Posted on September 22, 2020 by John Posey
As a result of being a smart, responsible person you may have worked with an attorney and other professionals to put together an estate plan. As a result of your planning, it may have been suggested you use life insurance to provide liquidity and cash to make things work out the way you want for your heirs. If you’re unsure if you should have life insurance, check out this article, Do You Need Life Insurance in Retirement? Pay Attention to These Two Things. Now if you’ve determined life insurance is a necessary tool in your estate plan, you may be wondering: Where should I get coverage? Should I go with my life/home/auto agent/company or someone else? Where am I going to find the best rates? What kind of rate can I even get? Will my health history be a problem? What type of life insurance should I get?: whole life, universal life, or something else? This writing will aim to answer those questions.
I suggest you take the following steps when solving for the life insurance part of your estate plan.
- Decide Who You Trust. I know most are probably thinking, “Duh, thanks Captain Obvious,” but this may prove to be a primary contributing factor in placing the appropriate life coverage and fulfilling your wishes to your family. You’ve probably noticed the public perception of an insurance agent isn’t exactly synonymous with high integrity. Check the NAIC website here for some useful tips, but you should know it’s not easy to determine if an agent has had complaints or questionable behavior in the past. If an agent attempts to schedule you a paramedical exam (the formal health screening required for most insurance companies to offer coverage) before you’ve agreed to anything that’s your cue to run, not walk away from that agent. When you feel an agent is expending a lot of effort convincing (features and benefits talk) and trying to get a commitment rather than discussing options and educating, you’ve entered the high-pressure sales zone and you’ll feel it. Once you catch a whiff of it, get out and move on – there are actually better, less nerve-wracking options out there. Take a look at a local independent agency over the national firms. Independent agencies or agents that are partnered with vast insurance brokerage networks like Crump can often find good solutions with a little effort. Some segment of the population does like to get “sold”, but I’m assuming that’s probably not you because you’re reading this.
- Determine If Your Agent is Independent or Captive. Independent agents sell policies for many different companies and captive agents sell for only one. With that said, many captive agents are allowed to sell outside their respective companies in certain circumstances such as receiving an uninsurable underwriting outcome with the company they represent. I lean towards the independent agent route given the pure fact there are multiple choices in insurance companies available which subsequently provides a higher probability to realize a favorable outcome with less runaround.
- Consider the Agent’s Experience & Credentials. Of course, it would make sense to choose someone with experience and credentials just like anything else, but your reason for the insurance and the kind of insurance you are considering should match their experience. What has been their experience in working with the company they are recommending? You want someone that understands the marketplace and can recognize circumstances that may create challenges with underwriting and policy design.
- Evaluate the Agent’s/Agency’s Process for Selecting the Company to Apply With. This is where a lot of time is either saved or wasted and is typically the difference between a good experience and a painful one. In my opinion, the agent should start by having you complete a pre-screen health questionnaire to uncover any potential underwriting challenges. Now if you’ve had any adverse health history, this isn’t the time to be secretive about it. Underwriters will be sifting through all your medical records diligently, so omitting medical history just delays the process and ultimately makes the whole experience more agonizing. Gathering your health history upfront allows the agent/agency to determine what insurance companies are likely to give you the best pricing and outcome. Experienced in-house underwriting specialists employed by independent agencies really earn their worth in this area. Often independent underwriting specialists have relationships and experience working directly with underwriters at the insurance companies they do business with. That relationship and experience can be the difference between a favorable outcome and spinning circles to find a solution.
- What Type of Life Insurance Are They Suggesting & Why. Here’s where we dive into the weeds so to speak. Ask three different agents what kind of life insurance you should choose and it’s entirely possible you’ll get three different answers. The two basics types of life insurance are term and permanent (cash value). Permanent insurance is often suggested in the estate planning process because it is not designed to expire like term (temporary) insurance. Although term life may have its place in an estate plan such as buy-sell agreement funding for example (a commonly used tool when family businesses are part of the estate). Here is a brief overview of the permanent types of life insurance:
- Whole Life
- Universal Life (including Guaranteed & Indexed)
- Variable Life & Variable Universal Life
I think the most important takeaway is to try to get a clear understanding of what you’re really buying. If you’re like me, you like to view insurance as the general commodity it is. I’ll take the cheap one assuming it’s coming from a reputable company with high financial strength that pays a death benefit when I pass. If you share that perspective, go with the lowest cost universal life policy available that won’t lapse as long as the agreed-upon premiums are paid. Why universal life? – Because in my experience, it’s the least expensive. I believe any insurance product that includes the word, “indexed” is probably not worth trying to understand. I dislike these products given the complexity of how they actually work and the vague simplicity sometimes used in the explanation when offering it to consumers. I have reservations about how indexed products are illustrated versus how they will actually perform in real life given all the variables that dictate the actual performance. That’s my self-proclaimed bias and I’m sticking to it. Proceed with caution when you heard the word, “indexed.” Seek understanding over a quick solution.
But what about policies designed to generate higher cash value like variable life? I generally don’t like the idea of paying higher premiums with the prospect of generating more cash value or death benefit within an insurance policy. This starts to bend the line on viewing life insurance as an investment.
Keep your insurance and your investments separate as I learned from a professor at the University of Nebraska College of Business.
I always remembered that quote, but regretfully I didn’t always heed his advice early in my career. Yes, the cash values grow tax-free and the death benefit is tax-free, but even with that considered it’s tough to make up the costs included in the average life insurance policy (typically over many years of paying premiums) compared to what a traditional growth-oriented investment solution could provide over time. Premature death is one scenario I would conclude that life insurance is likely to provide a better financial result to heirs for the cash expended, but that’s not the statistically probable outcome most of us are planning for – at least I hope it’s not!
If you take these steps, many agents will recognize you’re an informed buyer and will often take the approach of working with you rather than trying to sell you.
Advisory services offered through Plains Advisory LLC, an investment adviser registered with the State of Nebraska. Insurance products and services are offered and sold separately through John Posey, a licensed insurance agent. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Any information provided is designed to provide general information on the subjects covered, it is not, however, intended to provide specific legal, tax, financial or investing advice and cannot be used to avoid tax penalties or to promote, market, or recommend any plan or arrangement. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.