Most
life insurance carriers do a pretty good
job with the core protection they are
suppose to provide with your typical
insurance coverage and we aim to focus
on the best rated and most reputable
companies. That being said, you need to
always be your own advocate or at least
have a trusted 3rd party
life
insurance agent like us to make sure you
are making decisions in your best
interest and not the carriers. An
example of this has been seen over the
last few years in terms of term life
benefit payout options. Let�s look at
what the situation was and how to
protect yourself.
Life
insurance carriers are generally pretty
reputable but every now and then, some
VP throws out an idea at the companies
which probably sounds great in terms of
keeping term life rates lower and
increasing profitability but wreaks
havoc on the carrier�s reputation to the
public. This was such a case.
Essentially, a few life insurance
carrier�s started to offer what was
occasionally the default payout option
of keeping the life insurance benefit in
an account housed at the insurance
carrier. The verbiage regarding this
payout option was confusing at best and
it looked like you have physically had
the life insurance benefit transferred
to your ownership. It was crafted to
look like a checking account that you
could write checks from and ostensibly,
you could write checks�even the full
amount of the life benefit to yourself
at anytime. The problem is that the
marketing of this option partially made
it sound you already had ownership of
this money which is not entirely the
case. Why does this really matter if
you could write a check from that
account at any time? A little thing
called the time value of money comes
into play.
Let�s
say term life insurance benefits were
triggered for $500K with you as the
beneficiary. $500K is a pretty standard
amount of coverage on the market to look
at. You receive notification that looks
like the money is now yours but it�s
sitting in the carrier�s account. They
pitch the ease with which you can write
checks against this account even up to
the full amount. Here�s the catch. The
carrier is retaining the interest and/or
investment from this money�not you.
See, if the $500K is just earning simple
interest at 4%, that�s $20K annually you
are losing out. The carrier is getting
this $20K. In fact, they�re probably
getting much more since the funds are
usually pooled with all the other
co-opted benefit payouts and/or general
term life insurance premium reserves and it
could be earning 8 to 10% on average.
That�s now $40-$50K that you�re losing
every year you keep it in that account.
Obviously, this is not in your interest
and you need to transfer those funds to
your checking/savings/investment account
as soon as possible.
As
your life insurance agent, we�ll make
sure to work with you including the
payout option to look out for your
interest. This takes into account plan
selection, enrollment expertise, long
term plan maintenance, and of course
payout options. You can always come to
us at the time of
term life insurance
benefit payout to make sure you have the
right option. Don�t give extra money to
the life insurance companies. They�re
going to be alright. |