The Snowball Wealth Financial Roadmap
Finding the right life insurance policy for you is a huge decision, especially since you are committing to it for a very long time. In some cases, it could even be a lifetime commitment in the case of permanent life insurance policies.
Many people turn to insurance agents or financial advisors to help them find the right policy. Unfortunately, some agents take advantage of unknowing customers and push for unsuitable plans that are often illegal.
So what should you look out for?
Stranger-owned life insurance
In this insurance plan, you allow someone who doesn’t have “insurable interest” in you to own a life insurance policy on you, as opposed to your family. When seniors take this life insurance policy on themselves, the intent is that they are transferring ownership to an investor or group of investors. Be aware of these arrangements, and is illegal in many states.
Inflating your net worth
In some cases, unscrupulous insurance agents will overstate your net worth on a life insurance application so that you qualify for a bigger policy than you need, which helps them land a bigger commission. Unfortunately, the policy may be more than you can afford, and eventually you may be forced to drop it, thus losing coverage.
Sometimes, agents don’t even expect the customers to pay. In 2014, the FBI brought a San Diego-based agent to court after he admitted to selling $80 million in “free” insurance policies to elderly buyers. He ended up netting $3 million in commissions.
To protect yourself from this situation, be sure to get a copy of your application and carefully go over it for inaccuracies.
Annuities for the elderly
Life insurance companies can also sell annuities, which invests a buyers payments which provides a stream of income after a set period of time, often in retirement. These can be a smart retirement income strategy, but only if you still plan to work for a few years. Many annuities come with penalty fees for removing your money early.
Again, financial advisors may take advantage of this and sell annuities to seniors, leaving them without retirement income for years, just so that they can get commission. If you are pushed to buy an annuity when you’re already retired, make sure you know when you will get paid before you sign up for one.
Term vs. Whole Life Scam
Many life insurance agents also needlessly promote a Whole Life policy to the average American, rather than a Term Life policy. The main difference is that the dollars you pay into Term Life insurance premiums are only there to provide benefits to your beneficiaries if you die in a specified term. The Whole Life policy builds cash value that you can use later in life or add to the death benefit payout, and is generally a good choice for a small percentage of most Americans. However, many independent insurance agents believe that most Americans would be better off by purchasing a term policy and investing the difference in other investment vehicles such as mutual funds, a 401(k) or an IRA.
According to the American Council of Life Insurers, as many as 63% of all new policies being sold are Whole Life. One of the main reasons this policy is promoted is because it costs a lot more money, therefore allowing the insurance company and the life insurance agency to rake in more income.
If you are being pushed to sign up for a Whole Life policy, you should definitely be cautious. Many insurance agents are company agents and won’t promote the right policies for you and your family, and it may be helpful to get advising from an independent life insurance agent.