Infrequently Asked Questions are an educational olive branch to improve your discernment about life insurance.
Uncertainty and complexity surrounding wealth-based issues are often driven by the classic don’t-know-what-you-don’t-know dilemma. Entrepreneurs and affluent family groups have achieved substantial financial and familial success, yet planning is an entirely different realm. Meanwhile, many families have had at least one less-than-ideal experience with an insurance advisory firm, thereby raising your guard.
How do you separate the claims you encounter from the actual behavior and business practices you’ll experience? By sharing the questions many firms wish you didn’t know to ask, we hope to help you make your own wise choice about where to begin your journey.
The underwriting process evaluates the insurance company’s risk thereby pricing your life insurance offer. Insurance firms often claim negotiating clout in this area due to their volume of business. This is akin to a real estate agent bragging about the number of luxury homes they’ve sold.
In reality, insurance companies have rules to follow in assessing risk, and 95% of those rules are based on proof not muscle. Proof comes from medical records, and these records are often overly generalized, contain errors, or may speak to historic health conditions that no longer apply.
True clout in underwriting comes from your insurance firm’s due diligence prior to submitting your file. First, there should be a thorough audit of your medical records, in search of red flags that could inflate perceived risk and therefore pricing. Next is a conversation with you to reconcile those red flags against reality. If there are mistakes in the transcripts, proper due diligence includes obtaining letters of clarification from your physicians.
Diligence also includes learning your perception of your health and vitality. These conversations include lifestyle choices, such as diet and exercise, as well as your level of engagement in business, family or community. All of this groundwork is summarized and provided to the underwriters. At the onset of their evaluation, they see you in the best possible light, with current, accurate information. This is the kind of clout that gets the underwriters’ attention, and gives them the proof they need to provide the most attractive offers.
Transparency in insurance shows up in two areas: compensation and product design. On the compensation side, you can ask a firm to disclose layers of compensation that are rarely proactively explained. These include gross agent compensation in the first ten years of the policy, as well as overrides, and perks for placing significant volume with one company (i.e.; five-star reward trips). You should also understand the differences in compensation for the top three to five options available to solve your need. This may illuminate potential conflicts of interest. Finally, you should ask if the compensation can be manipulated or lowered. If so, ask why the current compensation structure is being employed.
Transparency in product design means that cheaper isn’t better. There are assumptions embedded in the financial modeling of your policy. If these assumptions are overly aggressive, a policy will appear less expensive at the time of purchase, making it easier to sell. However, insurance illustrations are price projections, not price guarantees. Assumptions are based on factors such as: interest rates, life expectancy and the financial markets. Decades after purchase, aggressively projected policies often require increases – in premium size or number of premiums – in order to stay afloat.
Ask your insurance firm to show best-case, worst-case and appropriately conservative projections for each product they recommend. These scenarios reveal how the policy may perform under a variety of market conditions.
Common practice among insurance firms is to show choices from a variety of insurance companies, or a variety of product types. This is often used to check the box on holistic because you’re provided with more than one option. However, for affluent families, conversations regarding insurance must be far broader than insurance alone. Holistic means that a firm conducts deep discovery beyond the silo of the perceived need or problem.
Every planning decision you make impacts multiple relationships, entities and financial buckets. Proper inquiry about your situation should include personal and business financials. The process should include up-front interviews with your existing advisors – legal, tax and wealth management – and all relevant stakeholders to the insurance result.
Without this type of 360˚ approach, your insurance can fail to solve the perceived problem, or it can actually create issues that didn’t previously exist.
In order to accurately anticipate your post-purchase experience, there are a few specifics to look for pre-purchase. Ask the insurance firm about their review processes. What percentage of their current clients receive annual reviews? What are their project management processes in this area? Who on their team is dedicated to this time-intensive area? Who will do the research – is it managed in-house or by a home office?
A true review should include revisiting your original goals and objectives, and the original policy projections. Next it should demonstrate how the policy is currently performing. And last, it should indicate whether any action is required to keep the policy on track. Reviews of large insurance policies must be performed every year so that minor changes can be made as needed. Time can convert a small problem into one that becomes insurmountable or unnecessarily expensive.
Sometimes firms will reach out to offer a review after decades of dormant communication. This can be a veiled pursuit of a sale. Before purchasing a new policy to replace an existing one, ask to see all of your options for modifying and keeping the policies you already own.
Objectivity is defined by the aggregate behavior in the four preceding IFAQ areas. If you dig deep with a firm and you like their answers to all of the above questions, they may indeed be objective.
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