This comes from Michael Plaks, formerly a licensed insurance agent: Insurance as an industry is fundamentally messed up, and I have no idea how it can be fixed. The three biggest problems:
- We forgot the true purpose of insurance
- There are too many choices
- Insurance agents usually live off commissions from sales
Why do we buy insurance
Somewhere along the way we lost sight of the concept. Insurance is not supposed to help us today in any way. It is supposed to bail us out in the future – if we are faced with some huge bill that we cannot possibly pay ourselves. For example, if our dishwasher breaks, can we afford to buy another one? Probably yes. Then, there is no need to buy the insurance or warranty to “protect your investment” in dishwasher.
Next example: if your AC unit dies, can you afford to replace it out of your pocket? Hopefully yes. But if not – then some kind of insurance or warranty for AC may make sense. Now, if the next hurricane destroys your entire house – can you pay for that? Almost certainly not. This is why house insurance is a must.
Conclusion: only buy insurance for something you absolutely cannot handle yourself, such as house fire, hospital stay, or long-term disability. Do not waste money on insurance against something that you can handle, such as dental cleaning, fixing your computer, or even the funeral costs.
Choices, choices…
Insurance choices are overwhelming. Here are some navigation pointers.
- Start by deciding what kinds of insurance you must have and ignore the rest
- For each kind of must-have insurance, learn the basic principles (but not specific products)
- Find an honest insurance agent (they are rare but they do exist) and take his advice
- If you want to understand all the options and make “the best” choice yourself – you are likely to kill yourself in the process
One more tip: look for the broadest insurance available – the one that covers all possible cases. There is an alarming trend to sell “narrow” insurance that covers a specific situation. Examples: cancer insurance, flight insurance, dismemberment insurance, employee theft insurance, mortgage insurance. Stay away from those. Instead, buy a general insurance that covers a wide range of possibilities.
Yes, cancer is scary. But what’s the use of a cancer insurance for somebody with diabetes or heart failure? Choose comprehensive medical insurance instead. If you die, will your mortgage be the only financial problem for your family? I don’t think so. Dump this “mortgage protection” insurance and trade it for a generic life insurance. Then, your heirs will be able to use the money for whatever they need, including the mortgage if necessary.
Is the insurance agent on your side?
Commissions issues
Something you need to remember about insurance agents: they are not evil, but the insurance industry often forces them to act that way. As a rule, insurance agents are paid withcommissions only. No sale – no money. Just like you, they have families to feed and jobs to hang to. Some agents have large client base and make comfortable living. Unfortunately, many are hungry and desperate. A desperate agent will do anything to make a sale – whether it benefits you or not. Don’t blame him: for him, it is about survival.
Another thing to remember about insurance agents: their commissions vary dramatically from product to product. Some types of insurance are very profitable to sell, for example “whole life” insurance and annuities. Other products are hardly making any money for the agent, such as auto and health insurance. Besides, within each category, some products are more profitable than others, and some insurance companies pay better commissions for selling their stuff. It is simply human nature to sometimes choose what is best for your bottom line as opposed to what is best for the customer – particularly when your business is not doing well. I am not saying that insurance agents are dishonest as a group. But I am saying that you need to watch for serious conflicts of insterest that may influence your agent.
Licensing and affiliation issues
If you go to a Ford dealership – are you likely to hear about the benefits of Toyota? Insurance agents have different licenses and are affiliated with different companies. Sometimes, they are “captive” agents – meaning that they have an exclusive relationship with one specific insurance company and sell their products only. Even if they are not married to one company, they may have an arrangement to promote Companies A and B but not Companies C and D. This is not necessarily bad – as long as the agent is upfront about it, and the products he sells are a good match for your needs.
Well trained to…
Last thing to keep in mind: insurance agents are highly trained professionals of selling. Believe me – I am a licensed insurance agent myself, and I went through this training. The sales techniques employed by agents range from legitimately creative to disgustingly abusive. Always remember that you are dealing with a person who was trained to manipulate you. As long as they do not abuse their skills – it is not a problem. Unfortunately, some of them do.