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Can You Trust Your Life Insurance Agent?

Your life insurance agent is biased. How do I know? I used to be one. Not only is your agent biased, I can attest to the fact that it is unavoidable.

There’s something called a “conflict of interest” that the Freakonomics guys wrote about in the section about realtors. They used research to show that more times than not, real estate agents sold their clients’ homes for less than they sold their own.

Insurance agents have a conflict of interest because when they tell you to buy one policy over the other, they stand to make money from commissions. They make money by selling policies, so their interest (to make money) may be in conflict with yours (to save money).

Imagine if you and your partner are both getting life insurance, you could have twice the problem on your hands. But if you could solve the problem of putting your family’s interests first, then you would have overcome a double-hurdle. Here’s an example of how people in the insurance industry may put their interest ahead of your family’s.

Conflict of interest in action

I got in trouble at one of my old jobs. I was in charge of supporting about 600 active agents through an independent life insurance brokerage agency. They would come to me with problems and I would help them find the best solution for their clients – or so I thought.

It turns out I wasn’t supposed to work for their clients. I was supposed to work for the agents.

I got in trouble because I recommended the higher rated life insurance company that was about $15 less a year instead of the lower rated company that was more expensive. This was a problem for three reasons:

  1. The agent made a significant portion less on the less expensive company. (Because of the way commissions were calculated behind the scenes, not because of the small difference in premium.)
  2. The brokerage agency I worked for made less money for the same reason. (Even the people who you never see have their own conflicts of interest.)
  3. The brokerage agency wanted to channel more premium to the lower rated life insurance company to maintain its payout with them. (How would their payout be any of your concern?)

This includes online agents

Oh, and by they way, this includes life insurance agents you find on the internet, too. How do you know you found an online insurance agent? Look at their website, sometimes in the fine print or disclosures. If they want to sell you something, well… then they are trying to sell you something.

Many of the “big names” of online life insurance quotes act the same way your local agent does. They want to get in contact with you to sell you a policy. They have the same conflicts of interest. And in many cases, your local agent can actually show you quotes from more life insurance companies than some of the most recognizable names in online life insurance quotes.

Fight the power

The best way to fight the power of life insurance agents, intermediaries, and life insurance companies from making less-than-optimal decisions for you is to put competition on your side. Get quotes from multiple agents. In fact, let them know they will be in competition. That way, they will work harder for you to put their best foot forward.

There are good agents out there. You want to find them and put their expertise to work for you.

In case you think there should be a pitch is in this article, here it is. You see, I created a service that lets you get quotes from multiple agents but is free to use. The best part about it is you don’t get any sales pressure or unwanted phone calls.

We aren’t trying to sell you life insurance. We want you to be able to find the best agent who can. I think getting competitive quotes without any sales pressure is the best of both worlds. If you agree, go check it out.

Photo Credit: Matt Biddulph

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10 comments add your comment

  1. Thank you for mentioning the good agents out there. Some of us want to believe we can change the life insurance industry one policy at a time. Definitely a good article that I’ve had too much experience with. In the end, it is the insurance guy’s choice how they want to run their business and it doesn’t have to be the way you described it. That’s why some of us will stay independent.
    For anyone not familiar with Clarifinancial, you should definitely check it out.

  2. Thanks for the recommendation CJ. There definitely are good agents out there, but there are others who do a good job ruining the reputation of the industry. The tricky part is sorting through them to find the right for you and your family. Thanks again.

  3. Thanks Aaron for taking time to share your thought with today’s guest post!

    You’re so right CJ about how important personal integrity is with our careers. I think there are some people (including some insurance agents) who lose focus and put their an emphasis on money rather than people. It’s possible to do both, but it can be hard sometimes.

  4. Can’t speak much for life insurance agents but for real estate agents there is a person that can counter this conflict of interest. His name is the property inspector. The agent will basically do anything just to get your house bought or sold. The property inspector should by his job description find every flaw in the home and try prevent the sale or at least get the buyer to be more wary.

  5. It would be an interesting thought to have a “property inspector” of sorts in the insurance field. Still, getting an appraisal is done by another person, often at the last minute with pressure by the lender and real estate agent who probably referred the business. It’s all a game.

    There are some fee-only advisors who can help with this sort of thing for insurance, but some don’t have adequate training and other advisors want to sell you something else. This leaves only a few “fee-only” advisors left who seem truly suited for a stop gap measure.

  6. I have to disagree with the focus of the article and the comments. Life insurance can be very simple (term 10), or it can be a very complex financial instrument.

    IF, and it’s a very big IF, you know exactly what kind of policy you want, then getting competing quotes works fine. But you’ll also need competing presentations so you know why the cost of quotes differs. Clients barely want to sit through one advisor’s presentations, let along multiple appointments.

    Also, to properly assess a client’s insurance need, I need a lot of information about long-term plans for family, estates, business if they are owners, and much more. Then I can offer a few options for them to select from. And just because Term may be most suitable now, due to financial constraints, they may well want to convert part of that policy in the future for long-term planning needs, so I want to make sure I’m setting them up for the best long-term options. This goes double for ensuring that you set things up properly at the get-go in case they become uninsurable in the future.

    What you are proposing is comparable to asking for quotes from a pharmacist after having self-diagnosed. Great idea if I am exactly right about what I want, lousy idea if I am mis-diagnosing. I need to see the doctor.

    And the fee-only boondoggle is just that. Most middle-market clients will not pay the money necessary to get a proper plan done, but are content to have the commissions paid by the insurer. With significant disclosure of fees paid here now, and full disclosure coming, it should not be a secret between client and advisor as to what is being paid. Just ask. If they won’t tell you, or they fudge, find someone else. On top of that, it’s not currently possible to operate on a fee-only basis for insurance in Canada, the comp models do not support it.

    The biggest problem in our industry is that clients either won’t seek advice, or can’t get it because they don’t meet minimum asset levels. Turning insurance planning into a commodity will only undermine family’s economies further. People need help, good advice, and support in making complex financial decisions.

    While I agree that advisors who are only in it for the sale are predators, asking for AND contacting supplied references will help to ensure that you choose a reputable advisor. Big fancy offices, lots of television advertising, and all the other marketing claptrap do not ensure that an advisor operates from integrity. Neither does finding the ‘cheapest’ price for a client’s stated need.