To keep this as brief as possible I am breaking it into two segments. One this week and another next. I am sure, dear reader, you have already experienced how difficult it is to compare insurance products on an “Apples to Apples” basis. I am briefly going to share with you what I have learned over the past 30 years in negotiating and working with insurance companies. Some of it is inherently cynical. I apologize for that but one can’t help but become cynical in the process of unraveling the mysteries and enigmas created by the marketing efforts of various companies. I don’t believe insurance companies are any more intent on hurting or manipulating someone than anyone else. But, it remains that finance can be complex in its nature and what you think you see may not always be what you get.
Analyses, like scientific experiments, always contain assumptions and these assumptions influence and sometimes dictate the outcome. So, my first step is to challenge common but falacious assumptions as you begin any analysis.
Assumptions common to funeral home owners:
1. Your needs and the needs of the insurance companies should be aligned.
Any alignment between your needs and theirs is coincidental. A strong and somewhat harsh statement like that deserves explanation. There is nothing malicious or malevolent in this. In fact, you don’t always want them to be aligned. What you want is for them to be a strong and profitable financial institution. You want them to be able to pay your claims. As a consequence they will often need to make changes or adjustments you might prefer they not make. In other words: they will make decisions that are in their best interest and, other than normal market pressure, you will not have a seat at the decision table. It is unrealistic, unreasonable and unfair for you to expect them to “watch your back.” I assume you are an adult … you should watch your own back. An old latin proverb is appropriate: CAVEAT EMPTOR…LET THE BUYER BEWARE!
2. The company representatives understand their products.
Few field reps know much more about their products than their company tells them. Likewise, few funeral directors really understand the business they are in. This is not a slam on either it is simply a universal truth common to human nature. It is not bad or good it just is. The field rep cannot and should not make a decision for you. You must make an informed decision based on doing your own due diligence. The nature of people is they hate doing this work. It is this that makes word-of-mouth so powerful. Hence, my desire to help you understand the variables for yourself.
3. You know as much about insurance as they do.
In gambling the advantage is always to the house. Insurance may not be gambling but one assumption that is always wise to adopt is that the advantage is always to the house. This is accomplished by understanding more about how this works than you do. It is easier than you might think to unravel some of the confusion…but it does take some effort. Think of it this way: as a funeral director you have all the answers to your customer’s questions but they don’t always know the questions and you have forgotten many of them. It is the same when you deal with insurance companies. They are not responsible for asking your questions for you.
4. You can make a decision on somebody elses averages.
If I can convey only one thing to you it is this: You cannot understand any product by using averages. You must always price it out on a specific block of business. In fact your specific block. When people hire me to compare products for them I always use their specific contracts (minimum of 60).
5. Commissions or growth are independent of other variables
There is an old saying that “you can’t spend percents”. Well, it is true. Did you know for instance that a 2.5% simple growth product can outperform a 3% compound product? That’s because growth is paid on face value not prearrangement value and the bumpup on some simple growth products is so much higher that it creates a higher growth than the compound product. The same is true of commissions. Sometimes a higher commission rate creates lower dollars. Next week I will show you how this works.
6. You can take sample age brackets and determine what the product will do for you.
Perhaps the single greates fallacy of all. Again, you must look at the overall block to understand impact. I have seen many, many people emotionally lock on to the highest commission rate (which is usually between ages 55 and 60 multipay) and ignore that they were being paid significantly less in their sweet spot between 70 and 85.
7. Liking the sales rep or because your buddy uses them is a poor way to make this decision.
In my opinion there are only 4 viable companies right now. The rest are high risk at best. Unfortunately, because I don’t feel like putting my lawyer’s kids through college I can’t tell you who I would pick. But I can tell you that in these financial times youNEED TO DO YOUR DUE DILIGENCE AND FINANCIAL SOUNDNESS SHOULD BE NUMBER ONE.
8. You don’t need to check their math.
There is an old saying: “Figures don’t lie, but liars figure”. There are ways of presenting things that (in my opinion) are just plain misleading. One of the most common is to change the denominator in an explanation without making it clear that you have done so. If you study the example closely you will catch it but you have to study it very closely.
9. You can get 5 bucks for 4 bucks
This assumption lies at the root of every preneed financial debacle from NPS to Meachem Financial. Bernie Madoff and his kind depend on this belief. So, I have a rule: “If it seems too good to be true…it always is.” Any financial instrument that is promising results outside the norm for the times is immediately suspect…and this includes trusts and annuities. Proceed at your own risk. And be confident it will be YOUR risk.
Well, I am guessing I am going to get some interesting phone calls this week. I have ruffled enough feathers for now. Next week I will show you how to find the common denominator (the apple) and do this yourself…or hire me to do it for you.