Term Life Insurance and What to Look Out For: Tips from an Industry Veteran
Ami Maishlish says the wording
in term insurance contracts
has a big impact on your coverage.
Photo by Joe Hall
Ami Maishlish has been involved with the insurance industry since 1974. He is president and CEO of CompuOffice Software Inc., a software firm that creates various software tools for the insurance industry. His company's LifeGuide(R) Professional Software, which is the most advanced independent life insurance software, is used by thousands of the top life insurance professionals across Canada. It promotes consumer rights, disclosure, and full access to information.
"I look at insurance as a commodity, which has qualitative and quantitative aspects and values," says Maishlish. "What insurance really is, is the transfer of risk from the individual to a risk-pool — the insurance company — insuring a large number of individuals. In large part, the premium is the 'risk transfer fee' that the individual pays to the pool for the pool to accept the risk and be obligated for under the risk assumption agreement (the insurance policy). In other words, each person in the pool contributes a little bit of money to the risk pool, so when an insured incident happens, the person who has suffered the loss may be reimbursed and/or compensated in accordance with the risk transfer agreement — the insurance policy contract."
Maishlish's 39 years of experience in the insurance sector on both sides of the border gives him a unique insider's perspective that anyone about to buy insurance would find valuable, so if anyone knows what to look out for when buying term insurance, it would be him. Maishlish does not sell insurance, and his involvement with the insurance sector is primarily that of a researcher and consultant.
"There are two aspects to look at when buying term insurance, one is the qualitative and the other is the quantitative. Some agents, unfortunately, compare term insurance only on the basis of the quantitative," says Maishlish. "In other words, how much will it initially cost per year or per month to insure an X amount of dollars of life insurance? And they leave it at that. So they'll look at two companies and compare the premiums and say, 'Company ABC is up there at number one and company XYZ is down here at number two, so we'll sell ABC.'. The shortfall with that approach is that there are very pronounced qualitative differences among term insurance products."
One example he gives has to do with the conversion of a term policy to a permanent plan. One policy contract may state something like, "This policy is convertible to any permanent plan then designated by the insurance company for conversion," while another policy may state, "This policy is convertible to any permanent plan then offered by the company." Though it doesn't seem like it at first glance, these two sentences entail a potentially significant difference. The first sentence states that there will be one or a few products specifically created for conversion purposes, and those products could be significantly more expensive than normal permanent plan offerings of the same insurance company on the market.
The reason is that the companies assume that a person may be subject to a risk surcharge or uninsurable at the time of conversion, and they factor that risk into their pricing. "Product B may be slightly more expensive than product A in part because product B's conversion privileges are significantly more liberal and it could make thousands of dollars of difference in the event that conversion is needed." says Maishlish.
He also contends that you should not compare term life insurance policies based on the price of the initial premiums alone — even though some agents do this. "I compare that to shopping for a house on the basis of the down payment," says Maishlish. "For example, Company ABC has a slightly lower initial premium, but it's renewal premium will be significantly higher than Company XYZ and the difference could be thousands of dollars. So, it's pay a little more now or pay much more later, particularly if you become uninsurable."
Anyone buying term life insurance also needs to understand the preferred rate classifications and what they really mean, because qualifying for them can save you thousands of dollars in premiums.
"When an insurance company uses the words 'Regular' or 'Standard' that means, 'Better than the average.' When it uses the words 'Preferred' that means 'Much better than the average' and when it uses the words 'Super Preferred,' 'Preferred Plus,' 'Elite' or anything along those lines, they actually mean, 'Exceptionally better than the average,'" says Maishlish.
But qualifying for these preferred or elite rates is not simply a matter of great health. There are a number of factors that go into determining whether you are one of the lucky few.
"Health is just one aspect," says Maishlish. "You may be the healthiest Olympic athlete in the world. However, if your father died of a heart attack and your mother died of breast cancer, you may no longer be exceptional. Likewise, if you enjoy such pleasures as scuba diving, you fly as a private pilot or as a passenger in private planes, or you happen to like to travel to certain areas that are not 'flavour of the day.' Plus, your driving history factors in, particularly how many tickets you have, and even your credit rating is starting to creep in lately."
The industry has certainly changed significantly since Maishlish became involved with it in 1974. He remembers when renewal premiums on term insurance were either equal to or just slightly higher than the initial term life insurance premiums. Now that is not the case. Statistically, people who have qualified as better than average when underwritten tend to drift towards the mean or average of the population. Over the years, and particularly over the last 20 years, the insurance industry has lowered premiums for the initial period subsequent to qualification for term life insurance; however, that reduction in initial period premiums is more than compensated for by increases in renewal premiums.
"A person may start at age 35 with ABC insurance company and pay just under $400.00 a year for a million dollars worth of 10-year term coverage. Then, if he renewed that policy at age 45, he would find himself paying $2,530 a year to renew for the next 10 years," says Maishlish. "However, if he were 45 years old and applied to the same company for the same product as a newly qualified applicant, he could get that same policy for just $930 per year for 10 years."
In addition, he reveals that some agents aren't doing all they could for their clients because they're not putting in the extra effort for them. He cites the example of a 30-year-old female looking for $400,000 in term life insurance at standard rates for a 20-year term. The premium from Transamerica for that product would be $298.00 a year.
"So, based on this example, an agent going to a free internet site to price insurance for his clients or otherwise cheaping out on proper tools will end up quoting the Transamerica rate at $298.00 for $400,000 of coverage and leave it at that. However, if the agent cared a little bit and was properly equipped, he would quickly realize that for the same $298.00 he could submit an application on the same person, with the same insurance company and on the same product for $506,000 in coverage," says Maishlish.
Maishlish will also tell you that agents worth their fee have access to a number of competing insurance providers, not just one or two, so they are truly able to get their clients the best prices. Proper agents also have the proper equipment, such as Maishlish's LifeGuide software, which can aid your broker in finding more coverage for the same price, as the example above demonstrates, and highlight the conversion clauses in the contract.
If Maishlish could leave you with one piece of advice when buying term or other form of life insurance, it would be the following:
"Consult with a broker who is knowledgeable, equipped with the needed market research tools, and is prepared to actually show you that he or she is in fact researching the market for both the quantitative and qualitative aspects of the alternative offerings under consideration. When completing the application form, answer every question fully, truthfully, and with as much detail as possible, and review your insurance portfolio with your broker at least once per year."
Maishlish adds that buying term insurance based on the initial premium alone is a potentially hazardous mistake unless you are certain that the insurance is necessary only for the duration of the initial level premium and level coverage period.