While I was in college, I spent a year and a half as an intern with a large life insurance company. But rather than getting coffee and filing paperwork for the insurance agents in the office, I was one of them.
I learned all about different types of life insurance and sold policies to several friends, family members, and strangers. I also learned firsthand that many consumers don’t trust insurance agents, even if they haven’t known or worked with them. In fact, only 18% of salespeople are trusted and respected by consumers, according to a report by the Harvard Business Review.
Most importantly, I learned that some life insurance agents do try to oversell to pad their pockets. To help you avoid overpaying or being taken advantage of, here are the top five questions you should ask an insurance agent before buying a policy.
1. Are you an independent or captive agent?
There are two types of insurance agents, and choosing the wrong one could cost you. Here’s a short definition of each kind:
- Independent agent: This kind of agent doesn’t work for a specific insurance company. Instead, an independent agent acts as a broker and works with several insurance companies.
- Captive agent: This type of agent works for one insurance company and doesn’t sell policies from other companies.
Working with independent agents is better in almost every scenario because they have the ability to help you shop around and compare policies from several top insurance companies.
A captive agent, on the other hand, can offer you policies only from one insurer. So you won’t know if it’s the cheapest policy available or even the best for your specific situation, because you won’t be offered alternatives with which to compare it.
“Some companies are more lenient than others on certain health issues, or travels outside the U.S., or smoking cigars,” said Chris Huntley, the president of Huntley Wealth Insurance Services. “In each case, you want your agent to be able to take you to the company that will be the most lenient when it comes to underwriting, as that will lead to better rates.”
2. How do you make money?
Life insurance agents generally work entirely on commission, which means they’re incentivized to upsell policies. The commission can vary by company, but it’s based usually on a percentage of the annual premium.
For example, the company I worked for paid me 50% of the annual premium for each policy I sold upfront, and then a smaller percentage — say, 1% to 4% — over the next 10 years.
So the bigger the policy, the more money the agent makes. It’s no surprise that market research firm LIMRA found that permanent life insurance, which includes whole and universal life policies, makes up 73% of the life insurance market.
Permanent life insurance costs much more than term life insurance, and it can be a good product only in rare circumstances.
If a life insurance agent dodges this question about making money or you don’t have a good feeling about the answer, it might be time to move on to the next agent.
3. How do you determine my needs?
The main goal when buying life insurance is to get as much coverage as you need for as little money as possible. But determining that need can be tricky. Some personal finance experts recommend that you get enough to cover 10 to 20 times your income — and some life insurance agents might agree with that.
However, by using a rule of thumb instead of considering your actual needs, you might end up getting more or less coverage than your loved ones require.
“Determining the right amount of coverage can be tricky since needs vary so much for buying life insurance,” said Huntley. “You might buy life insurance for business protection, estate planning reasons, or to cover final expenses. Every case is unique, and you should speak to a qualified, independent agent about your needs.”
Find an agent using the needs-based approach. Then start the process by adding all the things your loved ones might need to get covered, such as:
- Burial and other final expenses
- Income replacement (you decide the number of years)
- Savings goals, including college and retirement savings
Next, subtract the amount you currently have in liquid assets, including nonretirement investments, savings, and other assets you can turn into cash easily without penalties. These are assets your family can use to cover some of their costs when you pass away.
Go through this process with the insurance agent so that you can verify the accuracy of the final number.
4. What extras do I get with the policy?
Many life insurance companies offer riders, which are extra benefits on policies. There are several types of life insurance riders — depending on the insurer, some riders are free while others cost extra. Examples include:
- Conversion rider: This allows you to convert a term policy to a permanent policy without having to prove that you still are insurable. It’s a good rider to have in case you develop a health condition that could make it hard to get coverage again once your current policy’s term is up.
- Guaranteed insurability rider: This rider allows you to buy additional coverage at predetermined intervals without having to prove your insurability.
- Waiver of premium rider: If you become permanently disabled, the insurance company will keep your policy in force without requiring further premium payments.
- Accelerated death benefit rider: If you’re diagnosed with a terminal illness and have less than 12 to 24 months left to live, this rider allows you to access a portion of your policy’s death benefit to pay for immediate medical costs.
If the policy offered to you doesn’t come with any of these or other riders even for an additional charge, it might be worth shopping around a little more until you find an insurer that offers what you need.
5. Can you explain this to me?
Life insurance policies can be extraordinarily complex, so you shouldn’t be embarrassed if you’re having trouble understanding something. Part of the insurance agent’s job is to give you a basic understanding of life insurance, how it works, the different types of policies, and which is best for you. A good agent should be more than happy to help you understand a confusing concept or tricky term.
For example, if an agent is pushing whole life insurance as an alternative investment option, don’t be afraid to ask how it compares to other top investing options. (Spoiler alert: The rate of return on a whole life policy is much lower.)
If the agent is trying to rush you into filling out an application or promises to explain things better at a later time, then recognize the red flags and consider going to another agent.
There are plenty of good life insurance agents
When I sold life insurance, I prided myself on my determination to put my clients first. I took as much time as they needed to talk about what they were getting themselves into before buying. I wanted them to feel like they could make an educated decision but didn’t press them when they decided a policy didn’t fit in with their budget or if weren’t ready to buy.
I wasn’t the only one doing that, though. I met several insurance agents who took a similar approach. There are good insurance agents out there, and taking the time to find one is more than worth it. They’ll not only help you score lower rates but also educate you so that you can feel confident in your decision to buy coverage.
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