Insurance World

I admit it. I’m a Letterman fan. When Johnny Carson retired from the late night scene, and Letterman and Leno moved to late night center stage, I channel surfed right over to Dave. And, I’ve been there ever since. I usually fade to black somewhere between the monologue and “Will it Float?” But, when I do manage to stay awake a little longer I really enjoy Dave’s Top Ten. So, I’ve been working on my own Top Ten. My Top Ten isn’t funny. But they could just save you a bunch of money if you’ll take them to heart. These are the Top Ten mistakes I see consumers make every day when considering a life insurance purchase.

Blunder #1 - Taking the cheapest quote at face value…

There is no way to get quality low-cost life insurance, appropriate for your needs, without giving it some serious thought and going through the underwriting process. Just because some agent on the other side of the country emails you a cheap quote does not mean that you will get the quoted premium. These quotes are always based on “best case” underwriting. Less than 10% of applicants qualify for the preferred best underwriting classification these quotes are based on.

Blunder #2 - Asking for a quote from multiple web sites…

A computer generated quote can be a good starting point to your search for cost effective life insurance. And, if you are totally honest about your physical condition, medical history, and hobbies, you may get a pretty good idea of what your premium will end up being. But, if you choose to use one of the dozens of “free quote” services, plan on getting 5 or more phone calls from insurance agents. These services make their money by selling leads. And, you become a lead by keying in your information. Leads generally cost between $10 and $20, whether or not you buy anything. And, the lead companies often sell your information to 5 or more agents. I’ve known clients who have asked for quotes from 2 or 3 sites and gotten 15 or more phone calls.

Blunder #3 - Buying permanent insurance when term is more appropriate…

The fact is that insurance agents can usually make more money by selling you a whole life or universal life product than a simple term policy. “If” these products are the right products for your needs - ok. But, often they simply are a bad fit. It all depends on why you are buying life insurance and how long you expect to need it. An insurance agent’s job is to identify the right insurance product, and get you the best possible value. If you suspect that your agent is more interested in making money than helping you, fire him or her. And, hire someone you can trust. One more thing, if some slick operator does manage to twist your arm. You always have 10 days, after you receive the policy, to cancel for any reason. The 10 day “free look” is the law.

Blunder #4 - Working with a captive agent…

Competition drives down prices. It’s a fact. But, many large insurance companies hire “captive” agents. These agents can only sell their employer’s products. So, when you ask a captive agent to give you a quote you get a quote from their company. Independent agents don’t work for the insurance company. Their job is to help you find the best possible carrier and product for your need - period. If you have a captive agent you really like, you owe it to yourself to get a quote from an independent agent as well.

Blunder #5 - Procrastination…

Nothing good can come from delaying a life insurance purchase. If you develop an illness, your premium could go through the roof. Or, worse yet, you could simply be declined for insurance altogether.

Blunder #6 - Buying life insurance at work….

By all means take the life insurance your employer offers as a free benefit. Free is the absolute best deal you can get. But, if you are in good health, the life insurance you buy through your employer is almost certainly one of the most expensive purchases you will make. So, again, it depends. One thing for certain, you won’t get level term from work. So, your premium will likely go up every year.

Blunder #7 - Buying the options….

Riders, like Return of Premium rider (ROP), are very popular with insurance companies and with agents alike. These “options” inflate premiums and commissions significantly. But, usually, they just don’t make good financial sense. The pitch may be compelling. But, take time to think it through before you check the riders boxes. And, definitely read the small print when your policy arrives. Remember, the 10-day free look is the law. It’s your right to return the policy within ten days of receipt even if you just don’t like the color of the paper it’s printed on.

Blunder #8 - Buying insurance just based on ratings…

It’s important to consider the AM Best (www.ambest.com) and/or Standard and Poors (S&P) ratings for any insurance company from which you are considering purchasing a policy. Financial ratings are an measure of the viability of the firm. And, you don’t want to buy from a “here today gone tomorrow” carrier. But, ratings are not the whole story. Some companies just plain have poor service. This is one more area that a good agent can help you sort out.

Blunder #9 - Sticking with an old policy…

The insurance business is highly competitive, and insurance companies are constantly adjusting their rates. It’s not at all uncommon to find that you can replace an existing policy and save money on your premium. It pays to shop around. Maybe your current carrier is the company you shouldn’t keep.

Blunder #10 - Failure to exercise patience…

Let’s say you found an agent you like, and he or she helped you wade through the carriers and their offerings. You worked out the right amount of coverage, the right kind of insurance, and you have a pretty good idea where the underwriter will rate you. You completed an application. The paramedic showed up at your office, took a sample, weighed you and got the answer to a bunch of questions. The application is “pending.”

A couple of weeks go by and you hear nothing. This is the point where you need to exercise maximum patience. From here the process typically takes four to eight weeks. If the process drags on call your agent. If it takes longer than eight weeks, you may want to move your application to a different carrier. There’s no excuse for poor service.

At last, a real life insurance bargain – but as always there are strings attached!

If you take out a new pension policy after 6 th April 2006 and within the same premium pay for life insurance cover, then you can use your pension contribution tax allowance to reduce the cost of your life insurance. This means if you’re a standard rate taxpayer, you’ll receive 22% tax relief on your life insurance premiums and relief at 40% if you’re a higher rate taxpayer.

The combined premium you pay for your pension and life insurance will automatically be reduced by 22% by the pension provider. But if you’re a higher rate taxpayer, you’ll need to claim the balance to bring your relief up to 40%, on your year-end self-assessment tax return.

But there are three strings attached:

• The pension company must also provide your life insurance and be paid as one combined premium.

• The current value of your pension fund plus the sum insured by your life insurance policy must not exceed Ј1.5 million.

• Your combined annual premium for your pension and life insurance must not exceed Ј215,000.

In practice the savings on your life insurance will not be quite as big as you might otherwise expect. Its because the underlying premium for the life insurance cover will be a bit more expensive than a stand-a-lone policy with the same company and, in all probability, the insurance company providing your pension policy won’t be the cheapest on the life insurance market. Furthermore, you can’t buy a combined pension and life insurance policy online - so you’ll miss out on the Internet’s discounted life insurance prices.

Nevertheless, if you’re a higher rate taxpayer, your tax savings are bound to guarantee that your life cover is a real bargain! If you’re a standard rate taxpayer you’d be wise to do a little homework. Before you buy, you should get an online quote for life insurance to compare against the price you’d pay if you bought it alongside your new pension.

There are some other points you also need to know. Firstly we know you’ll ask whether you can convert your existing life insurance policy into a combined pension purchase. The answer is no! The tax relief is only available if from the outset, you take a pension and life insurance policy as one combined purchase.

Secondly, the life insurance cover can only apply to the owner of the pension policy - you can’t add in anyone else on the life insurance policy. Joint policies aren’t available as a pension/life insurance package.

And whilst many people also add critical illness cover to their life insurance, this is not possible when you have a pension/life insurance package. Critical illness cover pays out a tax-free lump sum if you are diagnosed with a specified serious illness which is listed on your policy. If you want critical illness cover, you’ll have to buy a normal stand-a-lone policy.

Finally, if you’re going to buy a pension life insurance package and replace your existing life cover, a few words of warning. You’ll obviously be older now than when you first took out your existing life insurance policy. This means that the premium rate on your new cover will be higher.

Furthermore, the premium for your new policy could be loaded if you’ve developed any medical conditions since taking out your original life insurance. Remember, even if you’ve simply put on weight, your premium could be loaded. In extreme medical cases, the proposed insurer might even totally refuse to provide life cover. To avoid the possibility of being caught without life insurance cover or being forced to accept a more expensive premium, you should obtain written confirmation from your pension company that they will insure you. You then need to compare their proposed cost, net of tax, with your existing premium.