Yesterday, I read an article by an LTD claims lawyer about people with declined claims. He said you need to get a lawyer to sue your insurer to pay the claim. His premise is all insurance contracts are the same. That premise is not correct.
Gold. Silver. Wheat. Soya Beans. Those are commodities and can be regarded as the same. Insurance contracts, even if they look similar, are rarely the same.
After 21 years in this business, it still strikes me as amazing that many insurance advisors think the way this lawyer does.
If a client needs life insurance, they typically look for the cheapest insurer and most advisors assist with that goal.
The advisor will typically use a tool called Life Guide (LG). LG ranks insurers by price. Insurers know this and constantly fight to be the cheapest on LG by reducing their rates. When this happens, something has to give.
Service levels decline. Offers of insurance are made with higher premiums than quoted. A higher number of applications are completely declined. Renewal costs increase. Other effects can be seen.
Insurance is not like silver, the same everywhere in the world. As such, with insurance, it is important to learn the differences between companies, their processes and their contracts. Differences between insurers can include:
- Some are easier on underwriting. You may get a reduced price or have an easier application process.
- Some have additional riders that give you more benefits. (i.e. they do not charge extra if you go backcountry skiing, they may fund some charities on your behalf. Others may provide opportunities for scholarships.)
- Some have better options for conversion from term to permanent policies.
- Some have contract wording that is better for business owners or tax planning.
There are a ton more differences.
With group benefits, you can tell you are not dealing with a professional if that person shows you a spreadsheet
with a bunch of companies and points at the cheapest first year price.
The reality with group benefits is most insurers will produce a low quote to win your business. In year two, they reset your premium to the correct price. Some will even claw back some or all of those savings. Group Benefit Insurers use a calculation of claims (divided by) premium + their cost of administration + cost of living. Insurers that offered a first-year discount may recover their original discount by adding it to the renewal. This is where the differences start.
- Some insurers have fees that can be 20% higher than others. Even though you saved money in year 1, in year 2 and every year after, you will pay 20% exponentially more than you would have with the insurer with lower fees and a higher first year price.
- All insurers have different definitions of what medication they will cover.
- Some insurers will pay reduced amounts if you do not use their preferred pharmacy or if your Dr gives you a medication that is not on their preferred listing.
- Some limit the list of medications they will cover.
- Some simply do not pay for high-cost drugs. When you need it the most, you are cut off!
- There are different fee guides for dental coverage. As such, 80% dental, may not mean you only pay 20%.
- Travel insurance may not cover existing health issues. Others may.
- Long term disability may only cover accidents. It may cover you if you cannot do any job vs. others that cover you if you cannot do the important parts of your job. Unless you are confined to a hospital for months, the first may have you push a mop and the latter may actually pay you.
- Some disability contracts may not cover mental health related conditions.
I can continue to list differences between insurers for pages.
I think you get the point. When buying insurance, listen to the words the broker is using. You can tell you have a professional as they will explain the differences between companies. They will tell you why one will fit you better than the rest. If they do not, and they simply point at the cheapest on the spreadsheet, go find another advisor.
In the end, the cheapest price in year 1 will likely not do what you think and it may very well cost more over time.
If you are reading this article, you likely need insurance. Insurance is a relationship between you, your advisor and the insurance company. Interview your advisor. Are they fully independent and can access every insurer or are they beholden to 1 or 2 or 3 insurers? Do their answers make you feel like their teams will be able to support you if there are any issues? Are they part of a team or a lone ranger? Do you feel comfortable with them? Did they admit when they did not know something and offer to follow up? What happens if they are abducted by aliens? Do they have a plan in place? Did they provide you extra context and advice that will help related areas of your life or business? What else is important to you?
As for that lawyer who assumes that all insurance contracts are the same, I won’t be paying him for advice.
Happy insurance shopping. Please let us know if you have any questions.
We are always happy to help. The more questions, the better.
Jay Nadler, Employee Benefit Specialist.
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