Top Five Lies your Life Insurance Agent is Telling you

Life insurance agents are people, too.  They have social lives, families, and dreams.  They aspire to make as much money as possible and desire nice things–or at least financial peace-of-mind.  But in this pursuit, some of them bend the rules a bit and distort reality in an attempt to close a sale.  There are too many reasons why one might opt to fib or flat out deceive in an attempt to earn some money.  Personally, I think to tackle this as a problem to fix likely ends in failure and many wasted resources.  We can potentially curb the behavior, but liars gonna lie.

So instead, I'm going to do my best to protect you from some of the biggest red flag fibs I've seen life insurance agents utter.  I'm also hoping that agents who read this who might be headed down a path of deceit will take note and choose to drop the dishonesty and approach their profession in a more noble fashion.

So, I present to you, the top five lies I can almost assure you life insurance agents tell.  If you read to the end, I might even give you a bonus lie.  How exciting?

#1 Rate of Return Doesn't Matter

Life insurance is unique.  It affords a few truly remarkable opportunities that are difficult to execute with other financial assets with quite the same efficiency.  For this reason, some agents push the idea that all life insurance is the same and therefore you don't need to worry about the specific policy you buy.  If you want the benefits afforded by life insurance, you simply have to buy life insurance, specifically the one I'm trying to sell you now.

This often takes shape in something related to “don't worry about the performance of the policy itself because the real benefit to wealth building is what you end up doing with the policy; therefore the rate of return on the policy itself doesn't really matter.”

If you can't already read between the lines, I'll offer up a little assistance.  This is purely a way to sell you inferior and often higher commission products.  Focusing on the millions you're going to make by taking policy loans against your life insurance policy to buy other assets rather than on how the policy itself performance is a sleight-of-hand that David Copperfield would applaud.

Rate of return does matter and it matters because better life insurance products will provide you with more value/wealth.  I assure you that there is no such thing as a lesser performing life insurance product that magically enhances when you borrow against it.  I also assure you that there is no such thing as a life insurance company or product that holds back on providing as much benefit as possible to its policyholders due to some unique feature that you have to unlock to realize it's true potential.  Life insurers are just as competitive with one another as any company in any other industry.  If they have can mop the floor with their competition with respect to providing more value, they'll do it…in a heartbeat.

Despite this, some agents want to turn the focus away from how well the policy delivers value internally to the policyholder because he/she knows this is an unwinnable batter with the product he/she wishes to sell if up against the certain competition.  So, instead the preference is to focus on difficult if not impossible to quantify aspects so there's no chance you can clearly compare and make a numerically guided decision.

#2 Whole Life Insurance is Better than Universal Life Insurance (or vice versa)

Many life insurance agents appear entrenched in a product battle.  They took up arms to fight to the death in favor of a specific flavor of life insurance.  Why?  They don't usually know.  Why is whole life insurance superior to universal life insurance?  It's not.  Why is universal life insurance superior to whole life insurance?  It's not.

So why then, do we find so many agents who violently argue in favor of one over the other?  Traditionally there are two answers.

First is ignorance.  Somehow someway this agent decided early in his/her career that a specific product type was the one to rule them all.  He/she doesn't understand much about the other product type, but what he/she does know he/she doesn't like.  This type of agent long ago convinced him/herself that there can only be one answer to ALL life insurance questions period end of sentence.

What exactly this type of agent knows about the other product he/she doesn't like would barely fill a thimble in most cases, and the sad–also possible dangerous–part of this is often really bad advice given that completely overlooks and de-emphasizes the many great features of the opposing product.

These individuals don't necessarily mean you any harm, but their carelessness leaves you ripe for potential damage.  This becomes even more frustrating as you try to sift through the information and determine on your own (good luck with that) who is telling the truth.  The reality is no one is lying per se, you're just being driven really fast down the freeway by an extremely myopic “advisor” who forgot his/her glasses at home.

Alternatively, some one-or-the-other only agents do understand the merits of other products, they just don't want to sell them.  The reason for this is mostly motivated by money.  Something caused them to decide it was more profitable for them to sell their number one product of choice and now he/she must figure out a way to sell you on why this idea is so fantastic.

The good news about these people is they generally start to crack if you push them just a bit.  Sure they'll put up a fight in the beginning, but before too long the shroud blows off and they realize there isn't much left to defend.  Push a little hard and see what you might uncover.

#3 Non-Direct Recognition is Superior to Direct Recognition

Okay you have to be quite the insurance dork to even understand this one.  Dividend recognition is the term we use to identify what happens to the dividend payable to participating whole life insurance policyholders when they take a loan out against their policy's cash value.

On the one hand, we have non-direct recognition, which simply means that no change occurs to the dividend.  And then we have direct recognition, meaning and adjustment of some sort take place to the dividend when a policy loan exists.

Because non-direct recognition means that the company will not change the dividend payable to policyholders who take out a loan against their policies, some agents proclaim that this is the only way to go when it comes to dividend-paying whole life insurance.  It's like a free bonus you get your money, and you get to still earn money on your money!

But you'd be slightly (or maybe more than slightly) foolish to believe that some insurance companies are so benevolent that they simply love giving you more dividends while other insurers just hate their policyholders more.

Truth is, there's a lot of complexity regarding how cash value accumulates inside a whole life insurance policy and dividend recognition is only one of an array of variables that make a policy flush with cash or not so much.

There are bad non-direct recognition whole life products and buying them with the intention of using whole life insurance for its many cash focused purposes will leave you lagging several other options.

Selecting the right whole life policy for your purposes goes way beyond just the dividend recognition.  If your agent tells you this is the most or only important consideration, it's time for a new agent.

#4 Only Mutual Companies Care about their Policyholders

Broadly speaking there are two major types of life insurance companies, mutual life insurers, where company ownership is held among policyholders and stock life insurers where ownership is held among those who purchase stock in the company.  Now, I know some people are going to raise points out fraternals (not technically life insurance companies that don't technically issue life insurance companies) and hybrid insurers like Mutual Holdings Companies (MHC's) as well as privately own companies (which are usually stock companies, just not publicly-traded stock companies.

For the same of simplicity, let's broadly categorize MHC's with mutuals (yup that will offend some of you) and privately held companies with their next-of-kin publicly-traded stock companies.  Fraternals can sit somewhere in the middle because, again, they aren't technically life insurance companies.

Because mutual insurers place company ownership in the hands of policyholders, some like to suggest that mutual insurers are the only life insurance companies who truly care about their policyholders.  They even send out voting proxy cards to all of the policyholders to elect the board of directors and…at times…vote on super important company direction…even though that voting is non-binding and only the collection of recommendations from policyholders to gauge their collective feelings on issues.

The implication further goes on to suggest that only mutuals insurers act with a keen awareness of policyholder best interest.  This is the case because mutual life insurers hold a fiduciary responsibility to policyholders (because they are owners of the company) whereas stock companies have a fiduciary responsibility to stockholders, who do not necessarily have to be policyholders (in fact most probably aren't).

So does this mean that stock companies look to fleece policyholders and take that money to lined the pockets of shareholders?  We have no evidence of systemic practice.

While it's true that insurance law does place some mandates on mutual insurers to provide a certain level of benefit to policyholders from business profits, we have no data that suggests this results in a meaningful benefit to mutual company policyholders always over-and-above stock company policyholders.

Mutuals do tend to maintain higher credit ratings, which does to some degree suggest a higher level of stability for certain aspects of the life insurers business model.  But that doesn't always mean they are always better.

There are stock companies that manufacture and sell very competitive life insurance products, and their policyholders benefit just as much or in some cases greater than similar policies issued by mutual life insurers.  Neither approach appears to have a clear corner on the market for life insurance.

#5 This Dividend Rate or Interest Rate is Better than ALL the Others

We are all busy.  We would welcome a concise way to compare life insurance options.  This way we can quickly make a decision and get on with our lives.  Some agents want you to believe they have a quick and easier answer to this problem.

You should buy this whole life policy because it has a 7% dividend rate, which is higher than all the other whole life products out there!  Or you should buy this indexed universal life insurance policy because it has an index account with an 18% cap rate, which is higher than all the other products out there!

This information sounds straightforward.  You might even see a graph with the recommended company and then some other company's dividend rate, or index cap rate compared against it to convince you that, luck day this agent comes with a simple solution to selecting the best option.

But sadly any quick reference to a singular data point or glossy brochure as the reason for you to close the deal is almost certainly a ruse to ink a deal and drop some money in the agent's bank account.

Life insurance products differ considerably even within similar product categories.  Whole life insurance is not whole life insurance is not whole life insurance.  The same is true for universal life insurance.  Just because a policy has a feature that pays X%, which appears high relative to other companies does not mean that this is the best deal going.  Life insurers love to quote these numbers applicable to cryptic policy features that rarely assume a universal basis off which you can compare across different companies.  So a 7% dividend might be great, “but 7% of what?” is the important question you are not asking.

If the reason you should buy today has to do with a singular statistic about what rate an insurer is paying on a certain feature almost presented as a CD rate of annual interest, your agent is either woefully inexperienced or looking to partake in some numerical trickery made possible by your inexperience.

Never, I mean it, NEVER make a decision to buy a life insurance policy based on a sole figure quoted about a life insurance policy unless you can explain to a 10-year-old exactly what that sole figure means both in theoretical terms as well as applied numerical results.

Bonus Lie #6 This Company is the Greatest because they have A Bazillion Dollars in Assets!

Life insurance companies are large financial institutions.  Even the small ones tend to dwarf tiny non-insurance companies with significantly more brand recognition.  Because of this, the vast majority of life insurance companies are capable of displaying impressive financial figures.  Be it the assets under management or an income statement, almost all life insurers make A LOT of money and can honestly claim to do so in an attempt to woo customers.

Agents understand this and they will often make absolute statements about life insurers with no comparative comment.  This is intentional.  The hope is that you become so impressed by the statement that you do not care if this fact places the insurer near the top or near the bottom of life insurers in existence.

For example, if I told you a life insurer managed $6 billion in assets and made over $800 million last year in revenue would you be impressed?  Most people would be.  But what if I then told you that the average life insurance company in the U.S. manages over $10 billion and earned about $1.3 billion last year.  Now that company doesn't look like such a hero.

You should always ask for at least one more data point whenever an agent makes a superlative statement about a life insurer to gauge just how big a deal that statement is.

Example #2: is standing at 183 centimeters tall?  If you don't have a firm grasp of the metric system (thanks Jimmy Carter) you don't really know.  But when I tell you that 183 centimeters is roughly 6 feet, you can give me a more precise answer.  If you are in unfamiliar territory and someone quotes a statistic about a company, you need some frame of reference to understand just how significant (or insignificant) it is.

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