The Dirty Secret Your Life Insurance Broker Isn’t Telling You

A couple of weeks ago, I told you about the big issue with your mortgage broker. Essentially, they’re getting paid a volume bonus to funnel most of their business to one or two lenders, which makes it really difficult to believe that a broker is truly sending your loan to the lowest priced lender.

If you think the mortgage broker business is bad for doing this, then you’re not going to like what your life insurance broker is doing.

The life industry in a nutshell

The world of life insurance brokers works very much like the world of mortgage brokers.

Most life insurance agents are part of organizations called managing general agencies. The majority of agents belong to big ones which offer access to every major life insurer in Canada. In theory, this is good for customers.

Like with mortgages, the life insurance for most folks is pretty standard. The average person will get an average amount of insurance, paying about an average price to do so. In this sort of environment, how does a life insurance company get ahead?

There are several ways. Several insurers hire their own sales staffs to push their own stuff. Both Sunlife and Manulife have their own wealth management sales reps, who sell insurance, investments, mortgages, and so on. TransAmerica owns World Financial Group, which uses a pyramid sales structure to recruit more agents, who then sell insurance and mutual funds.

Most insurance companies don’t want to hire their own sales staff though. They’d rather focus on the insurance side of the business. So they deal exclusively with brokers. But how can they differentiate themselves from the competition? Why will brokers choose their products over a competitor’s?

The solution is simple. Like with mortgage brokers, life insurers give agents perks for sending most of their business to a certain insurer. But instead of cash, agents get all sorts of other perks, like exotic trips.

These trips aren’t the standard weekend jaunt down to Vegas either. Insurance execs spend lots of time planning these out, knowing that the difference between a mediocre trip and a great one can motivate a broker to send many potential new deals their way.

These trips typically include wives (or husbands), and as long as there are a couple of meetings about insurance-type things, they’re tax deductible. They’re a nice distraction from Canada’s long winters.

How to make sure you don’t pay too much

I’m not really a fan of these types of incentives, but I don’t let myself lose a lot of sleep over them.

The whole reason why these types of incentives need to exist in the first place is because the life insurance industry is so competitive. For many types of policies, the difference in premium costs between different companies is just a couple of bucks each month. There are always going to be outliers that are more expensive, but for the most part these policies are priced competitively.

The easy way to make sure you’re not getting ripped off is to get a quote online before you even go and talk to a live agent. These quotes aren’t perfect, but they should give you a decent enough place to start. If online tells you a certain policy should cost you $50 per month and an agent quotes you $75, at least get the agent to explain the big difference.

You can also ask the agent some very specific questions if you don’t like the quote. How many companies has he checked on your behalf? And just how many companies does he work with? Why did he choose one over the other?

Most agents will go a step further, and discuss some of the best quotes with you. It’s part of their customer service. Getting more than one quote is the whole reason why people go to brokers in the first place.

For the most part, your insurance agent is interested in getting you a good deal. They know if you’re satisfied, you’ll refer your friends. But just remember, your agent just might have a very large incentive to not get you the best deal that’s out there.

Saving Money On Things You Don’t Even Want to Buy But Have To

Save MoneyThere are lots of costs in life we would rather pass on. Most of these things fall under the category of insurance. Life insurance, homeowner’s insurance, business insurance, auto insurance, renter’s insurance, health insurance: they are all things that we pay a premium for and hope that we will never ever have to use (well, except for life insurance; so far skipping death hasn’t been doable).

This makes a lot of us opt, almost across the board, for the cheapest policies available. Paying as little as possible takes the sting out of having to pay for this (hopefully) non-usable thing a little bit. Unfortunately, this is the wrong way to go. When you buy bargain basement policies you set yourself up for future financial disaster. Why? Because the bargain basement insurers are great at finding loopholes and technicalities that get them out of having to pay out on your policy at all. With a bargain basement policy you are literally paying for something you won’t get to use and isn’t that that’s worse than hoping that you won’t need it?

We don’t mean to say, though, that you should fork over all of your cash for the most expensive policies either. Just because something is expensive doesn’t mean it is necessarily better.  No, what you have to do is look for the right policy for the right price. Here is how you do that.

Do Your Research

At this stage in the game, you need to learn everything you can about what this particular type of insurance policy actually does. You need to learn the lingo. For example, “deductible” is the amount of money you can expect to pay out of pocket before your insurance policy kicks in and covers everything else. You’ll also want to look at coverage terminology, as well as the basic laws of insurance and insurance coverage in your state. The more you know about what insurance is, the language it uses and how it is governed in your state, the better able you will be to pick a policy that will actually work for you…and the less likely you will be to get taken advantage of by an insurance company.

Reduce Your Costs

The type of car you drive plays a large role in the amount of money you will pay for an insurance policy. Newer cars, cars that have safety issues, etc. are more expensive to insure. The more expensive your belongings, the more your home or renter’s insurance policy will cost. Now, nobody is going to tell you to trade your car in for an older model or to get rid of family heirlooms. If you’re in the market for a new car, though, consider an electric and super safe model. Consider keeping smaller expensive and important items in a safety deposit box instead of in your closet.

Look for ways to reduce the amount of coverage you need where you can. For example, if you’re shopping for a homeowner’s policy, consider installing a security system. It will cost more now, but you could make up that cost in insurance savings.

Shop Around

Once you know how to read and compare policies and you know the value of what you’re covering, it is time to go shopping. Take your time here. Compare the details and price of each car insurance policy. Which companies give you a better value for your dollar? Which policies will actually cover you and pay out when you need them?

Whenever possible, do your research and shopping around with real people. Talk to or, even better, meet with actual agents in person. Get each quote in writing. This way, if you decide to buy, they can’t unexpectedly charge you more than you had talked about in your initial consultation. Written quotes also give you leverage when shopping for a policy. Most insurance companies want your business and are willing to price match to get it. If you can provide written proof that the same coverage costs less with another agent, you might be able to negotiate a cheaper rate.

The point is that you don’t have to settle for terrible coverage or ridiculously high prices. When you do your homework and you take steps to reduce the amount of coverage you’ll need (where applicable), there is no reason that you shouldn’t be able to get the perfect amount of coverage for the perfect price.

Have you recently found a hack that will allow you to reduce the cost of those expensive necessities in life (the kind you don’t want to buy but can’t go without)? Share your advice in the comments!

photo by: