HOW TO SELECT A LIFE INSURANCE COMPANY

Transcription

1 HOW TO SELECT A LIFE INSURANCE COMPANY There will prbably be hundreds f life insurance cmpanies t chse frm when yu decide t purchase a life insurance plicy. Hw d yu decide which ne? Mst cmpanies are quite capable f handling the transfer f risks and are deserving f cnsumer cnfidence. All cmpanies are subject t stringent regulatin by state insurance departments as t their financial viability. That said, cmpanies d fail frm time t time causing disruptin fr plicyhlders. Thugh ften there is little r n lss f value, particularly fr the death benefit prtin f plicies, the uncertainty that flws frm such failures is gd reasn fr care and diligence in the selectin f a cmpany. Prices differ dramatically amng cmpanies and yu may want t make certain yu have a cmpetitively priced prduct. Often, the life insurance agents prefer a given cmpany because f lng term relatinships and cmpensatin advantages that may clud their bjectivity as t what is best fr yur situatin. The mistakes we see cnsumers mst ften make fall int these three categries: NOT CHECKING AROUND T ften the individual cnsumer gives n thught t the cmpany because they simply trust the agent t make a gd selectin. Agents likely have varying (even subcnscius) mtivatins, including lng term allegiances and cmpensatin prgrams incenting them t send business t certain cmpanies regardless f hw well the prduct fits the client s needs. Sme agents are captive r tied t nly ne cmpany and cannt represent ther cmpanies. They are nt allwed t search fr ther ptins. An imprtant nte here sme agents wh wrk exclusively fr multi-line cmpanies (life, health and prperty/casualty) may have prducts which by themselves are nt highly cmpetitive but they are able t grant multi-line discunts fr ther cverages, bringing the verall pricing int a mre cmpetitive psitin. Cupling that with the fcused service they ffer may be appealing. We believe the agent yu select is a very imprtant advisr and we als believe that mst agents give very gd advice, nly that their advice is limited t their wn perspective. The agent, even the independent agent wh represents multiple cmpanies, represents the life Neither Petra Life Services, Inc. nr its representatives may give yu tax r legal advice. We recmmend that yu cnsult with, and rely n, yur wn tax and legal advisrs abut the cncepts presented in these materials. petralife.cm 1 f 7 PLS.116.1

2 insurance cmpany, nt yu, under the agent s cntract. They sell the cmpany s prducts and are the cmpany s cmmissined representative. Underwriting class When yu buy life insurance the insurance cmpany lks at yur health t determine what price t charge. Yu will be placed in an underwriting class based n yur medical histry and cnditin. Generally, mst cmpanies divide insureds int smker and nn-smker categries. Sme use tbacc use rather than smker and sme allw cigar smking while thers d nt. Sme cmpanies allw individuals t be classified as a nn-smker if they have nt smked fr 1 year while thers require n smking fr 2 years r lnger t get the nn-smker rates. Smker classes carry a significantly higher premium Example: Male age 50, 20 year Term Life $250,000 Cmpany A Cmpany B Nn-Smker: $ $ Smker: $2, $2, Rati Surce: April 2009 CmpuLife Term Rate Cmparisns Often cmpanies will ffer 3 levels f standard risk fr nn-smker standard, preferred and preferred best. The additinal levels f the standard class ffer discunts t the best risks. Hwever, nt all cmpanies define the risks the same way. Cmpany A may believe that chlesterl cntrlled by medicatin can still be a preferred best risk while Cmpany B believes it can nly be preferred r even standard. These same cmpanies may see family histry differently with Cmpany B viewing a family histry f heart disease r cancer less negatively than Cmpany A des. Therefre, the risk class is nt necessarily indicative f hw cmpetitive yur price will be. Each cmpany lks at risk in their wn way s underwriting decisins can vary widely amng cmpanies. Neither Petra Life Services, Inc. nr its representatives may give yu tax r legal advice. We recmmend that yu cnsult with, and rely n, yur wn tax and legal advisrs abut the cncepts presented in these materials. petralife.cm 2 f 7 PLS.116.1

3 At times agents may ffer qutes f the mst cmpetitive rates in rder t secure the business but thse rates may nt be the final rates after the underwriting prcess has been cmpleted. Here s the pint: Lk at the final rates, nt the underwriting class r even the rates quted, when yu d cmpare. ONLY CHECKING PRICE N cash value plicies (term and n lapse UL) The life insurance industry has lng believed that n cnsumer has ever been denied a death claim due t cmpany inslvency. A cmbinatin f State Insurance Departments, State Guaranty Assciatins and ther life insurance cmpanies have rehabilitated blcks f business that were impaired, and as lng as the wner cntinued t pay the premium, the death benefits have been paid. There is certainly n guarantee f that result int the future but paying mre than a cmpetitive premium may nt prvide any additinal security. Prices d vary greatly amng highly rated cmpanies s checking price can make a difference: Male age 50 - $1,000,000 standard nn-smker risk cmpanies rated A r better 10 year term life Cmpany Rank Annual Premium A #1 $1845 B #3 $1935 C #10 $2145 D #20 $2270 Hwever price is nly part f the stry. Term If yu ever need t cnvert the plicy t a cash value frm (which may be able t mre efficiently prvide lifetime cverage) the strength f thse types f plicies fr the underwriting cmpany shuld be cnsidered. Mst cnversin ptins allw yu t exchange t a new plicy at yur riginal risk class. If yur health has changed ver time yu may nt qualify fr the same risk class n a new plicy as yu have with the term plicy and cnversin may be yur nly reasnable ptin. Initial price fr Neither Petra Life Services, Inc. nr its representatives may give yu tax r legal advice. We recmmend that yu cnsult with, and rely n, yur wn tax and legal advisrs abut the cncepts presented in these materials. petralife.cm 3 f 7 PLS.116.1

4 yur term plicy may be mre than ffset by higher (r lwer) ultimate csts after cnversin. The plicies available fr cnversin need t be understd as well. Sme cmpanies will ffer any prducts in their prtfli while ther cmpanies may place restrictins n availability. N lapse UL These plicies smetimes have plicy prvisins that need t be well understd. Fr example, mst f them are based n an assumptin f the timelines f when premium is received. If the premium arrives just a few days late, interest crediting can be impacted, the n lapse guarantee can vanish and the plicy itself may lapse at a time when the cverage is needed. Many cmpanies ffer catch-up prvisins but sme can be cmplicated and cstly. Cash value plicies Plicies with cash value are particularly difficult t assess. These plicies have illustratins f future value based n certain assumptins. We encurage ur clients t recgnize that these illustratins are always wrng! That is nt t say cmpanies are trying t be deceptive but that t ften cnsumers see a cmputer print-ut and believe it is guaranteed. There are many variables invlved. The insurance cmpany usually has the flexibility t make adjustments ver the years based n experience s prjectins wuld rarely cme true exactly as riginally prjected. A simple example is the interest rate. Since illustratins demnstrate values far int the future, the interest assumptin makes a huge impact n the results. Here is an example: Male, Age 50, standard risk $250,000 Universal Life Death Benefit Annual Premium $2,393 Prjected Cash Surrender Values at varying interest rates Year 4.0% 5.0% 5.4% (current) 10 $23,761 $25,687 $26, $67,518 $77,111 $81, $114,949 $145,836 $160,279 The abve values are fr cmparative illustratin nly. Neither Petra Life Services, Inc. nr its representatives may give yu tax r legal advice. We recmmend that yu cnsult with, and rely n, yur wn tax and legal advisrs abut the cncepts presented in these materials. petralife.cm 4 f 7 PLS.116.1

5 Recgnizing that illustratins are nt a guarantee f future results, the real cst f any plicy will nly emerge ver time. Cnsequently, a review f the histry f a cmpany s crediting strategies can help give insight int what may happen t their plicies in the future. Hwever, that histry can be difficult t btain and is nt a predictin f hw the cmpany will perfrm in the future. Mutual cmpanies versus stck cmpanies: Generally speaking, stck cmpanies will have smewhat lwer premiums initially than mutual cmpanies. Mst mutual cmpanies include extra margin at the utset but ver time may be able t give very gd value thrugh the dividend scale. Since the mutual cmpany des nt have sharehlders like the stck cmpanies d, they may be able t return extra value t the plicyhlder and may be very cmpetitive ver time. The decisin between mutual and stck is nt simple and invlves yur time hrizn and yur evaluatin f the expectatin f cmpany perfrmance ver that time frame. BUYING THEN FORGETTING Plicy perfrmance Many f the plicies purchased ver the last 20 years may nt perfrm as riginally illustrated due t declining interest rates. Therefre, additinal premium may be needed t keep these plicies in frce ver the lives f the insureds. If inadequate funding is caught early it can be mre easily crrected. Hwever, if adjustments are delayed, significant additinal premium may be required t maintain cverage as planned. Cmpany financial strength When insurance cmpanies begin t decline financially there are usually, thugh nt always, warning signs. With ntice yu may wish t change cmpanies, thugh yur ptins may be limited if yur health has changed. Financial decline is nt the nly reasn t actively manage yur life insurance prgram. Objectives and circumstances change s the amunts and types f cverage shuld regularly be reviewed. Mst agents try t ffer nging service but ften the cmpensatin systems are such that they are encuraged t pursue new business rather than spend time servicing existing clients. We ften hear frm ur clients that they have nt heard frm their agent fr several years. Of curse, in sme situatins the agent may n lnger even be in the life insurance business. Neither Petra Life Services, Inc. nr its representatives may give yu tax r legal advice. We recmmend that yu cnsult with, and rely n, yur wn tax and legal advisrs abut the cncepts presented in these materials. petralife.cm 5 f 7 PLS.116.1

6 We suggest yu cnsider the fllwing apprach t selecting a cmpany. FIRST SELECT AN AGENT. LOOK FOR THE FOLLOWING QUALIFICATIONS: Yu respect and trust the agent. The agent is knwledgeable and experienced with a reputatin fr prfessinalism. The agent is well qualified t help with yur situatin perhaps hlding CLU, ChFC, CFP r ther certificatins indicating a cmmitment t cntinued educatin. Yu enjy wrking with the agent. THEN GIVE THE AGENT YOUR REQUIREMENTS AS TO THE COMPANY TO BE USED. CONSIDER THE FOLLOWING CRITERIA: Ratings We generally recmmend cmpanies with at least an A- r A rating r higher. Yu certainly may wish t set the standard higher but we find the highest ratings are ften reserved t larger cmpanies simply because f size and, therefre, sme very cmpetent and cmpetitive smaller and mid-sized cmpanies are excluded. Size D nt be verly swayed by size. Size des have its advantages, ptentially giving additinal strength t weather difficult challenges. At the same time, many f the prblems encuntered in the financial turmil f 2008 and 2009 were mre significant in the larger cmpanies. In fact, their size may have required that they be expsed t virtually all f the risk areas in the ecnmy. Sme very large cmpanies with a great histry f perfrmance have struggled because f higher than average leverage r expsure t market segments that declined quickly, leaving little time t adjust. Sme cmpanies are part f a hlding cmpany structure. This structure may ffer the ptential fr additinal capital supprt nt evidenced n the cmpany s direct financial statements but can als require capital flws t help with prblems at the hlding cmpany level. Reputatin A knwledgeable and experienced agent will be able t help yu knw f the reputatin a cmpany has fr caring fr its plicyhlders. Thugh cmpanies change, t ask fr a cmpany knwn fr gd service is reasnable. Cmpetitive pricing fr this plicy Yu may wish t require that the price be in the tp 10-15% f prices available t assure a gd ecnmic value. Dn t be t persuaded just t get the lwest price. Histry f cmpetitive psitining Again, yur agent will knw the cmpany s histry f remaining cmpetitive and hw they have handled renewal crediting rates fr interest sensitive plicies. Please recgnize, thugh, that histry is nt a guarantee f future perfrmance. Neither Petra Life Services, Inc. nr its representatives may give yu tax r legal advice. We recmmend that yu cnsult with, and rely n, yur wn tax and legal advisrs abut the cncepts presented in these materials. petralife.cm 6 f 7 PLS.116.1

7 Other prduct lines Particularly if yu are purchasing term insurance yu may wish t knw f hw cmpetitive ther prduct fferings are likely t be in the future, if needed. LET US HELP. (YES, THAT S A COMMERCIAL!) At Petra Life Services we wrk directly fr yu and can help with the abve issues. We will wrk with yur designated agent t help yu make a quality cmpany selectin. We als prvide ur nging Stewardship Supprt Prgram (SSP) that will help keep yur prgram up t date with changes in bjectives r circumstances. The benefits f ur SSP include: Peridic reviews f yur gals and circumstances with updates t any f ur cnfidential, prprietary reprts, such as ur CARE and LIFE reprts, that have been prepared fr yu. Open access thrugh the year t ur cunsel and advice abut any questins yu have cncerning yur life insurance prgram as cncerns arise. Regular updates n ratings fr yur life insurance cmpanies. Please cntact us if we can be f assistance. Neither Petra Life Services, Inc. nr its representatives may give yu tax r legal advice. We recmmend that yu cnsult with, and rely n, yur wn tax and legal advisrs abut the cncepts presented in these materials. petralife.cm 7 f 7 PLS.116.1