Is Life Insurance a Commodity?
As an early disclaimer, I no longer sell life insurance nor do I receive compensation when my clients purchase it. As you will soon learn, I have tried to distance myself from the commodity side of the business over the last couple of years.
I started my professional career in the insurance industry.
My first sales meeting was about “understanding” annuities. I
learned more about life insurance, annuities, and long-term care insurance in
one weekend than I could have possible imagined. More importantly, I
learned that I was perfectly capable - and better prepared - to sell it than
the next guy. I didn't believe that then and I certainly don't believe it
today.
As such, my first experience in the financial services
industry gave me an extremely bad taste about life insurance. I learned -
to my own detriment - that life insurance is a product that is sold and not
bought. For example, I was taught that variable life insurance was a
product that you had to sell over and over again to the same client in order to
keep the client from allowing the policy to lapse (i.e. to prevent the client
from stopping making premium payments). During that time, I lost a lot of
respect for the insurance industry and came to the conclusion that life
insurance was a commodity based business. In other words, find the lowest
cost product and buy it.
Over the last couple of months, I have had the opportunity
to review that premise and have learned that I was wrong. Life insurance
is a knowledge based and personal business that, when done right, requires an
enormous amount of expertise to get the right product in the clients hands at
the best possible price. Let’s take a look at those two examples.
High Net Worth
I had a client that was recently looking to do something “safe”
with several million dollars that was parked in cash. The option is was
to purchase a high yield bond that matured in 5 to 7 years or price out an
insurance policy. I called a bunch of people to try to price out
insurance policies that could be competitive on day one. The problem that
I found with many insurance policies is that they take at least several years
before the cash in the policy can start to produce positive returns.
However, that only applies to 'off the shelf' policies.
Accredited investors can actually purchase a private placement policy
which guarantees positive returns in the first year. Positive enough that
given some strategic thinking about insurance the policy will actually compete
quite well with a high risk bond that is paying 6.5 - 7%.
Again, I spoke with numerous insurance agents. Several of them were simply trying to sell a
commodity. However, a few of them knew
their products extremely well and began tailoring solutions around the needs of
the client rather than pushing a standard solution onto the client. Not only did they know about the product, but
they understood enough about it to make sure that it was the right fit given
the unique situation for our client.
They also helped us think through future planning concerns and
opportunities that may arise as a result of the policy design they came up with.
Pension Maximization
I was also going through a potential pension maximization
strategy with someone recently. What did I learn? I learned that
some insurance companies underwrite you based on your age on the date of the
application while others underwrite you based on when you have been approved
(which could be 6 to 8 weeks later). I also learned that some insurance
companies will actually allow you to buy down your age. In other words,
if you are about to hit your birthday and want to pay lifetime premiums based
on the younger age you can essentially pay the insurance company a year of
premiums and be underwritten at the younger rate.
I also learned that insurance agents can actually negotiate
with carriers based on your underwriting to get you better rates. Additionally, some insurance companies will underwrite
you as a non-smoker if you prove for a year that you can quit smoking while
others will only underwrite you assuming that you have not smoked for a period
of month or years. It is probably
obvious on those lines that carriers view all kinds of peculiarities differently
and thus you may get better pricing from one company than from another.
In other words, if you are looking at the lowest cost on the
face of it, you could actually end up paying more than if you choose to work
with a good life insurance agent who knows all of this PLUS more.
Bottom Line
I work in the advice business and should have recognized
that paying for quality advice typically saves you money. However, I let
my initial impression of insurance impact the way that I view the industry.
Finding a good qualilty life insurance agent will save you time, money and
frustration in the process of trying to obtain the best possible coverage.
Yes, I realize that it is hard to determine who offers
quality but I have learned that you can sense quality in a person just like you
can sense quality in a product. Ask some questions, listen to what they
have to say and more importantly how they say it. Then don't be afraid to
move on to the next person until you find that person that understands their
line of business. I promise you will be rewarded.
Needless to say, my two solutions earlier were solved by the
same person - an extremely professional agent.
