In my last article I pulled apart the advice of someone looking to sell incorrect information through newsletter subscriptions. In this article, I’m going to show an example of mainstream media providing incorrect information on life insurance.
Here’s the article from the Globe and Mail (an excellent financial newspaper, perhaps the finest in Canada):
Here’s the paragraph I question:
“When it comes to the future insurability issue, Mr. Drake writes: “When it comes to protecting your child’s rates from future health issues, this would be a bit like gambling. To insure for this reason you would probably have some concern that your child will have problems in the future. The problem is, if you know of any family history then you have to tell the insurer and this will lead to higher premiums right from the start, and if you don’t tell them they could deny your claim.”
The comments are from Tom Drake. I know Tom personally. He is financially astute, and a stand up guy. And even he fell into the trap of offering information on something he didn’t have first hand experience in. The claim in the Globe is that if you have a hereditary problem, that this will lead to higher premiums on your children. My assertion is the exact opposite of this – if you have a hereditary issue, we can typically get regular life insurance premiums for your children prior to them developing any hereditary condition. In other words, if you have diabetes, and your children don’t, then your children should be able to get life insurance without regard for diabetes. If they later develop diabetes, they already have the life insurance. (whether you should do this is beyond this article).
Because I know and respect Tom, I ended up writing an essay in an attempt to educate him on the subject. Here’s the clip from my email, which I trust will serve to correct any consumers who may be looking for insurance on their children, but are reluctant to do so:
If you have a family history and no symptoms, then the only thing that happens is you get ‘regular’ rates instead of preferred.
If you have family history AND symptoms, then you absolutely are going to see some concerns from the company.
So if everyone in your family has died from diabetes, but you don’t have diabetes, then there’s no real issue with life insurance. if everyone in your family has died from diabetes and you have diabetes, we’ve got a problem getting coverage.
For kids, mostly the parents have something that’s hereditary but the kids don’t have it yet – so no issue on the life insurance. You can quite simply beat the game with this by insuring kids before they develop whatever hereditary issue you’ve passed along.
That’s the general answer. Practically, it’s never 100% because it varies by company.
I know financial bloggers make this stuff cut and dried, but let me give you a real example.
The reason is something called utility theory, and it’s partially based around people’s perceptions or value of life insurance. It works like this. You wouldn’t pay $1 to insure $5. You wouldn’t pay $500,000 to insure a million. But you will pay $5 to insure a million. The exact number you’ll pay, to cover a specific amount, varies widely, based on your ‘utility’ of the coverage. Healthy people and financial bloggers have one utility – they want cheap and term. People who’ve been declined have a whole other utility. They’ll pay permanent premiums because their utility says permanent is inexpensive. Their perception of the risk is far higher than most people’s. Would you pay a premium to insure your children’s future insurability? Probably not. People that have hereditary issues often will.
And that’s why people have different perceptions, why it’s not always as clear as ‘buy term’. It’s mostly ‘buy term’, but not always. And it’s not ‘don’t buy insurance on kids’, it’s only mostly ‘don’t buy insurance on kids.
The dilemma insurance brokers then have, is we see this stuff routinely. I see uninsurable people every day, and I get calls from people who had those crappy whole life policies as a kid, cashed it in for term, and 20 years later really regret it. So we know this stuff happens. Knowing it’s going to happen to some folks, do you walk away from insurance on kids and basically say screw the 10% that are going to be uninsurable…they took the risk? Or do you attempt to sell those policies because you’ve got first hand experience and know that 10% of the time you’re going to look like a hero?
I’ve got $250K of permanent on my kids. Almost all of my clients have no insurance on their kids (most of my clients are hardcore term advocates). The best way I can find to address this is to simply educate my clients, make a recommendation based on what I think is best as well as what most people do, then let people tell me what they want. It works for most people :).
That’s my essay for today!
And as I mentioned in my last blog post, the takeaway from this article is consumers should be wary of information they read on the internet – and sometimes even the information they read in mainstream media like the Globe and Mail. Consumers are best served by consulting with an experienced life insurance broker – and even better if you consult with two or three to get a balanced opinion.