Today’s guest post is from Aaron. He’s the creator of clarifinancial and is active with the personal finance community. I asked him to share some of his thoughts on Green Panda Treehouse and he was gracious enough to give his thoughts on shopping for life insurance. If you want to keep up with Aaron, chat with him on Twitter (@clarifinancial).
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).
If you want to get technical, suppose your agent has access to low-load or no-commission life insurance. Will they show you those rates? Chances are they won’t, unless they work for one of those companies. And if they do work for one of those life insurance companies, they won’t be able to show the other options. Besides, their salaried job won’t be around very long if they can’t sell something.
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:
- 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.)
- 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.)
- 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.
(Note: Aaron included no links to site when he submitted his post, a gracious move. Since it was well written and honest, I included the links myself. )
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