Most life insurance advisors get paid commissions when you purchase a policy from them. This revenue is largely based on the value of the premium, therefore the more you pay, the more they earn. The product you select can impact the commission they earn, for example whole life insurance tends to have higher premiums and higher commission rates. All things considered, it may appear as though an advisor has reasons to upsell you, but don't fret - here are some things to consider when purchasing your next life insurance policy.
A brokers fiduciary responsibility
Fiduciaries like doctors, accountants, lawyers and insurance brokers 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? Do your background research on the brokerage and broker if you have any cause for concern. Don't be afraid to ask questions or pull back if you are ever unsure of the information or advice being presented to you. Trust is a two way street, but when you find a trustworthy and knowledgeable broker great things can happen.
Watch out for expensive alternatives
An advisor has financial incentives to sell you permanent life insurance products, like universal life insurance, even if temporary term coverage would save you money and fits your needs better. You may not be shown less expensive options - don't be afraid to ask why?
Staying within 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 insurance gives you the most coverage for the fewest dollars.
Avoid becoming overinsured
Too much life insurance may seem better than too little but that isn’t always true. If you overspend on your life insurance policy, 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.
Selecting the right life policy length
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.
Think about how long you think you need the financial security that a life policy offers and select the appropriate term length. If 10 years makes sense for you and your family, then don't hesitate to purchase one. Only you can accurately account for your family's needs.
Don't blindly commit to policy add-ons
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 brokers aren’t bad people, in fact quite the opposite, but they don’t work for free. They may focus on the merits of expensive product options rather than cheaper ones. Since life 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.
Always compare the market
Don't forget to compare life insurance quotes, as it's your best protection in the insurance shopping landscape. By speaking with multiple brokers about the your life insurance needs, you will not only be bale to find the best rate for your needs, but any uneasiness you may have about a potential upsell situation should hopefully be negated.
Poor sales tactics and irregularities will become apparent as you compare the market. Once you've felt like you've gathered enough information and found a broker you trust, you can make a savvy and confident financial decision.