Every so often I am asked to review someones current personal insurance. This is a service I gladly provide for free. In some cases people are well taken care of, in others they got royally screwed by their last agent. Such was the case this week. Lets look at the situation.
Young couple mid twenties, just married, just bought a house. Mortgage of $500,000 which is co-signed by a parent. No kids yet, but perhaps down the road. No other savings, or assets, on a tight budget as they are "mortgage poor".
What immediately stands out to me is they need life insurance for the mortgage, as well as disability insurance and possibly critical illness insurance. The husband is working out of the country, so we can't insure him at the moment. If the wife dies, the parents are left with a house and a huge mortgage they cannot pay, same goes for a disability or serious illness.
What this client needs:
- Affordable term life insurance to pay off the mortgage.
- affordable disability policy with maybe a 24 month max benefit
- affordable critical illness policy covering a year or two's income in the event of a serious illness such as cancer.
MY solution
- $500,000 of Term 10 life insurance, Premium $20 a month
- Disability isn't available due to occupation, so substitute with Critical Illness
- Two times annual income ($50,000) of Term 10 Critical Illness with Return of Premium after 15 years. Premium $40 a month.
The other agents solution
- $150,000 (not enough) permanent Universal Life (expensive) paid up in 10 years (REALLY expensive) life insurance policy. $90 per month
- $250,000 (way too much) Term to 100 (expensive) Critical Illness. $180 per month.
Stuff like this makes me rage. The client is WAY underinsured for life insurance, yet they are paying nearly 5 times the premium. The policy they get doesn't fit their need as it is designed for people in their retirement and estate planning phase of life. This client has NO NEED for a permanent life insurance policy, other than possibly $25,000 for final expenses. While the life insurance coverage is way too low, the Critical Illness is crazy high. Why do they need a quarter million dollars of Critical Illness Insurance? If you are diagnosed with Cancer, you are off your feet for a year, maybe two. bonkers.
My solution, which provides them the amount of coverage they need, in the form of affordable policies and costs the client about $60 per month, rather than $270. The client could use the extra $210 to pay down their mortgage faster, save in an RRSP or TFSA, or improve their lifestyle.
Now why in the world would the other agent set this client up like this?
COMMISSION.
Total commission for my solution $828.00
Total commission for the other guys solution $4,076.24
In my opinion, my solution provides better, more appropriate, and vastly less expensive coverage for this client. I get rewarded with an appropriate compensation of $800 or so dollars. I also have the opportunity to set up an investment account for this client, which can be worth much more commission down the road.
On the other hand, the other advisor's solution, leaves the client, over and under insured, costs far too much, and pays an exorbitantly high commission.
I can see the temptation to sell the big expensive policies, they provide a big commission, which feeds your family, but it does it at the expense of someone elses family. I see this stuff all the time, far more often than I like. It is usually from younger, new agents, and in the vast majority of cases, agents with a captive insurance company (Clarica, Sun Life, Freedom 55, London Life, Primerica), I am not saying all captive agents do this, but that is where I see it the most. New agents survive on new sales commissions since they have no trailers to rely on. They up-sell to more expensive policies which pay themselves more. Their managers push for higher sales, and higher commissions, so agents push these products on their clients.
How does a consumer know if they are being taken for a ride? It can be hard to know, especially since the advisor can usually make a case for the product they are selling in any situation. The best tips I can provide are:
- Ask to see a market survey so you can compare rates between companies. Like this
- Ask why the advisor is recommending a specific company. Is the product better, is the price better or are they beholden to only one carrier.
- Ask for a second opinion. This will drive your advisor crazy, myself included, but it is the best way to be sure you are getting a fair deal.
- Ask what the advisor is getting paid. If it seems extreme it probably is.
TL;DR Nice young couple gets hosed by a sleazy insurance salesman. not me ;)
Commission Calculations Below I have talked about Commissions before
here
My Solution
Term 10 life insurance pays 40% of first year premium, I also get a bonus of around 130% of the base commission.
Annual Premium $240
Base commission 40% of $240 = $96
Bonus commission 130% of $96 = $124.80
Total commission: $220.80
Critical illness insurance pays 55% of first year premium, I get the same bonus of 130%
Annual Premium $480
Base commission 55% of $480 = $264
Bonus commission of 130% of $264 = $343.20
Total commission: $607.20
Other Guys solution
Universal Life pays a commission of 70% of the first year premium + 3% of excess contributions, plus a bonus lets stick with my bonus level of 130% for consistency.
Annual Premium $644.40
Base commission 70% of $644.40 = $451.08
Bonus 130% of $451.08 = $586.40
Total commission $1037.48
Since the UL policy is paid up in 10 years, they are over funding the policy this over funding is commissioned at 3% of excess contributions but paid for each year. So over the life of the policy the commission looks like this.
Excess Deposit over 10 years, $4440
Base commission 3% of $4440 = $133.20
Bonus commission 130% of $133.20 = $173.16
Total commission 306.36
Critical Illness insurance pays about 55% of first year premium, lets use the same bonus of 130%.
Annual premium 2160
base commission 55% of 2160 = 1188
bonus commission 130% of 1188 = 1544.40
total commission 2732.40
Total commission for the other guys solution, $4076.24
--
Robert Reynolds, GBA
Certified Group Benefits Advisor
Hendry McKenzie Reynolds Employee Benefits Ltd.
Toll Free: 1-888-592-4614
rob@hmrinsurance.ca
www.hmrinsurance.ca
E.O. E.
