The Advantage of Using a Multi-company Insurance Brokerage Firm; of Backdating; of Paying Premiums Annually Case Study # 13

I just finished a case that illustrates the advantage of using an insurance brokerage firm representing many companies versus a single company, even a good one such as Northwestern Mutual, State Farm, or USAA.

The best offer my normal go-to company would provide this client was Preferred rather than Preferred Best, because she uses anti-anxiety medication. However the insurance brokerage firm which I suggest for many clients (but from which I receive no commissions, in case you’re wondering) uses a generic application, so without her having to sign additional paperwork they automatically switched her to Metropolitan who issued her Preferred Elite. Met had no problem with her mild medication and the premium difference was 21% less for 15 years. This brokerage firm routinely uses over 30 companies and shuffles risks around based on health conditions, medications, avocations, and occupational hazards, for optimum offers. Insurance underwriting departments have personalities too, and some are more tolerant of certain risks.

We also backdated the policy to be issued at a younger age for a lower premium. Backdating is a common practice allowing the policy to be issued up to six months earlier to gain a younger issue age, for lower lifetime premiums. The downside is you pay premiums for a period when you had no coverage, so you have to weigh the savings against the waste. After careful calculations, even if this insured backdated the maximum allowable time of six months the future savings represented a 16% after-tax return on the “wasted” premium. However she only needed to backdate for three months meaning the future savings represented a 36% tax-free return. It makes me wonder why it’s not automatically done, however agent commissions are a percentage of premium and an older issue age means higher premium, so there is a disincentive to do so.

The final piece of advice which I’ve devoted an entire blog to in the past is the advantage of paying annually versus quarterly or monthly. Sometimes this is a budget issue (can’t afford to pay annually) but the financing charge inherent in a monthly payment is typically 10%. If you take the money out a savings to pay annually, you save a lot more interest than you would earn leaving your savings account intact.

All of these improvements are small nuances compared to the big picture (right-sizing the policy, a competitive company, the right type, etc.) but collectively they are weighty. Once a policy is launched it’s usually carried for decades if not a lifetime, so trimming the premium down upfront is certainly worth the effort