The Seven Deadly Sins of Life Insurance

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The Seven Deadly Sins and the Four Last Things
(Painting by Hieronymus Bosch)

1 - 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.

“Regardless of what assurances you may receive about the new policy, you should NEVER drop your existing policy until the new one is issued. Otherwise, you might end up with no coverage at all, and no ability to obtain any if it turns out that you're currently uninsurable.” FPA member Tim Sobolewski (@TimSobo), President CFP® The Financial Planning Center.

The experts at Santander Investment Services (@InvestSantander) say, “If you've had a cash-value policy for more than three years, you've already gotten the up-front loads out of the way, and your policy will start to accumulate value. The sales commissions alone can equal the first year's premium.”

2 - 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.

“The whole premise around life insurance is about risk. A medical exam exposes the health risk that the insurance company is going to assume. Buying a policy without a medical exam means the insurance company is assuming much more risk.” JRC Insurance Group (@jrcinsurance).

“Typically the terms are shorter for your coverage and you will not be able to receive high face amounts like you might with a traditional policy. Terms are typically more restrictive depending on your age. For example, if you are aged 60, you will not be able to get a 15 year or higher term, as an example.” Andrea Amir (@smartmoneychick), Certified Personal Finance Educator and Certified Housing Counselor.

3 - 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.

“It is not uncommon for insurance companies to deny that a death was accidental and avoid paying out the accidental death benefits. In many cases, whether or not a death was "accidental" comes down to semantics, as insurance policies are written very narrowly.” KRMC LLP (@KRMCLawFirm)

“The beneficiary of your AD&D policy (such as your spouse) collects the money in the case of an accidental death, and you collect if you suffer one of the injuries spelled out in the policy. The amount of coverage you can buy through an employee benefits plan is often limited to a multiple (such as 10 times) of your annual salary. Compare that to life insurance, which pays money to your beneficiary if you die from any cause — such as accident, illness or old age — except for suicide during the first one or two years of the policy.” Barbara Marquand (@barbaramarquand)

4 - 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 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.

According to Alyssa Nixon, BSc, RIB (Ont), “An Independent insurance broker is not exclusive to a single insurance company. They shop the market and get products that line-up with your coverage and price needs. They work for you: the insurance buyer, and place your insurance with the insurance company that offers the best value.”

Chuck Jaffe of MarkWatch says, “The independent agent may have lower-cost competition to bring to the table.”

5 - 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.

“The cost of a life insurance policy isn’t necessarily directly in line with the amount of coverage you’re getting for that premium. That’s because the cost-to-coverage ratio depends on a couple of factors, the biggest of these being the type of policy you are buying.” InsuranceHotline.com (@ihcom)

Michael Gardon (@mngardon) says, “If your bottom-line goal is to find the cheapest insurance possible, you’ll want to say no to any add-on insurance or policy riders. Examples of add-ons include the option to purchase child policies or more insurance at a future date without going through the medical exam process again.”

6 - 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.

“I’ve never seen an act of war or terror exclusion written into any current life policy. This also holds true to accidental death (AD&D) policies,” says Chris Huntley (@jrcinsurance), licensed insurance agent.

“We’re in the business of insuring people, not rejecting them,” says Chris Graham, chief life insurance underwriter for The Hartford. “The fewer exclusions that you can have in a policy, the better off you are from a consumer’s standpoint.”

7 - 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.

Aubrey Cohen (@aubreycohen) says, “A Los Angeles Times analysis of 2009 data found about two-thirds of disputed claims were for material misrepresentations, such as failure to disclose medical history details.”

“Be truthful on the application. You may be able to get away with an omission in the short term, but it may cost your loved ones in the end.” Ryan Andrew, insurance agent in Richmond, Virginia @taainsurance

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12 Comments

  1. […] you should avoid accidental death insurance and be aware of policy exclusions? We’ve put together a list of seven life insurance sins you have to know of before signing a […]

  2. Scott Mulholland 06/27/2008 at 9:52 am

    Great information…too often multiple forms of media push low cost and no medical questions as the solution for everyone. As someone with a little experience in the business, I think it important that the message is a little more cautionary. People need to take the time to explore in depth the decisions they are making about their family’s financial security.

  3. Dave 06/27/2008 at 11:05 am

    Very informative … I know whats its like to have worked with a “captive agent”. Great tips for the person who is interested in purchasing life insurance.

  4. LSM Insurance 06/27/2008 at 11:18 am

    Dave, thanks for the note. There are some very good captive agents. But too often their decisions are clouded by a lack of options and having to meet company quotas. If I can help out with anything please let me know. Regards … Lorne

  5. Carl 06/29/2008 at 2:22 pm

    Great article! This sure covers a lot of the bases! One buys life insurance for comfort and peace of mind. I have had bank insurance and insurance from a captive agent but I can’t agree more that being with an independent agent who ‘educates’ you on insurance gives you greater sense of security that you are making informed decisions!

  6. LSM Insurance 06/30/2008 at 9:20 pm

    Carl, I’m glad you found the article useful. If I can help out in the future please let me know. Regards … Lorne

  7. Rachel 04/17/2009 at 5:22 pm

    great info! helps alot.

  8. LSM Insurance 04/17/2009 at 5:39 pm

    Thanks for the kind words. Regards … Lorne

  9. Jack Babcock 09/03/2009 at 8:50 pm

    Good information. Am going to be very careful what type of policy I choose, and will ask questions rather than be ” SOLD ” a policy by a captive agent.
    Thanks for the heads up !!!!!!!

  10. LSM Insurance 09/04/2009 at 11:46 am

    You’re welcome. Thanks for the kind words and I’m glad you enjoyed the article. Best Regards … Lorne

  11. Peter Hones 02/25/2012 at 1:11 am

    Here’s another perspective on the “Captive Agent” argument. I am a captive agent which sounds aweful but in fact, in my opinion protects the client. We are self policed and honesty and integrity isnt left to chance. We have exceptional products which are constantly changing and improving. Rates are very competetive and have been reduced every year for 15 years while the industry has increased rates. We were the first in Canada to introduce 25, 30 and 35 year term and have unique features and benifits. Our commissions are far less in many instances and this is the crux of the problem. 15 years in the industry has convinced me that given the option of selling inexpensive Term for a $500. commission or Whole Life, Universal Life or the flavor of the day for $5000. Most Life agents will opt for the later. Cant count how many times I’ve heard it said, I work here and sell that BECAUSE IT PAYS WAY MORE! I would only trust a captive agent. Other than that, The Tips are very good.

  12. LSM Insurance 02/25/2012 at 10:15 am

    Thanks for the note. The most important thing is to find this best plan for the client at the best price.

    A broker simply has more options -full access to Term, Permanent, Long Term Care, Critical and Disability Insurance solutions. Agents and Brokers all have the same level of basic regulation. Of corse designations like CFP, CLU etc show an additional commitment to the business and continuing education requiremenst.

    If a broker / agent does a good job for clients and is in it for the long term the commissions take care of themselves.

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