Most insurance advisors get paid commissions when you buy. This revenue is largely based on premiums. The more you pay, the more they earn. Permanent life insurance tends to have higher premiums and higher commission rates. Combined, your advisor has reasons to upsell you. The results may be better for your advisor than for you.
Fiduciaries like doctors, accountants and lawyers have a legal responsibility to put your best interests ahead of their own. In contrast, the financial world is filled with commissioned salespeople. They may have good intentions, but are they required to put your interests first?
An advisor has financial incentives to sell you permanent life insurance even if temporary term coverage would save you money and fits your needs better. You may not be shown less expensive options.
All your budget
Be wary when an advisor asks about your budget for life insurance. Let’s say that’s $100/month. Your advisor likely earns more if you spend that on permanent life insurance. The drawback is that you may not be able to get as much life insurance as you need today. Term life gives you the most coverage for the fewest dollars.
More than enough
Too much insurance may seem better than too little but that isn’t always true. If you overspend on life insurance, you have less for protection against the risks of disability, a critical illness or long term care. You may be better off diversifying to protect against more risks.
How long do you need life insurance? If an advisor nudges you from Term 10 to Term 20 or Term 30:
- Your premiums (and your advisor’s commissions) go up.
- You may have coverage for longer than you need.
An add-on may look inexpensive to you but have high margins for the seller. For life insurance, you may be offered:
- Accidental death benefit: a larger death benefit for the unlikely situation of you dying in an accident. Consider buying more regular life insurance instead.
- Waiver of premium on disability: pays your premiums if you’re unable to work due to illness or injury. Beware of long waiting periods and restrictions or limits on your benefits. Consider getting regular disability insurance instead.
- Return of premiums on death: gives back the premiums you paid without interest. Consider buying more life insurance instead.
- Guaranteed insurability option: lets you add more life insurance at specific times regardless of your health. Besides paying for this option, you’re also charged for the increases based on your (older) age when you exercise it. You may benefit from adding more coverage now and locking in rates based on your younger age today.
Insurance advisors aren’t necessarily bad but they don’t work for free. They may focus on learning the merits of expensive options rather than cheap ones. Since insurance companies like making money too, they’ll invest more in selling and marketing what’s more profitable for them.
As Upton Sinclair said: “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”
Insurance advisors don’t get rewarded for saving you money.
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