Kim C. Christensen                                                              
Certified Financial Planner    
Registered Investment Adviser        
Registered Investment Advisor


Insurance is usually the foundation of a sound financial plan.  It is often the basis of your and your family's or business's financial security in the event something unexpected happens.  If you do not have insurance for unexpected events, you are in effect self-insuring.  If you do not have the cash or resources to cover an unexpected event, you are jeopardizing your financial security, and financial independence down the road.

Like most people, you probably do not like to think about insurance, or buy it.  However, you probably do like what insurance does if you need it.  Anyone who has a mortgage, a car, and/or a driver's license is supposed to have insurance, so most people are used to owning it.  In fact, most people would probably feel uncomfortable not owning it for something like their house, which is the most valuable asset many people own.

But, the same people often give little thought to what would happen to them, their family, or their business if they or someone they depend on became sick, injured, or died.  The value lost would probably far exceed the value of a home or car when taking into consideration the lost income or care-giving provided.  There is also a tremendous emotional loss in such a circumstance, and a lack of financial resources only adds to the emotional roller-coaster.


So how do you determine how much insurance you need, who you should get it from, how much it should cost, and how not to get ripped off?  You can find more specific information in the sections on types of insurance, but here are some generalizations that go across all lines of insurance, especially life, disability, and long term care:

1.    COMMISSIONS:  Insurance pays the people who sell it very well in most cases (not all).  On average, agents are paid somewhere between 40% to 100%, or more, of the first year premium on a policy.  (It is less for health, auto, and casualty insurance.)  The more you spend on a policy, the more the agent is likely to make.  The company they use also may affect the commission percentage they receive.  Therefore you need to be aware of this potentially large conflict of interest, and ask a lot of questions.
        You also need to know that there are cash-value policies available that are "institutionally priced" with significantly lower premiums and commissions (on the order of 3.5% to 10%), and much higher cash values with NO surrender charges.  They are available from the best companies in the business.  But, they are generally a well-kept secret, they are available from only a small number of companies, and most agents are not aware of them or how they work.  Some agents that do know about them and how they work may not want to recommend or provide them because of the lower commissions they pay.  I can help you find the best policy for your given situation on a consulting basis, and provide you with comparisons of the different companies that offer them.

2.    SALES INCENTIVES:  The insurance industry (as well as the brokerage industry) is rife with sales incentives to get agents and representatives to sell more products, and/or company-specific products.  These incentives include things like bonuses, trips, recognition at sales meetings and in company correspondence, better office space, more technology, expense allowances, etc. , none of which have to be, nor are probably going to be, disclosed to you.  If an agent is on the verge of qualifying for one of these incentives, that creates a lot of motivation to try to get someone to buy more, spend more, or go with one company over another.

3.    INTERNET DOES NOT EQUAL CHEAPER:  It is not cheaper to buy your insurance over the internet than from a local agent.  The companies that set up insurance internet websites are brokerages and/or agents also, and will be paid exactly the same as someone down the street from you.  The only benefit would be not having to deal with a salesperson who might be pressuring to do more than you want to do.  But a good agent who knows their business, and makes recommendations based on your needs, should provide value to you.  They can make recommendations and shop your case to find the best value, which will probably not happen through a website.

4.    QUOTES ARE OFTEN NOT REALITY:  The cheapest quotations do not always turn out to be the cheapest policies.  It is common to be presented quotations based on excellent health, but underwriting often uncovers health or avocation issues that lead to higher premiums.  That is why it is important to work with an agent who can "shop" your case in the event you do not get a favorable policy from your initial application.  It is also important to apply with an agent who knows what they are doing, so that you do not have to take multiple exams and fill out multiple applications to come up with the best offer.  Be aware when getting proposals from different agents and companies that they may be showing you premiums for people in excellent health to get you to go with them, knowing that you probably will not wind up with that premium.  Agents who ask you health, hobby, and travel questions are serving you well by doing "field underwriting".

5.    KNOCK-OUT CRITERIA:     Many companies use "knock-out" criteria that will prevent you from getting their best rate.  That means that a single factor like higher than normal cholesterol, being slightly overweight, a family history of heart disease or cancer will automatically disqualify you for the best possible rating.  In that case, it is often better to work with a company that uses "debits  and  credits" in underwriting.  That means that if  one factor is less than optimal, but others are more than optimal, they will balance out and you can still get a better rating.  This saves money.

6.    RECONSIDERATION:  In the event you do wind up with a rating (premium) that is less than the best, it is nice to have it with an insurance company that will offer you reconsideration down the road, perhaps in one year, two years, etc.  Sometimes ratings are permanent, sometimes they are not.  The best companies will give you reconsideration taking into account only the condition you were rated for, not new ones that might pop up.  What that means is that if you were rated for hypertension, and get it  under control before the reconsideration date, they will lower your premium, even if in the meantime you have developed cancer.  Be aware that few companies do this - most require that you apply with a new application, which would mean that you would probably get a worse rating because of the cancer.  Be sure to ask about reconsideration, and how it works if they offer it,  if you are rated by an insurance company.

7.    CAPTIVE AGENTS VERSUS BROKERS:  Almost anybody can get a Group 1 insurance license, and anyone with an insurance license can sell products from most of the insurance companies in the business.  These companies "broker" their products, either directly through agents, or more often, through insurance brokers who represent many companies.  However, there are still a few companies that use only "captive" agents to sell their products.  That means that the agents are treated as employees by the companies (although they are usually paid only commissions for what they sell), and only they can sell the company's products.  Some examples include State Farm®, Northwestern Mutual®, and New York Life®.  Companies that broker there products may also have captive agents.  If someone is a captive agent, incentives, and most likely requirements, exist that encourage or force the agents to sell those products first.  These companies have fine products, but they may not always be the best for all of your circumstances.  But if you determine that they are the best, you will have to purchase them from a captive agent of that company.  It is important to make sure that the captive agents understands all the nuances of their products and how to design products that provide you with the best value, and not necessarily the biggest commission for  the agent.

8.  NO-LOAD INSURANCE:  Many fee-only advisors advocate buying only "no-load" insurance, which pays no commissions or fees to the advisor.  However, my research indicates that the premiums for at least some of these policies are actually more than the best-rated policies of commission-based companies, and the financial strength ratings may be lower.  I do not see the benefit to a client in selling a more expensive product, even if it removes a potential conflict of interest. 

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