Are you looking to buy your first life insurance policy? Before you sign the proposal forms, I would like to give you the top questions you should absolutely ask your insurance agent.
I am sharing this so you can be an informed consumer and evaluate your servicing agent better. It means:
- You will get a trustworthy and competent agent
- You are going to buy an insurance policy that meets your needs
- If done right, you will save on insurance premium, which is a very long term commitment.
But if you are an insurance agent reading this, please don’t feel intimidated. Don’t get me wrong. It is because if your prospective client is asking these questions, you get a chance to prove yourself. When you can handle them well, you will win a lifetime customer, who will not easily terminate the policy, which affects your persistency ratio, reducing your commission and bonuses.
A little disclosure: I was an active insurance salesperson from 2003-2010. I semi-retired from the industry in 2010 to focus on my online financial education business. Later, I could no longer maintain my manager and agent status and left a few years later. So now, I am no longer representing any insurance company. From the point of view of a former insider, here are the top five questions to ask your insurance agent.
Question #1: How much life insurance do I need?
A competent agent should provide a guideline based on your income level and family commitment, which is how much you are providing for your family.
It is like bringing the right amount of water for a hike. When you carry too much, it becomes a burden. If you don’t have enough H2O, you’ll suffer from dehydration.
A good insurance salesperson should be able to explain the five major types of insurance coverage thoroughly, which I call the 3DHA.
- Death Benefit
- Disability (Total Permanent Disablement = TPD)
- Diseases (dread diseases or critical illnesses)
- H&S (Hospitalisation & Surgical benefit aka medical card)
- Accident (Personal accident benefit)
If you only buy an accidental coverage plan, it means you are going to war with only your underwear. (show b-roll of movie 300)
I provided more details in my book Money Smart, Chapter 81, page 312 and gave you some guidelines on how much insurance you should get.
Your agents should be able to explain all these different types of coverage in simple language.
If the agent goes directly to name a product without telling you what you need, it is a red flag.
Imagine a doctor prescribing a medicine straight away without taking your temperature, asking questions about your illness, checking on your other symptoms, etc. I think you dare not take that medication at all.
A genuine insurance agent should know your needs before proposing any plan in the first place.
Question #2: How can I get adequate coverage with the least amount of premium commitment possible?
Let’s say you need RM100,000 life coverage. There are many different types of insurance plans that can provide the same sum assured. You can choose from the cheapest group term life plan (RM12/month), or investment-linked plan (RM100/month), or whole-life policy (RM200/month), to endowment or savings plan (RM500/month), to a one-time payment single-premium insurance plan which could be RM20,000.
It is like climbing a mountain. There are many routes you can take, including taking a helicopter.
For various types of life insurance plans, the main differences are
- the amount of premium you need to pay,
- how long do you have to pay it, and
- the cash value in the policy.
When you ask for adequate coverage with the least premium, it shows that you are only interested in the protection, not the cash value. That’s also the mindset I want you to have.
Would you go to a McDonald’s to order a CharKoayTeow? Similarly, insurance companies are experts in protecting your risks and insuring your wealth. They don’t specialise in helping you to make tonnes of money.
By asking this question, you get to know if your agent can propose a policy explicitly designed for protection with the least premium.
This is beneficial to you because
- you can have adequate insurance,
- without overpaying for the protection and
- end up with more capital to invest and grow your wealth more efficiently.
Back to the hiking metaphor, you bring just enough water for the journey, so you can also take along a camera and snacks to enjoy the hike.
Try asking this same question to different insurance agents. You will get several different proposals, even when the agents actually represent the same company.
Let’s get to the next question you should ask:
Question #3 to the agent: Do you also purchase this same policy?
I can accept a barber who doesn’t cut his own hair. But if a chef doesn’t like his own cooking, I don’t see a reason why I should eat at his restaurant.
Similarly, if a policy is good, the agent should have one for himself or his family members. If not, we would like to know the reasons and see if his explanation makes sense.
For example, your agent might try to sell you a savings plan. This type of endowment plan provides low coverage but high cash value. In fact, this kind of plan is much easier to sell because you don’t need to pay the premium for your whole life. And you’ll get back relatively higher cash value in the future compared to other plans designed for protection purposes. It is an excellent force-saving system for people without discipline, so that they can automatically contribute to a savings plan and at least build up some retirement fund 20-30 years later.
The only problem is that the plan is not providing superb returns. You are already on the winning side if you can get a compounded growth rate of better than a fixed deposit. However, it is not as efficient compared to investments in the equity market and property market.
So some agents also don’t buy this type of savings plan themselves. But they do market it because it is relatively easier to sell, and the premium is usually higher. Therefore, they get higher commissions too. Here is a confession: I plead guilty myself because there was a period that I actively sold this type of policy to my clients too.
But I don’t buy the policy for myself or my family. I think you will encounter many agents who market only savings plans and don’t buy one for themselves.
It raises a red flag when someone doesn’t eat his own cooking.
This leads us to the relevant
Question #4: What are the disadvantages of this policy?
Every type of policy serves a specific purpose. So each policy is sure to have its downside. If your agent keeps saying that this is the perfect policy and you will surely win, please beware.
If your agents can explain the disadvantages of a policy well, that means he has good product knowledge.
For example, a group term life policy is suitable to get death benefit coverage at a low premium. But the problem is you couldn’t add a medical card bundled together.
An endowment plan is suitable as a force-saving tool. But the return is mediocre. If you depend on it to save for retirement, it will take longer and yield a much lower return than equity investment in the long term.
My favourite type of policy is the investment-linked plan because it is transparent, flexible, and provides the most comprehensive coverage. And if quoted appropriately, you can get the best coverage with the lowest premium. However, the only downside is that it is complicated to understand.
Some insurance agents also don’t understand how it works and have never sold one ILP ever. If your agent can explain to you the nitty-gritty of ILP, that shows that you have found a very knowledgeable agent.
And finally, a sensitive question to ask. Most agents will be uncomfortable answering. But an experienced agent will handle this really well.
Question #5: How much commission will you get from this policy?
Without sheep, there can be no wool, which means the benefit comes from a price one has paid.
In other words, what I am trying to say is that agents’ commission also comes from the premium that policyholders pay.
Generally, a low commission is good for a client. So whatever you pay less in commission is returned to you in either a lower premium or more cash value.
But on the other side, the low commission also means that agents will get paid less. Imagine doing the same amount of work, but make much less income. That’s precisely the situation most insurance agents face.
When an agent sells a high protection policy with the lowest premium, say RM3000/year premium for protection of RM1 million, there is a lot more work involved because the underwriting process will be more stringent. The agent has to fill up more forms. The client will have to go through medical examinations and answer more questions regarding their health and financial status.
To thrive in the insurance selling business, agents enjoy the most benefits when a client buys a high premium policy with low protection coverage. That’s the reason you might encounter insurance agencies that sell only savings plans. That’s based on the 80-20 Pareto Principle. 80% of the commission incomes come from 20% of those high-profit policies, which are easier to sell, and require less service commitment.
How do agents get paid? The commission is a percentage of the premium collected. Agents get a commission for 1st year up to the 6th year based on your recurring premium payment. Cumulatively it is usually more than 100% of your one-year premium amount.
Plan A Vs Plan B: Same Benefits for Customers but Different Commission Rate
Back in 2003, when I was a rookie agent, there were two similar plans that I could sell. A client could buy Plan A or Plan B, with identical protection coverage, including all the 3DHA benefits I mentioned before, plus cash value. The only difference is the commission rate! For Plan A, I would earn 125% commission over 6 years. But for Plan B, I would only get 15% over the same period.
Can you imagine the dilemma I was in at that time? Selling Plan A is good for my own pocket. But obviously, all my clients should have bought Plan B because they will surely have much more cash value at the expense of my reduced commission.
So what’s the solution? After about a year, the insurance company stopped issuing Plan B (the one with lower commission, and better benefits for customers), so that agents can only sell Plan A, which is of course, the preferred plan agents would promote.
Okay, why is it important as a client to ask how much is the insurance agent’s compensation? The reason is to find an agent who is transparent with you, who is truthful and trustworthy. To earn your business, the agents must convince you that they deserve the commission.
An insurance policy is usually a lifelong commitment. To get the most suitable plan, you need to start with the most competent agent you are comfortable working with. And here are the top five questions you can ask to help you screen a good one:
- How much life insurance do I need?
- How can I get adequate coverage, with the least amount of premium commitment possible?
- Do you also purchase this same policy?
- What are the disadvantages of this policy?
- How much commission will you get from this policy?
Thanks for reading until this point. You can take part in the Money Smart book contest. Here is how you can participate by posting in the comment section. Tell me your experience dealing with an insurance agent. How did you get connected? What happened during the discussion?
I will pick a lucky winner to receive my book Money Smart. If you want a higher chance of winning, elaborate more about your conversation with an insurance agent. Tell us your unique experience.