agent, like any other professional. If you get emotional, you cannot be objective about the agent’s recommendation.

Most agents are on success-based professional fees. So it is no surprise that they recommend products which get them maximum professional fees. Agents typically earn 70% of first-year premiums as fees over the tenure of the investment linked life insurance policies. 

Ethical, need-based life insurance selling, is the world’s toughest concept selling job. Don’t grudge the professional agent the professional fees received for professional advice. Ensure they do the right job!

When making any purchase decision, do your homework. These ten pointsare some basic guidelines, to help you choose wisely. Remember Joan Rivers, words – “ Trust no one with your money, because no one is smarter than you when it comes to your money. Well, they may be smarter – but you care more!”

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