Life insurance is an important part of your financial foundation. Because of that it’s crucial that you work with a good insurance company, policy and agent. Let’s get to it.
Bad Life Insurance Companies
Life insurance companies are in business to make a profit. There is nothing wrong with that. In fact, most life insurance companies are very reputable. Most are solvent and pay their claims. That makes it very easy; all you have to do is avoid doing business with the small number of life insurance companies that fail to live up to this standard. How?
Research
It’s easy to research the company you are considering doing business with. Find out what the financial strength is and how it’s changed over the last several years. AM Best, Weiss and Standard and Poor’s are companies that rate financial strength and claims paying ability.
Next, go to the NAIC website (National Association of Insurance Commissioners*) to download the insurance company’s financial statements. Look for changes in profitability from year to year and pay attention to the firm’s liquidity.
Your subsequent step is to call the state insurance commissioner. Find out if the insurance company in question is licensed to do business in your state and if it is part of the guarantee fund. That way, if the company doesn’t live up to its obligations you can make a claim. While you’re talking with the insurance commissioner’s office, ask if any complaints have been filed against the firm.
If you take these steps and the company comes up clean, you can be pretty sure that you are dealing with a reputable firm.
Caveat – Conditions change. It’s important to go through this exercise every year or two to make sure your company maintains a good standing.
Bad Life Insurance Policies
The only way you’ll get stuck with a rotten life insurance policy is if you buy one without understanding all the nuances of the death benefits and/or the premiums. Ask the following questions:
a. What has to happen in order for your heirs to collect the death benefits?
b. What happens if you die within the first year or two after you first buy the insurance? Are the death benefits reduced?
c. Can premiums rise? When? How?
d. Do the death benefits change? How? When?
e. Is there any cash value? If so, what rate does it earn? What are the guarantees? What happens if the investment returns are lower than expected? Can premiums rise?
If you ask these questions and get straight answers (which I’ll show you how to do) you’ll avoid getting trapped with a junky policy you don’t want. Let me give you a few examples.
If you look into guaranteed life insurance and ask these questions, you will learn that if you pass away within 2 or 3 years of purchasing the insurance you’ll probably only get the premiums back – not the death benefit.
If you ask these questions about whole life, you will learn that the premiums can rise – and they can rise significantly – if the company earns less than it projects.
If you ask these questions about mortgage life insurance you will discover that the death benefits decline over the years.
None of the above has to be a deal breaker. You might be fine with all the conditions of the insurance policy. I just want to make sure you understand them all.
Read through the policy – it won’t take you all that long. Make sure you understand it fully and don’t be intimidated into going forward until you are completely comfortable with all the conditions. Life insurance is that important.
If you want to make sure you don’t get the short end of the stick, write your questions down and send them in. Finally, insist on getting your answers on company letter head. If the company doesn’t answer your questions, have your attorney review the policy to make sure all the conditions have been disclosed.
Bad Life Insurance Agents
Most people who buy life insurance get the coverage they want with a policy they understand and there really aren’t any snags. That’s because most agents do a good job. But when there are problems, it’s usually because an agent misrepresents the policy.
This is not always done intentionally but the damage is still done regardless of the agent’s motivation.
The best way to dodge that bullet is to use a combination approach. Call the state insurance commissioner to make sure you are dealing with a reputable agent. Find out about his or her regulatory past and whether or not there are any complaints against this person. If the agent has a clean record, ask the questions I referenced above and get your answers in writing. Again, you want the answers to come from the insurance company – not the agent.
Life insurance is a contract and life insurance companies are bound by that contract. Good life insurance companies live up to their side of the deal. Your job is to make sure you deal with solid firms and to understand the terms. Its fine to trust your agent but you can’t do so blindly. The only way to make sure you know what you are getting involved with is to confirm that your understanding of the terms is indeed the way the policy works. You do that by asking good questions and getting straight answers (in writing) from the company. If they refuse to do this, have your attorney review the policy.
What has been your experience with life insurance companies and agents? Have you discovered other ways to protect yourself?
*NAIC
KYNA GREENLEY says
!!URGENT!! Please read before ever even considering this company for yourself and/or your loved ones!! It has been less than 48hrs since my 64 year old mother passed away after losing a very rapid battle with cancer. It was very fast, within 4 months of discovering the cancer it spread to a point were mom was not able to competently make decisions, and with that the ability to call and change things on such things as accounts.. like life insurance premiums that are automatically taken out of a bank account. The trips, the hospital runs, the quick down hill slide that took my mother stopped any hopes of a POA in order to save her accounts because there was simply no time. My mother paid $32 and change for a mere $3,000 policy as extra for her grandchildren for when the time came to ensure there would be something left for them after costs. The nursing home started intercepting her check from the bank, which left those autodraws to overdraw, and in turn miss a whole 2 payments totaling roughly about $65 dollars. It was told to us at the time that if anything happened she would at the very least receive the money she had paid in instead of the $3,000 face value of the policy, nothing was ever stated that a mere $65 or even one missed payment could stop everything. My mother and myself were both put in positions where we could not touch or change anything on the account without it being any fault of hers nor my own. I was met with simply “you could have called and paid the bill.” However, there is a complete list of validated reasons that I could not possibly pay the bill with the first and foremost being that the company WOULD NOT talk to me until today because.. simply put I am not on the policy. They say that they will take payment from anyone… however, I was able to pay.. willing to pay… never notified as beneficiary or kin or even as a healthcare POA that any funds were even over due until notified by the funeral home that Lincoln Heritage refused to uphold their end because of the $65 lapse and the fact they were only notifying my, at the time, non competent mother. My mother never missed a payment for, at the very least, a year of her life she may have had the policy until she was ravaged by this cancer. With all this being said, I was literally shut down by Lincoln Heritage, and I feel that they robbed my mom since the day they showed up on our doorstep. My mother also had another policy through a different company, that she had bought roughly around the same time period but it was a little larger of a policy. The same thing happened with that company, and after explaining the situation they told me, no worries… even if her policy had truly lapsed we would have found someway to help you in any way we could find possible. She said, that is what life insurance is for… to help those we leave behind, and to make the processes easier on those we leave behind so they can focus on grieving rather than trying to figure out how to respect our loved ones wishes with no means to do so. That is what a real life insurance company SHOULD be like, and it is because of them and them alone I will be able to give my mother the peace she wanted after her passing, but thanks to Lincoln Heritage my mother will not be able to leave anything for her grand daughters like she had hoped to after discovering the cancer had returned. Also, I would like to mention the fact that Lincoln Heritage said that they had sent notices to my mother, which never actually came, however today as all of this unfolded I did receive a policy holders update, warning my mother that she may not have enough coverage through them and should buy more… not once did I ever receive a bill, an insufficient funds notice, nothing until today and it was simply to get more money. They actually quite a few times made reference in some form to the fact that if I had just paid the bill… well thanks for the blame on top of everything Lincoln… losing my mother was not enough I suppose… I wish I could leave no stars.. but I am speaking out 2 hopefully save others.
JC Webber III says
At what point can you elect to self-insure? Other than my wife, I have no dependents. Kids are all grown up and doing well. Also, we have north of $1.5m portfolio and no debt. I don’t believe I need life insurance. Concur?
Neal Frankle, CFP ® says
JC – you may not need life insurance. If your passive income is sufficient, you may indeed not. Have you run a financial plan? Have you looked at what would happen to the survivor’s income should one of you pass? That’s the test Pilgrim.
Paul says
As a life agent licensed in the state of California , I can honestly tell you that I agree with this topic. Sometimes, you will get an agent that will misrepresent a policy illustration to a client, therefore what the client thought they were getting is not what they actually end up paying for. Also, there is no one size fits all policy. Policies are designed to the individual based on their needs for the policy, so I agree that both parties should be straight forward with each other, and that there not be any confusion on the client’s side as to what they are paying for.
Neal Frankle, CFP ® says
Paul. Thanks. I agree that this misrepresentation is not rampant – but it is something to watch out for. And I also like your statement that there is no one size fits all. Thanks!
DC @ Young Adult Money says
As someone who is in the market for life insurance, this topic is an important one. While I haven’t set aside time yet to go through the process, I want to avoid getting a bad life insurance policy at all costs.
Neal Frankle, CFP ® says
I appreciate the important you place on this topic. It is crucial – especially if others depend on you. Thanks David.