In all of the research I've been doing there are warning about hidden fees and commissions but how do I know if I've uncovered all of the possible "hidden" fees? What are normal fees for a whole vs. term policy?
This is a very confusing thing to understand as life insurance policies have many different types of fees. Depending on the type of policy, company and riders, figuring out fees on a policy is no easy task. As an independent insurance broker, I have access to many different companies and policies. A good agent can review the different fees and cost with each policy so you have the best opportunity to make a strong decision based off your needs. The best way to analyze this is through the illustration and policy contract.
Margaret - if you are asking specifically about whole vs. term life insurance, then the information will be available in the disclosure document provided by the insurance company.
Whole life policies are especially difficult to dissect, because the fees and expenses associated with them are paid for over time through inferior risk-adjusted investment performance. In short, you may never know how bad a policy is until it's too late to do anything about it! As a rule, whole life policies offer extremely poor value for consumers, especially in a low interest rate environment. I can virtually assure you, without having seen the specific policy you are considering, that you can do better with Term Life coverage coupled with a diversified investment portfolio.
You may have heard the old saw "buy term and invest the difference." There is sound reasoning that underpins this cliche: by un-bundling the insurance risk from the investment risk, you can more fairly evaluate the benefits, costs, and risk of each. I realize this response does not exactly address your question, but I hope it leads you to carefully evaluate your options.
Dear Jerry - It would be helpful to the community if you would post your background, as it would help users understand any special expertise or biases that you may have. In particular, if you are an insurance agent, you should say so.Your statement "there are no hidden fees" is simply not credible given the experience of most advisors on this forum.
There are no hidden fees. Each company is different, and there is a major difference between stock and mutual companies via ownership. On average (again, each company varies), a years worth of premium is paid to the conduit (be an agent, online company acting as intermediary, et cetera) within the first 10 years, and depending on the conduits production, certain bonuses are paid which vary per company and relationship between the conduit and said company. Typically, a mutual company refunds premium each year in the form of a dividend ( most stock companies do not pay as high a dividend due to shareholders being owners of the company) for permanent or whole life products. Term is basically renting insurance, as a small percentage pays out. The current death rate is 100%, so permanent typically insures your heir(s) will get paid while less than about 3% of term ever pays a death benefit. The fees do vary per company with the cash value and the mechanisms to borrow, as it normally affects the dividend rate (to my knowledge, about 3 large companies pay an ordinary dividend when someone borrows cash value IF it is set-up correctly from the start). Buy term and invest the rest is not a sound strategy, and the group that promoted that a decade or so ago lost in court. There are no guarantees with investments, and permanent insurance is an unique contractual aranagement WITH guarantees. Some companies are paying dividends of about 7% and the IRR (on the cash value) is tax free if accessed correctly and can be higher than a traditionally conservative portfolio. The IRR on the death benefit is tax free, so it has its advantages over investments (and also avoids probate if a beneficiary is named and or put into a Trust). The purpose of life insurance is to make a family whole after the death of someone and or allow an individual to be able to spend all their money versus living of a percentage (typically 3.5% today) of their nest egg. Say you do borrow money from one of the three companies that do pay you a regular dividend, with one company you actually net money on monies you are using. Using cash value in insurance properly allows you to use the money more than once, and if compare to and you spend your investment, your money is GONE forever and you have the potential to lose in the market. There are some insurance products referred to as variable (please note there are over 20 main categories of insurance with hundreds of hybrids and riders) which utilize the stock market, these seemed great when the market was rising, and most folks wish they never bought them due to the sideways market of the last decade. Please note there are other costs associated with variable products, and ALL riders with all products (including term and whole life) cost money. Typically, with term, you want to make sure you can convert the policy into a permanent product should you lose your insurability. In conclusion, take action with a person you trust and a company you trust, as you could lose your insurability or die tomorrow. Bind your coverage when you decide who to work with. I hope that gives you some color. If you are cash constrained, focus on getting an inexpensive term policy you can convert later to a permanent product. If you knew you were going to die tomorrow, how much life insurance would you buy? If you knew you were going to die at age 85, how much permanent would you buy versus term that would typically lapse before you die? Focus on simple, traditional products. There is a reason whole life has been around for over 160 years, and that is because it works. Term works if you die while you own it, and it does give you and family peace of mind for x number of years.
No biases, as I elminate mine and any elses via a financial simulator. You should not be selling life insurance if you are not aware of the fees, as all fees are required to be disclosed in a simple manner and if you are "brokering" there is no way you can know all the associated company protocols and fees, as it is like knowing 10 different tax codes. For example, all companies I use charge a modal factor if you 'finance" your premium monthly, versus paying annually. That costs you 9.5%. I am a RIA.
As an RIA and a licensed insurance agent, I would say you are comparing apples and oranges when talking about term insurance versus whole life or another cash or permanent product. I hate the terms “commissions and hidden fees” because if you buy an insurance product, someone is going to earn a commission. If you go online and purchase term insurance or buy it from and agent directly, they will generally get 60% or more of the first year premium in commission. It cost you no more or less based on where you purchase it. But what you are buying with term insurance is pure death benefit only, nothing else. So it would behoove an individual to shop term through an independent agent.
With whole life, universal life and variable universal life, it is important to have your agent run an illustration based on minimum rates of returns and guarantees. This will give you an idea of how costs degrade the growth in cash value.
In whole life and universal policies, the money is invested in the company's general account and your returns are based on their investment return and internal cost structure as well as the basic cost to insure you.
If you purchase variable universal life, the premiums are invested in separately managed accounts, and you take the investment risk. It is actually easier to get the costs associated with this product because the agent has to give you a prospectus since it is an investment product. However, beware. The prospectus is like navigating a small local telephone book.
If you want to know what the agent is earning in commission, simply ask them. They are generally paid well as a percentage of the first year premium.
All term policies are note created equal, and if someone loses their insurability with a term policy that cannot be converted or can only be converted to the most undesirable permanent product of said company, I would say you did not act in the best interest of your client. Certain term policies can be converted to various products if someone becomes disabled where the waiver of premium pays for the new policy, and that is a benefit worth reveiwing versus having a client lose their insurability because an agent commoditized the product versus diving into what is best for a client.
Jerry, as you know, there is no way to cover the complexities that the original question created. This is why everyone needs a competent, trusted advisor. I have to answer in generalities on a bulletin board.
All good points; it is confusing and lots of information out there. Ideally, you can find an adviser who has an insurance background but is independent ( not an agent for one company). If you trust this individual and they are explaining concepts in a manner that you can digest - working with then is the best route in my view.
