If you are like many consumers, you probably give your insurance agent and insurance company the benefit of the doubt. While you probably recognize in the back of your mind that your interests may not exactly be aligned, you probably at least think you are roughly pointed in the same direction.
For some products such as whole life from mutual insurance companies, the interests of the consumer and the insurance company are closely aligned (although even then there are situations that are major exceptions). However, for some of the most popular products today, including guaranteed universal life – where a guaranteed premium buys a guaranteed death benefit – the interests of the company are often diametrically opposed to the interests of the consumer.
It basically boils down to this: If you are receiving less than the “fair value” for your policy when you walk away from it, then the insurance company would prefer that you lapse your policy rather than stick around. In fact, they are counting on a significant percentage of policyholders to lapse their policies before they die – the company needs the profits from those lapses in order to pay the death benefits on those who keep their policies.
Other policies that have this perverse incentive include long-term care and level term insurance.
Nobody buys a policy with the intention of throwing a bunch of money down the drain – yet the insurance company would like nothing more than for you to do just that. How motivated are they going to be to help you keep your policy in force? Do you really expect them to do more than the legally required minimum given the strong financial incentive to induce you to lapse?
These types of products are concerning, simply because most consumers will blindly rely on the advice being given to them by insurance agents and insurance companies - without ever recognizing the massive conflicts of interest that exist.
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