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?
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?