How to spot a crappy advisor

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:

1. Affordable term life insurance to pay off the mortgage. 
2. affordable disability policy with maybe a 24 month max benefit
3. affordable critical illness policy covering a year or two's income in the event of a serious illness such as cancer.

MY solution

1. $500,000 of Term 10 life insurance,  Premium $20 a month
2. Disability isn't available due to occupation, so substitute with Critical Illness
3. 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

1. $150,000 (not enough) permanent Universal Life (expensive) paid up in 10 years (REALLY expensive) life insurance policy. $90 per month
2. $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:

1. Ask to see a market survey so you can compare rates between companies. Like this
2. 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.
3. 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.
4. 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 ;)

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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

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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.

Care for stroke patients: $50,000 in first 6 months

The Canadian Press

Date: Tuesday Jun. 8, 2010 10:05 AM ET

TORONTO — A stroke can rob victims of the ability to speak or move an arm or leg, but a new study shows it also steals from the bank accounts of those afflicted.

The national study tallied the financial cost of a stroke in the first six months -- to both the health-care system and the patient -- and found the expense adds up to an average of $50,000 per person, with about 20 per cent of that hitting families in the pocketbook.

When the $50,000 total is multiplied by more than 50,000 new strokes per year in the Canadian population, it works out to a whopping $2.5 billion or more a year, according to the Burden of Ischemic Stroke study being presented Tuesday at the Canadian Stroke Congress in Quebec City.

"We wanted to know how much stroke costs the health-care system and patients and their families, and there had never been a national study done on this prior to this," said Dr. Mike Sharma, deputy director of the Canadian Stroke Network.

"We looked at 12 different hospitals spread across the country from Halifax to Vancouver, and we took patients who'd had stroke, after they were leaving the hospital, and gave them a diary and arranged to meet with them periodically afterwards."

Sharma, who's with the University of Ottawa and Ottawa Hospital, led the study with Dr. Nicole Mittmann of Sunnybrook Health Science Centre in Toronto. They looked at the health-care costs of 232 patients.
In their diaries, patients or a caregiver tracked appointments, medications, whether they'd had to buy canes or wheelchairs, or modify homes with ramps or other features to make them safe and accessible. They also factored in how much time a caregiver had to spend away from a job.

Sharma said the grand total came as a surprise to him.
"The average cost over the first six months was $50,000 -- and this is probably about double what I would have estimated prior to this data being available," he said.

The personal tallies ranged from a low of about $2,000 for those who essentially had no disability to more than $200,000 for individuals who were quite disabled, he said.

The average length of stay in hospital after a stroke varies widely. Sharma said Ontario has worked hard to reduce the time, and it's now less than 10 days on average in the province, but "considerably more" in other jurisdictions.

In terms of a breakdown, he was also surprised to find that 80 per cent of the total cost was related to the health-care system, in particular hospitalization, while the other 20 per cent related to lost time from jobs and expenses for families.

"The times where it makes life very difficult are in those individuals who aren't covered with health-care plans, and when the primary breadwinner in the family has been affected by stroke. So there you've got the worst of both worlds. The income for that family declines while their costs go up."

After someone has a stroke, Sharma said medications are needed to prevent more stroke and for depression and sleep issues that arise.

Frank Nieboer of Calgary can speak from experience about the difficulties families face when someone has a stroke. His wife Lou had an aneurysm -- bleeding in the brain -- 33 years ago at the age of 32.
After seven weeks in hospital, she was deemed stable enough to come home, but she was in a wheelchair and had lost the use of her right arm, right leg, her ability to speak, and she was "massively depressed" and crying all the time, he said.
"And here I am, I'm 33, I've got a day job, thank you very much, and what are we doing?" he said. "It's really a learning curve."

Lou's income was wiped out because she had to resign her bank job. Fortunately, Nieboer was in a good financial position and able to get private help for physiotherapy, occupational therapy and assistance working on speech and cognitive processes.

The Nieboers formed a support group in Calgary and have helped counsel many families, hearing in the process numerous stories about the crippling financial burden of stroke.

"A lot of younger families, it results in family breakup," Nieboer said. Sometimes a breadwinner leaves a partner and young children after the partner's had a stroke, and the family must turn to social supports, he said.
Other times, a breadwinner -- for instance a trucker, teacher or lawyer -- can't work because of physical effects, or the impact on the ability to speak. Cognitive processes can also be affected.

"You may present very well from the outside, but a lot of folks have what I call invisible deficits. They can't process information. They can't quickly process and respond," Nieboer said.

Sharma said 50,000 to 60,000 strokes a year are diagnosed, but 10 times that number are covert. It's known they occurred because scars are seen on imaging, but they weren't diagnosed because there were none of the classical symptoms. They are, however, associated with dementia and long-term difficulties.

About 87 per cent of diagnosed strokes are due to blocked blood vessels, while 13 per cent are due to bleeding, Sharma said. There are effective treatments for the blockages, such as the clot-busting medication tPA.

"If we can get at it very quickly in a centre that has expertise and if we give that treatment, we know that the probability of disability is decreased by a third," he said.

"And that is what you need to do to shift that burden from somebody who is significantly disabled to somebody who has absolutely no disability, and consequently shift the cost from those very large numbers down to one-hundredth of them."