Life insurance, like any other financial instrument, is all about knowledge. The more you know, the less you lose. However, getting this knowledge can be difficult. Especially when insurance companies profit more when you know less. In this case, knowledge is not just power, it is profit.
To help you get a better understanding of the life insurance industry, we will be sharing with you three dirty secrets life insurance agents will never tell you. Hopefully next time you talk to your life insurance agent, you will have some better questions for them.
1. Whole Life Insurance is More Profitable for the Life Insurance Agent Than For You
Whole life insurance is structured as a hybrid insurance slash investment product. The idea being that the cash component of your policy earns returns over time. This seems attractive especially due to so-called vanishing premiums.
The life insurance agent will tell you that your returns will soon overtake your premium payments. This way you will stop paying premiums at some point. This is not always the case due to low returns. The insurance agent, on the other hand, will earn handsomely from selling you this policy.
This is because the first few years of your policy payments will go towards paying their commission. In addition, when the vanishing premiums do not vanish, you will need to dig into your pocket to keep those premiums going. This despite paying hefty premiums on the promise of good returns.
A better alternative to whole life insurance is either permanent life insurance, term life insurance or, depending on your line of work, accidental death and dismemberment insurance.
2. You can Renegotiate Your Premiums if They Become a Strain to You
Statistics show that a quarter of policyholders will see their policies lapse within the first three years. Another 40% within ten. In all these cases, policyholders often do not know that they can lower their premiums to keep the policy active.
These abandoned policies add to the profit margins of life insurance companies. The real tragedy, however, is that this does not have to be the case.
Let us assume you started your policy paying out $1000 per year for a cover of $200,000. After 5 years, you feel uncomfortable paying such a high premium. Instead of abandoning the policy, and forfeiting 5 years’ worth of payments, renegotiate your policy instead.
This could be down to $100 per year for a payout of $50,000. This way, you do not lose what you have already paid.
3. Life Insurance Companies Will Not Go Out of Their Way to Track Your Beneficiaries
Life insurance companies have billions of dollars in uncollected claims. Why? Beneficiaries were not aware they had been named in a policy. But this is not the entire story.
When you pass away, life insurance companies are required by law to trace your beneficiaries. What the law does not stipulate is how hard they should try. This means many life insurance companies get away with just a cursory search.
Notify your beneficiaries to ensure your claim does not end up as profit for the life insurance company. Updated contact details will also make it easy for the life insurance company to contact your beneficiaries.
Educating yourself about life insurance is a must. Also make a point to work with a trusted, credible and honest life insurance agent. One who will not hide these secrets, among others, from you.