Why You Need A Consumer Advocate
Insurance products are built by the most astute mathematical minds, actuaries. These products are built with an expectation of providing profit to the insurance company and ultimately to a group of shareholders. Insurance companies manufacture a series of products they make available to contracted insurance brokers.
Insurance products move from the insurance company to the consumer through a distribution system and finally a salesperson. A salesperson who is contracted with a number of companies is called a broker. A broker is not an employee with an insurance company, they are independent contractors.
The industry is built on commission based incentive; a salesperson does not earn income if they do not create a sale. Any agency operating in the middle of that distribution line is also commission based, and often commission is further enhanced by volume of sales. The existence of agencies relies on their ability to support and facilitate the sales process and only the sales process.
Therein lies the rub. A client is left between a product designed to ensure profitability to the insurance company, and a broker paid only on sales commission. The product that pays the most commission to the broker is likely the most profitable for the insurance company. That’s how commission and incentives are designed… pay more commission for the product you want to sell (understand the opposite is also true, the insurance company can remove commission from product they don’t want the brokers to promote). So if it’s best for the two entities making money, is it the best product choice for the party paying the premiums? You can see the conflict. Sometimes yes, the outcome can be a win, win, win… but the odds are not in your favour. You need an advocate that can evaluate your need, the product, and the suitability of that product in your very specific situation.
Here are some of the reasons to consider an advocate:
- It would be a false assumption to believe that there is a great deal of oversight in the life insurance distribution system, focused on suitability or review of product recommendation from a broker to a client.
- Your other trusted advisors may not have your best interests at heart. Your investment advisor makes commission. They may not have an insurance licence and so cannot offer you those product choices. Any amount of money you divert from investments affects their commission. Investment advisors who are not licensed would be hard pressed to give you that correct analysis. Where would they gain the in-depth product knowledge to properly advise you in any insurance matter?
- Investment advisors often introduce an estate planner to address any insurance matter. Both are sharing a single commission. Investments under management are their primary consideration. Life Insurance is a specialty and your advice should come from an expert specifically dedicated to that specialty.
- Advisors wrapped in a bank banner are often viewed by clients through rose coloured glasses; the bank connection can lend a false sense of security. Clients often award bank advisors an unearned and often misplaced level of competence in the life insurance arena.
- Financial planners are likely compensated in some way by investment product purchases, and then you are back to looking at a conflict of interest. There are a few “fee only” based Financial Planners that I highly recommend for objective information.
- Everything you are being told and sold must be in writing, itemized very specifically and covering the critical points. Who will help you identify those critical points? ‘Critical’ points are often in conflict with ‘selling’ points.
- Brokers will often use a supplemental illustration with wording that covers the basic matters while leaving out the details that are most significant to future performance. This additional illustration is for the insured to sign when completing the application, to comply with industry requirements. One might ask why? I assure you, it isn’t for the benefit of the client. The importance of that particular page will not become apparent for years out when a client (or the family) may need to find proof of what they were told and sold.
- Commission is only paid if there is a sale and that commission is paid up front. Very little income is generated for servicing existing Life Insurance policies. So who is really looking after your policy as the years go by? If you are in a “review” is there an ulterior motive? There is no paycheque in simply researching old policies and looking for opportunities for the client… unless it leads to a new sale… so is your advisor looking for the gold nuggets in your old policy?
- There are a lot of gold nuggets.
- Even when you know there are gold nuggets, accessing the opportunity is often a lengthly and complicated process. So knowing there is no paycheque for your broker, and its beyond your expertise, who will lead that charge for you? I can tell you from years of experience, the insurance companies will not be in any hurry to do you the favour.
- There are old policies that have guaranteed investment accounts paying 4% +. You won’t find the account listed on your yearly statement. You’ll be hard pressed to get anyone on the phone to acknowledge those accounts exist. You’ll have to know the specific wording of your contract to utilize that option. You’ll need a strong advocate to work with you.
- There are old policies that ensure in the contract that you can increase your amount of insurance, with no medical requirements, at very low prices. Amazing opportunity! But the insurance company no longer pays commission to the broker on that business, so…
- You bought term insurance, knowing you could renew the contract at the end of the term. No one told you that your $350/mth premium would be over $6,000/mth at the renewal date.
- There was a conversion option on your term insurance to convert to permanent without medical evidence. You missed the deadline because you didn’t know. You are now 70 years old and your health makes you uninsurable. If you’d only known.
- Many permanent life insurance contracts purchased over the last 30 years are running into real catastrophic outcomes. People who deposited large sums of money into those cash accounts are now getting notices that the cash has been used to pay for the policy during the years of low interest (that adversely affected those original “assumptions”). Not only is the cash gone, but huge amounts of deposits will be required to keep you from losing your insurance. What are your options?
- Leverage is a nasty buzz word. The philosophy is sound but the implementation deserves much more thought. Picture your elderly parent… now picture them arranging and monitoring a new loan arrangement (a demand loan no less). That’s going to be you. I think there is a lot to be said for peace of mind and financial security as we navigate our retirement years. Are you sure you will have the alertness, stamina and enthusiasm to manage that leverage process in your later years?
- There are often competing products that offer similar contracts that are lower priced on any given day. There are publications that allow a broker to see that information in real time. You should demand to see that information. The cheapest isn’t always the best choice but there should be a reasonable explanation for the alternative.
- Closed shops are not in a client’s best interest, in my opinion. Brokers that are contracted to deal with a variety of insurance companies will be able to make sure you are taking advantage of competitive pricing and contracts. Closed shops make it almost impossible for you to engage someone to gather policy information and offer any meaningful help to you in the future.
- There are fantastic strategies for addressing retirement income and maintaining legacy wishes. You can do both. Tax rules and product design are constantly changing, you need an advocate to ensure you aren’t missing the opportunities.
- There are excellent opportunities for corporate clients. Utilizing the cheaper corporate dollars and accessing CDA needs to be considered in light of the new legislation. You need to know the pros and cons.
- Clients that transferred personally held policies into their corporations have to investigate how they will navigate the retroactive legislative changes. It’s complicated but there are ways to mitigate the tax in this new scenario.
- Any contract you own is between you and the insurance company. That contract is the only truth… not promises or intentions. You need to know that contract.
- Good decisions can only come from good information. Good information will only come from an advocate with extensive contract knowledge, a financial background, exceptional product expertise, tax and estate proficiency as it applies specifically to insurance.
- Litigation. You might just need a lawyer and an advocate to reconcile what you were sold with what you’re now being told.
The list of reasons that an advocate will bring value to a situation expands with every case that crosses my desk. Each situation and each contract is unique. The opportunities and pitfalls are common in the big picture and unique in individual cases. Alone you can’t know what you are missing. You need an advocate.