The Seven Deadly Sins of Life Insurance
- Be wary when replacing your insurance – Many unscrupulous brokers encourage applicants to replace existing life insurance policies, simply to pad their wallets. Replacement often does make sense, as term costs have decreased across the board in recent years. But be careful when cancelling an existing whole life or universal life policy. Many such policies are locked in at favourable rates and carry heavy surrender charges.
- Be careful when selecting a no medical life insurance plans – These policies carry higher premiums and lower face amounts than traditional life insurance policies. No medical life insurance plans can broken down into 2 categories. Simplified issue coverage - no medical tests and generally three to twelve health questions and Guaranteed issue coverage - no medical tests and no health questions. Guaranteed issue plans have death benefits which are limited to a return of premium plus interest in the first two policy years. Non-medical life insurance can be a very good fit in some instances but these policies are designed for applicants with significant health issues.
- Avoid accidental death insurance – Many Canadian life insurance companies heavily market accidental death insurance to unsuspecting consumers. Accidental death insurance is extremely profitable to insurance companies, as under 3% of all life insurance claims are paid out because of death by accident. Accidental death insurance can sometimes even cost more than an equivalent term policy.
- Watch out for captive agents – A captive agent is only allowed to sell his/her own company’s products. Insurance companies employing captive agents generally charge higher premiums than do insurance carriers employing independent brokers. Captive agents cannot shop for the best value for you, and in some instances may not offer the product best suited to your needs.
- The cheapest isn’t always the best – When analyzing your life insurance premiums remember that the overall cost is more important than the initial premium. Many insurance companies try to lure clients with low initial premiums. Term insurance policies, which offer low initial premiums that increase as the insured ages, are appropriate if used for temporary insurance needs. The problem is many brokers employ a one-size-fits-all philosophy. They don’t take enough time to assess why you are looking for insurance or how long you’ll need it.
- Be aware of policy exclusions – All life insurance contracts have a two-year suicide exclusion. But many contracts also carry certain travel or recreational activity exclusions if the applicant was engaged in these activities at the time of application. Each insurance company has its own underwriting guidelines, so the best defence is to pick a broker who works with multiple carriers and is up to date on the different underwriting protocols.
- Avoid any misrepresentations on your application – All life insurance policies have an incontestability period, generally of two years. During this period, insurance companies can contest a claim for misrepresentating or not disclosing a material fact.