March 20, 2010

How Advisors Really Prepare Term Life Insurance Proposals

If you have a short-term need, term life insurance provides the most protection for the fewest dollars. You may think you can buy on price. That's generally true. Advisors say they'll survey the market to pick the right proposal for you. Some do and some don't. Here's what really happens.

Run Computer Illustrations
At The Sony Store, you can't buy Samsung, Panasonic or Nakamichi. Some advisors only sell products from one company. They give you get no choice. You rarely get the lowest price either. Since the advisors are captive and need commissions, the insurer gets sales without being especially competitive.

Independent advisors often conduct market surveys using comparison tools. You can do this online yourself. Beware of biases. Comparisons may not consider all products available since an advisor is only contracted with selected companies. Do you think they'll show products they don't sell?

Some advisors do show all products and then explain their recommendations. This prevents another advisor from showing you a cheaper option.

Coke or Pepsi? Like most of us, advisors have personal biases. Some insurers provide better support. Some pay more compensation. Some give better ongoing service. Some are better at paying claims. Some are better-known (e.g. more like GM than Subaru). Some are more financially stable. Some host better conventions.

Since there are so many insurance companies, it isn't practical for your advisor to deal with all of them. It's not advisable either. Because forms and procedures differ among companies, mistakes can easily be made. Companies also disappear, but you're protected against that.

Risk Classes
Insurers generally charge different rates based in expected claims
  • males pay more than females
  • smokers pay more than nonsmokers
Now there are further distinctions by health: regular (higher), preferred (lower) and elite (lowest). Since your advisor can't which class you'll be in, you'll probably see comparisons for the regular class. If you're found to be healthier, you'll get the pleasant surprise of a lower price. That's better than thinking you'll qualify for elite and having to pay more. 

If your health is even worse than regular or if you take part in dangerous activities like race car driving, you'll face a temporary or permanent surcharge for that extra risk.

Since companies assess risks differently, your advisor might ask you to apply to several insurers. 

After The Term
Circumstances change. You may find you that you need permanent insurance. Most insurers anticipate this and let you convert your temporary protection to pricier permanent coverage up to a maximum age (say 65). You don't even require proof of good health. You simply pay the higher premiums for the new plan based on your current age.

Your advisor may anticipate your changing needs and select a term plan from a company with good permanent plans. Your term coverage may cost a bit more in exchange for these valuable options.

The Proposal
Your advisor may take the time to prepare a simple easy-to-follow summary of the different products. Others skip that step and show you computer-produced illustrations for selected companies and let you pick. Others select a company for you and only prepare proposals for that one. These advisors may bring printouts for different coverage amounts to help with your budgeting.

Despite the simplicity of term life insurance, you'll see differences in the advisor approaches. Since products and prices are similar, you'll generally get a reasonable solution. The deviations hurt most with a complex product like universal life.

Podcast 59 (4:33)

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PS Paying premiums monthly is great for budgeting but usually costs more than paying annually.

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