Group disability insurance is bad?

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LH
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Group disability insurance is bad?

Post by LH » Tue Nov 27, 2007 3:09 pm

bluemarlin08 wrote: NEVER depend on group disability, not portable or transferrable, is taxable and could be dropped by the company.


I have two different disability insurance policies. One is group, the other is specific to me. This has always struck me as weird. Why would I need two?

Is it true I should not have the group disability policy?

What exactly should I ask me agent to provide to me so I can figure out exactly what I have? Should I ask for a "prospectus"? I doubt thats the proper term. But how do I go about dealing with my agent, and figuring out if I really need two disability insurance polices? Both are through my work.

This was in response to another thread initially, but might be hijackish, so I reposted here. This has always been something I have been meaning to figure out, needing two policies seems weird.

Thanks,

LH

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Post by Vig Oren » Tue Nov 27, 2007 4:02 pm

WD
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Post by ryuns » Tue Nov 27, 2007 5:03 pm

Vig wrote:
LH, if you don't understand the working of disability insurance why did you post that a group DI is bad?


LH wrote:
Is it true I should not have the group disability policy?

That "?" at the end indicates a question.

Vig wrote:
Couldn't you just ask Blue at the other conv?


LH wrote:
This was in response to another thread initially, but might be hijackish, so I reposted here


Sorry to speak for you LH, but I'd be curious for opinions on the matter myself. Hope that clarifies for you Vig.

Ryan

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mephistophles
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FOR LH

Post by mephistophles » Tue Nov 27, 2007 5:19 pm

When I was an employee of an insurance company awhile back I actually had three long term DI policies. One was a group policy with decent definitions and cost relatively little. A second policy was individual and was purchased when I was young and the amount of benefit was limited to my income at that time. I still have this policy as the rates were very low it was non-cancellable and guaranteed renewable. A third policy was bought as an individual policy after my income dramatically increased and I qualified for more. This was bought from another company at more competitive rates.

So, each person's situation is unique and what policy or combination of policies is right for you can be a little work in progress. You can do all the research yourself or try to find a CLU who is an Independent Agent/Broker and who shops different companies for his clients. This type of agent will pre-underwrite you, help you to determine what your needs are and will shop among a number of companies and provide you with a spreadsheet showing each company's policy by benefit, options and costs.

Regards,

ole meph

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Post by bluemarlin08 » Tue Nov 27, 2007 5:39 pm

Everything mephistophles stated is correct. I would add that most people rarely stay with the same employer through their working years and most all group insurance is not portible from one company to another. The problem comes in if you have a change in health, change jobs, become self employed or go to work where they don't offer DI, then you have no ability to get any insurance. In addition, group disability limits the amount of personal disability you can get and group DI claim payments are usually taxable. Group DI is very cheap, but there is always a reason. I write quite a bit of disability in my business and most people are unaware of the differences.

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Post by Vig Oren » Tue Nov 27, 2007 5:57 pm

WD
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Post by Gekko » Tue Nov 27, 2007 6:39 pm

Group is GOOD!

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Post by Ruprecht » Wed Nov 28, 2007 12:04 am

portable is good.

non-portable is better than nothing, but if you change jobs, nothing is exactly what you'll have. And by then you may have developed a "pre-existing condition" that will prevent you from getting a new DI policy.

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Post by LH » Wed Nov 28, 2007 7:20 am

ryuns,

Your reply is much appreciated.

Thanks,

LH


: )
Last edited by LH on Wed Dec 05, 2007 4:22 am, edited 3 times in total.

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Post by LH » Wed Nov 28, 2007 8:05 am

Gekko wrote:Group is GOOD!


Why do I need group DI as well as individual DI? Both policies where obtained at the same time, from the same agent recommended to me by my group. Is this a common occurance? It just does not feel right to me, why not two life insurance policies, two car insurance policies? Two home owners policies? Two malpractice insurance policies? Etc.


Thanks for help,

LH

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Post by jeffyscott » Wed Nov 28, 2007 8:49 am

You probably have disability coverage under SS, as well. If so, maybe you have triple coverage. The SS disability would be "portable".

What exactly should I ask me agent to provide to me so I can figure out exactly what I have?


Why not ask the agent "Why do I need group DI as well as individual DI?"
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Post by Insurance Guy » Wed Nov 28, 2007 9:43 am

Why do I need group DI as well as individual DI? Both policies where obtained at the same time, from the same agent recommended to me by my group. Is this a common occurance? It just does not feel right to me, why not two life insurance policies, two car insurance policies? Two home owners policies? Two malpractice insurance policies? Etc.


Group DI and individual DI are entirely different animals. It's not about having two policies. It is about having proper coverage. A good individual policy is much better than a group policy. Most group policies have serious holes in the coverage. Keep in mind that when your employer gives you a benefit, the employer wants it to be as cheap as possible. The way to make a disability contract as cheap as possible is to make it as hard as possible to collect. Insurers only have to charge premiums in relationship to their expected claims.

The ideal situation is to have all individual coverage. However, this is often not possible because the group coverage is often mandatory. Group coverage, along with lacking in contractual language, also often lacks in benefit amount. For instance a typical contract, might pay 60%. So, if someone was making $5000/month before tax, how will their family be ok if their new income is $3000/month before tax?

A good individual contract is much more expensive than a group contract. It is a fallacy to believe that the reason for this is group pricing.

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Post by Vig Oren » Wed Nov 28, 2007 9:56 am

WD
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Post by jeffyscott » Wed Nov 28, 2007 10:04 am

For instance a typical contract, might pay 60%. So, if someone was making $5000/month before tax, how will their family be ok if their new income is $3000/month before tax?


This is something for the individual to decide (I realize that reality is probably that most will give it less thought than they do which refrigerator they should buy). But, perhaps this family is saving $2000 per month and will suspend this in case of disability.

My disabilty used to be at 70/75%, but there is maximum limit, so now it has fallen to about 60%. But we could live just fine on that reduced income or even on no income from me, as my wife's would be sufficient.
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Post by Insurance Guy » Wed Nov 28, 2007 10:11 am

Jeffy,

You are correct that this is an individual decision, but most people can't take a 40% income hit and maintain the standard of living that they want. It is also very possible to become disabled and not be able to collect on a group disability claim.

Even with 60%, the income hit is often much bigger than 40% because the 401(k) matches stop and they'll be no future pay raises.

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Post by prh2s » Wed Nov 28, 2007 10:22 am

LH wrote:Why do I need group DI as well as individual DI? Both policies where obtained at the same time, from the same agent recommended to me by my group. Is this a common occurance? It just does not feel right to me, why not two life insurance policies, two car insurance policies? Two home owners policies? Two malpractice insurance policies? Etc.


Some people supplement group LTD with individual DI to raise the percentage of income their insurance would replace. This is what my wife does: if disabled, she would get 60% of income, taxable, through LTD and another 15% or so of income, tax-free, through DI.

Others get individual DI to fill in gaps in their LTD coverage. For example, if your LTD policy doesn't offer benefits for partial disability, you can buy an individual DI policy that will "complete" the group policy by adding residual disability coverage (MassMutual, at least, offers this feature as a rider to its Radius DI policy).

Individual DI can also be used as a backstop if you're no longer covered by group LTD. My wife's DI policy, for example, has a rider that allows her to increase her DI coverage, without additional medical underwriting, if she's no longer covered by LTD.

Since it appears that you acquired individual DI at the same time you got group LTD coverage, there shouldn't be any redundancy in your policies. Your DI coverage, together with the LTD coverage, will still fall within the DI insurer's issue and participation limits. Thus, if your LTD policy covered 60% of income, and the DI insurer would only insure 67% of income, then your DI policy would pay just enough benefits to bring your total (LTD + DI) up to 67%. (Note that issue and participation limits usually vary according to the taxability of LTD and DI benefits.)

Only you can decide whether you really need the individual policy along with the group. I think it would be a good idea to get copies of both policies, and to review exactly what each one offers--and how they would work together--before making a decision.

jeffyscott wrote:You probably have disability coverage under SS, as well. If so, maybe you have triple coverage. The SS disability would be "portable".


Group LTD nearly always offsets benefits by the amount of SS disability the insured receives. SS offset is an option on most individual DI policies, too.

Patrick

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Post by Insurance Guy » Wed Nov 28, 2007 10:28 am

SS offset is an option on most individual DI policies, too.


This is true only if the person doesn't have group coverage.

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Post by jeffyscott » Wed Nov 28, 2007 11:16 am

Group LTD nearly always offsets benefits by the amount of SS disability the insured receives. SS offset is an option on most individual DI policies, too.


I did happen to know that myself, but it is an important point. I mentioned SS only because that would still cover one who changes jobs or whatever.
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Re: Group disability insurance is bad?

Post by Valuethinker » Wed Nov 28, 2007 2:38 pm

LH wrote:
bluemarlin08 wrote: NEVER depend on group disability, not portable or transferrable, is taxable and could be dropped by the company.


I have two different disability insurance policies. One is group, the other is specific to me. This has always struck me as weird. Why would I need two?

Is it true I should not have the group disability policy?

What exactly should I ask me agent to provide to me so I can figure out exactly what I have? Should I ask for a "prospectus"? I doubt thats the proper term. But how do I go about dealing with my agent, and figuring out if I really need two disability insurance polices? Both are through my work.

This was in response to another thread initially, but might be hijackish, so I reposted here. This has always been something I have been meaning to figure out, needing two policies seems weird.

Thanks,

LH


You are a doctor, I believe?

Doctors should have personal disability insurance. That is my view. The 'own occupation' definition is really important.

Say you were an ER room doc or a surgeon. If your back went, or you got some other illness that gave you tremor, you might be able to retrain as a primary care physician. But it might pay a lot less, and you might not be able to do it.

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Post by Gekko » Wed Nov 28, 2007 6:22 pm

Group = Typically Taxable

Individual = Typically Tax-Free

If you have both, after taxes, should bring you close to 100%.

I'd keep both if you can.

Good luck.

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Post by Vig Oren » Wed Nov 28, 2007 6:37 pm

blue wrote:

I would add that most people rarely stay with the same employer through their working years and most all group insurance is not portable from one company to another. The problem comes in if you have a change in health, change jobs, become self employed or go to work where they don't offer DI, then you have no ability to get any insurance. In addition, group disability limits the amount of personal disability you can get and group DI claim payments are usually taxable. Group DI is very cheap, but there is always a reason. I write quite a bit of disability in my business and most people are unaware of the differences.


But since it's cheap, if you can get it why not? Isn't it better than nothing?

So blue, what kind (and options) of private DI do you recommend and for how long ?
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Post by Insurance Guy » Wed Nov 28, 2007 7:49 pm

Group = Typically Taxable

Individual = Typically Tax-Free

If you have both, after taxes, should bring you close to 100%.

I'd keep both if you can.


This deserves a little bit more conversation. Group is typically taxable because it is often employer paid. Individual is typically tax free because it is usually individually paid. What makes a policy tax free or taxable has nothing to do with whether it is group or individual coverage. Instead, it is all dependent on who pays the premiums. For instance, many group plans are partially employer paid and partially employee paid. With these policies, some of the benefit will be taxable and some tax free.

Typically insurers will limit someone to 60% of their pre-disability income. Assume that someone makes $5,000/month. An insurer offering individual coverage will be willing to give them $3,000/month of coverage. Here are 3 examples:

1)Individual has no group coverage: Insurance company will be willing to issue $3000/month.

2) Individual has group coverage that is employer paid and covers 60%: Insurance company will issue $750/month. (They assume that the employee will lose 25% of their benefit to taxes, so they'll replace this amount.)

3) Individual has group coverage that is employee paid and covers 60%: Insurance company won't issue any additional coverage.

If an individual is able to get individual insurance before getting group coverage, they can be insured for well in excess of 100% of their income.

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Post by LH » Fri Nov 30, 2007 2:37 pm

thanks for replies : )

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Post by White Coat Investor » Fri Nov 30, 2007 10:30 pm

Insurance Guy wrote: If an individual is able to get individual insurance before getting group coverage, they can be insured for well in excess of 100% of their income.


This is how my policy was initially sold to me as a resident. I got the maximum offered...I think it was $3500/month after-tax based on my resident income. The thought was that I would make up the rest with a group policy wherever I took a job as an attending. I think the maximum total I can get is $10K/month.

Unfortunately for me, my employer (the US Military) doesn't offer group disability insurance and the maximum VA disability benefit is something around 20% of my income. No one else will sell me disability insurance because I'm on active duty. A very unfortunate Catch-22. To boot, the disability policy I have won't pay if I am disabled climbing. At least it is own-occupation, specialty-specific, but I do consider myself woefully underinsured disability wise. If Insurance Guy wants to offer me a better deal, I'm all ears, no matter what his commission on it is.
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Post by Insurance Guy » Sat Dec 01, 2007 5:19 am

If Insurance Guy wants to offer me a better deal, I'm all ears, no matter what his commission on it is.


I think that this is what is driving me crazy about this board. Why do commissions matter? Yes, I understand that you would rather have the money in your pocket instead of the pocket of the insurance company or it's agent. More to the point, why does the focus seem to be "What is in it for the agent?" instead of "What is in it for me?"? I guess that I'm just trying to say that people would make better insurance decisions if they "selfishly" focused on themselves instead of worrying about what someone else earns.

This next part probably goes against all Bogglehead thinking, but when it comes to disability insurance as a very general rule, the more expensive, the better. Disability insurance is not like life insurance where one is either dead or alive. DI is all about contractual language.

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Post by LH » Sat Dec 01, 2007 11:36 am

Commissions matter because its a cost that you as the policy holder are paying.

That money comes from nowhere else except out of our pockets ultimately.

"More expensive is better" as a general statement, you are right, I do not think most bogleheads buy that at all a priori. Its a common refrain amongst salesman, and is defendably true in a lot of respects.

That top of the line lexus, is better than the camry, but the profit off the top of the line cars is higher for all involved is it not, so yeah, "more expensive is better" undeniably right. I do not own a lexus though, the benefit vs fee ratio is off for me. More expensive is not better for me, I will choose the camry.

I believe salesman are saleman, they want to feed thier kids, buy a nice house etc. If you want to maintain that DI salesman are above other salesman in that they automatically default to a fiduciary duty to thier clients even though they do not have to, I would ask you why? where is the proof of that?

Then if you cannot provide proof of that, then I would ask you about cold caller salesman, car salesman, all those annuity ripoff salesmen, etc.. And why I should not worry about my DI guy ripping me off in what is a very complex and hard to price area?

Should I assume my DI salesman is a saint? should I assume he is an outright crook, or should I assume he is an average salesman, like a broker. They are just people who want to feed thier kids, and buy nice houses like anyone. Thier interest and my interest are not aligned, and its complex, which means they can have a nicer house for themselves and thier kids if they so choose, than they would if they maitained a strict fiduciary duty out of a sense of sainthood. I posit a lot would opt for a nicer house, and better colleges for thier children, and give me an ok instead of a good value.

Fees matter to me. No matter what the product, or who the salesman is, its a cost I bear. Paying higher fees per se, does not mean a better product, as we are all aware of with active mutual funds, and variable annuities.

Insurance Guy

Post by Insurance Guy » Sat Dec 01, 2007 12:53 pm

Commissions matter because its a cost that you as the policy holder are paying.


My argument is that costs matter and commissions are just one aspect of this cost, but it is the cost that matters. Two simple, but common examples:

1) You go to two car dealerships to buy the identical car. In car dealership A, the negotiated deal is for $22,000. The salesman is making $3000.

In car dealership B, the negotiated deal is $24,000. The salesman is making $2,000.

You'll obviously buy the car from Dealership A. It does not matter how much commission the salesman makes.

2) You are looking to buy term life insurance. Policy 1 costs $600 and is guaranteed for 20 years. The total commissions paid are $800 with the salesman getting $540. policy 2 costs $700 and is guaranteed for 20 years. This is a no load policy with no commissions paid.

You'll obviously buy Policy 1.

My point is to focus on what is in it for you and not what the other person is getting.


That top of the line lexus, is better than the camry, but the profit off the top of the line cars is higher for all involved is it not, so yeah, "more expensive is better" undeniably right. I do not own a lexus though, the benefit vs fee ratio is off for me. More expensive is not better for me, I will choose the camry.


Very true. However, the difference is that both the Lexus and the Camry will get you where you want to go. An inferior disability policy often won't cut it at claim time.


If you want to maintain that DI salesman are above other salesman in that they automatically default to a fiduciary duty to thier clients even though they do not have to, I would ask you why? where is the proof of that?


What are you talking about? I haven't said a word about DI salesman. I'm not trying to sell anything. I'm making a very important point that disability insurance is all about the contract. If one policy is cheaper than another by a significant margin, there is probably a reason. Disability insurance is one of those things that can never be purchased on cost. I'm in complete agreement that more expensive in most areas doesn't mean better. However, I can unequivocably tell you that with DI, more expense almost always means better. If you are looking at two DI policies and one is less expensive, you need to understand the reason.

And why I should not worry about my DI guy ripping me off in what is a very complex and hard to price area?


A crook is a crook and if your DI guy is one, I guess that you have issues. However, it would be awfully tough to get ripped off on a price standpoint by a DI salesman. This is for two reasons. 1) An insurance company is going to limit how much coverage can be purchased and 2) More expensive policies are almost always better.

What's interesting is that I have seen many people get ripped off on their disability policies. However, it's done by selling inexpensive policies. Ex. A policy will be much cheaper if one has to be totally disabled before collecting on a partial disability. This would mean that if you came down with a progressive disease like MS, one would probably never be able to collect on a partial disability.


Bottom line: Understand your contract.

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Post by tfb » Sat Dec 01, 2007 1:38 pm

Insurance Guy wrote:Very true. However, the difference is that both the Lexus and the Camry will get you where you want to go. An inferior disability policy often won't cut it at claim time.


Not necessarily. A Hummer and a Hyundai will get me where I want to go, most of the time. A Hummer will hold up better at collision time, but I have to pay a lot more, both up front and ongoing. Is a Hummer always better?
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Post by Gekko » Sat Dec 01, 2007 1:40 pm

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Post by tfb » Sat Dec 01, 2007 1:44 pm

Car damage doesn't matter. What happens to the drivers and passengers when a Hummer hits a Ford Smart Car?
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Post by Insurance Guy » Sat Dec 01, 2007 2:32 pm

The analogy might not hold up. The point is that people buy disability insurance to protect their income. When purchasing coverage, a less expensive policy will usually have significant gaps in the contractual language which can easily leave someone unable to collect when it is needed.

Again as a very general rule, if a policy costs half as much, it is because they only expect to pay out half as much in claims. It would be analagous to buying a policy that will only pay if a disability occurs in January, March, May, July, September, or November.

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Post by bluemarlin08 » Sat Dec 01, 2007 6:17 pm

LH, would you share with us some of the non commission disability companies that you favor?

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Post by Vig Oren » Sat Dec 01, 2007 8:21 pm

blue, I asked you above a similar question:

what kind (and options) of plain vanilla private DI do you recommend and for how long, assuming the individual has/has not a group DI?

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Post by bluemarlin08 » Sat Dec 01, 2007 8:58 pm

Sorry Vig, your post got lost in the shuffle. Depends on what one is needing. The major players in the disability market are Guardian, Unum, Principal, Ohio National and Assurity. A good independent agent will represent all these and others. There are so many variables that to recommend one company is impossible, everything is fact dependent. Hope you are doing well, my wife recently had back surgery and developed major complications, she can't walk, so my life has been hectic to say the least. I can testify that being a care giver is one tough and demanding job!

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Post by Vig Oren » Sat Dec 01, 2007 9:31 pm

Thanks blue. My wife at 67 had her second knee replaced a few months ago. So I do understand being a caregiver. In my wife's case it was: ice, ice, ice. Btw, my neighbor lady, about 60 of age, had her lower spine fused about 6 months ago. I could not believe it that within a few days she walked the street back and forth. In a couple of weeks she extended the distance to the near grocery about a mile walk. Well, she is a physiotherapist which could explain it. :roll:

Best to your wife too. :sharebeer

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Post by Insurance Guy » Sat Dec 01, 2007 9:52 pm

In terms of major players, don't forget to include Northwestern Mutual, Mass Mutual, Standard, and Illinois Mutual.

A good agent will be able to represent all of the companies except Northwestern Mutual.

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Post by bluemarlin08 » Sun Dec 02, 2007 1:27 am

I knew most some, tonight has been a heck of a night, sorry about the all inclusivity of my lisr. Perhaps you still get my post.

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Post by LH » Sun Dec 02, 2007 2:38 am

bluemarlin08 wrote:LH, would you share with us some of the non commission disability companies that you favor?


I would ask my agent, but if they existed, he likely wouldnt tell me : P Sometimes salesmen kinda get fancy and obscure things to thier benefit, use slick tactics to try and make people feel stupid, par for the course saleman's tactic. Such is life. Makes my head spin so complicated, so I have to ask for help here.

Can you list some out bluemarlin08? : )

LH
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Post by LH » Sun Dec 02, 2007 3:14 am

More expensive is not always better.

Take my mother in law buying a 529. Now of course the agent steered her to the 529 with a 5 percent load, he has to make his living, feed his kids.

If he was a fiduciary, he would have told her to buy the no load version (I would assume). Ditto all these advisors putting people into load funds, happens every single day, and people are not even told what it costs are they? Only some people get a bill from the broker saying here is what you paid me, lots of times its obscured.

Now, it does not take much effort to avoid that load fee in a 529. One can avoid that fee, therefore more expensive, more fees, is not better per se. Bogleheads do focus on fees.

So then there is DI, an issue more complex than a simple 529. Companies are in it to make profit, agents are in it to make profit. I have never recieved a bill on how much I have even paid my agent. I bet no one does do they? So, if a DI company wants to attract business, in a product that is likely overwhelmingly, or completely sold through agents, whats a good capitalist company going to do.

Hmmm, tough question that. Perhaps pay a large fee to the agent to atttract business? That thought likely has occurred to DI companies. I guarentee the agents know very well how much they are paid. I bet if I polled everyone in my group on thier DI knowledge, it would approximate zero knowledge of what they actually have DI wise and of the fee paid to the agent from their policy.

So what you have is a salesmans dream. A complex product where the commission is hidden, and where really the main competition in a capitalistic sense is for the companies involved to pay nice solid fees to the agents.

How exactly do DI salesmen get paid? Are some policies structured such that the salesman gets paid every year? Or is it a front end load? Or is it a combo? I would imagine its like the mutal fund fee structure, some are probably low cost, some are possibly outright ripoffs that pay the salesman every single year for as long as the policy is held?

If ripoff policies exist, and I see no reason a priori why they would not, as variable annuities etc. certaintly exist, I just wonder if I hold one to some degree.

Interesting topic. Nice car pictures : )

LH

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Post by LH » Sun Dec 02, 2007 3:48 am

tfb wrote:Car damage doesn't matter. What happens to the drivers and passengers when a Hummer hits a Ford Smart Car?


Car vs car, mass is highly important, as the more massive object passenger experiences less decel. A car vs pedestrian, car drive safe. A car vs train, train driver wins. Hummer vs smaller car, hummer has a good advantage.

Structural integrity of passenger compartment is key, seatbelt use etc.

The thing which has really struck me, becuase I have seen the effects, is the introduction of airbags. I have had 70 year old ladies run into brick walls at highway speeds, demolish the front end, and end up with broken ankle only, whereas in the past, even with a seatbelt, they might have ended up in the morgue due to the seatbelt cracking thier ribs and bruising lungs or their chest hitting steering wheel despite seatbelt.

Really amazing and gratifying thing to see patients walk off in crutches that would have died due to new technology.

heh, the car analogy discussion was actually amusing if nonproductive I guess. Group DI fees are like a fuel injector in that they....

Insurance Guy

Post by Insurance Guy » Sun Dec 02, 2007 7:34 am

LH,

I can't help but wonder when someone just assumes that salesman are dishonest whether it is because they would be dishonest if they were a salesman. LH, if you were in sales, would you become a dishonest person.

Like most working people, my #1 reason for working is that I need to earn a living to support my family. I'm a salesman (not always, for some of my clients, I am a fiduciary). Although earning a living is my top priority for working, I also want to do what is best for my clients. As long as one has the attitude that salesman are just out for themselves, they'll see these two things in conflict.

Instead, trying to earn a lot of money and doing what is best for the client are actually in harmony. The act of getting new clients is not a profitable endeavor. We spend lots of time getting rejected and we also make lots of very small sales in the beginning. What is profitable is keeping clients and building long relationships and getting lots of referrals. The only way to do this is to ALWAYS do what is in the client's best interest.

In other words, honesty is the best way for a salesman to build a long successful career making lots of money. That said, there are lots of unethical salespeople just like there are unethical people in all professions.

More expensive is not always better.

Take my mother in law buying a 529. Now of course the agent steered her to the 529 with a 5 percent load, he has to make his living, feed his kids.

If he was a fiduciary, he would have told her to buy the no load version (I would assume). Ditto all these advisors putting people into load funds, happens every single day, and people are not even told what it costs are they? Only some people get a bill from the broker saying here is what you paid me, lots of times its obscured.


I'm not talking about investments and other products. I'm talking disability insurance and you can take it to the bank that if there is a large price discrepancy, there will be big contractual differences.

As to your 529 plan example, let me make a couple of points. It is possible that he just likes ripping people off, but again, that is going with the assumption that salesman don't try to do what is best for their clients. We don't know this person. Let's change our assumption for a second and believe that this salesman is honest. Why might he have recommended a load 529?:

1)If he recommended a 529 plan in which his firm did not have a selling agreement, he could be guilty of "selling away". This could cost him his career.

2)The load 529 plan might be the only plan that gave her a state tax break.

3)He has the ability to work as a fiduciary. When he does so, his fee is 1%. He felt that the commission would ultimately be less costly for your mother in law.

4)She may have enough investments with the fund company that the load is greatly reduced or even zero.

5)The 529 plan with far and away the most assets is a load family. Every single one of their equity funds (except one which trails by an insignificant margin) has lifetime performance that beats the S&P 500 (obviously, not an appropriate bench mark). For 10 year performance, Barron's has ranked this fund family #1 for performance every year that they've been doing their survey (I don't know the methodology) (I'm not mentioning the fund family because I have no desire to get into an active vs. passive debate. I'm just pointing out why an honest salesman might recommend it.)

6)The salesman might be dishonest and only care about a fast buck instead of doing what is best for the client.

People should always know the cost of their funds. It is in the legally required prospectus and it should always be explicity disclosed. On the other hand, they have no need to know how much of the cost goes into the salesman's pocket. It should make no difference. To put it another way, if one invests $100 and there is a 5% load, one needs to know that they are paying $5, but it shouldn't matter how much of the $5 is landing in the pocket of the salesman.

So then there is DI, an issue more complex than a simple 529. Companies are in it to make profit, agents are in it to make profit. I have never recieved a bill on how much I have even paid my agent. I bet no one does do they? So, if a DI company wants to attract business, in a product that is likely overwhelmingly, or completely sold through agents, whats a good capitalist company going to do.

Hmmm, tough question that. Perhaps pay a large fee to the agent to atttract business? That thought likely has occurred to DI companies. I guarentee the agents know very well how much they are paid. I bet if I polled everyone in my group on thier DI knowledge, it would approximate zero knowledge of what they actually have DI wise and of the fee paid to the agent from their policy.

So what you have is a salesmans dream. A complex product where the commission is hidden, and where really the main competition in a capitalistic sense is for the companies involved to pay nice solid fees to the agents.

How exactly do DI salesmen get paid? Are some policies structured such that the salesman gets paid every year? Or is it a front end load? Or is it a combo? I would imagine its like the mutal fund fee structure, some are probably low cost, some are possibly outright ripoffs that pay the salesman every single year for as long as the policy is held?

If ripoff policies exist, and I see no reason a priori why they would not, as variable annuities etc. certaintly exist, I just wonder if I hold one to some degree.


Again, why do you care how much money your agent is making? What you should care about is that you are paying $87/month and your contract says, "blah, blah, blah". The "good capitalist companies" have competion. If they charge too much, they lose out to others or they simply don't make sales. If they charge too little, they lose money. The laws of supply and demand still hold true.

Most disability policies pay the agent a large upfront commission and then small level commissions yearly. Again, keep in mind that insurance companies pay these commissions because it is the least expensive way for them to distribute their products. To the best of my knowledge, there are no no-load disability policies.

In DI, the only ripoff policies that I have seen are the ones that are too cheap. The contracts are gutted which means that it is much harder to collect at claim time.

Give us some information about your DI policy and we'll let you know if it's quality or junk.

There's just two points that I'm trying to make with these post.

1) Worry about the value that you are receiving instead of being concerned what the salesman gets.

2) The overriding primary reason between price differences with disability insurance is contractual differences. You get what you pay for.

bluemarlin08
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Post by bluemarlin08 » Sun Dec 02, 2007 8:13 am

LH, I don't know of any disability companies that don't pay commission to the agents that represent them. Most everything you purchase pays someone a commission or a profit, that is the capitalistic model. Unfortunately you are under the impression that because someone earns a profit/commission they can't be honest. I sell quite a bit of disability insurance and do operate, although not officially, in a fiduciary capacity. I will often recommend that before a client acts on my recommendations that we have their CPA and/or attorney review those recommendations and agree or disagree with the recommendations. You apparently had prior bad experience with insurance agents, let me assure you however, there are many that DO put the client first. It is a mistake, IMO, to color all with the same crayon.

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Post by Vig Oren » Sun Dec 02, 2007 12:14 pm

Well, well, we got two new insurance professionals on board. IMO, a Diehard's best interest, when purchasing insurance products, would be served by staying away from direct contact with insurance agents, brokers, etc. This means that non-CLUs, fee- only financial planners (and even CPAs, per the Bogleheads Guide book), should be the first address to inquire about insurance (DI, Life, LTCI,etc). Let the fee-only financial planner do the "needs analysis" and chose from whom to get the product. But still, a reasonable question to ask is how are the commissions arranged between the two.

-----------------------------------------------------------

From the web on DI:

(time to read others' inputs)


Getting your claims paid

Claims denials and delays are common complaints against insurance companies, according to the National Association of Insurance Commissioners. If your disability claim is delayed or denied, here's what you should do:

Denied claims. "The most common complaint we see is where an insurer deems an insured able to work and the insured's doctors state that the insured is unable to work," reports a representative of the New York State Insurance Department. If you encounter such a difference of opinion, ask your insurer to allow an independent medical exam. The company might accept the verdict from a qualified, unbiased physician.

As a last resort, call your state insurance department to ask for help in persuading the insurer to pay. In New York, for example, an insured visiting nurse was unable to physically help patients but the company denied the claim, asserting the nurse could work as a claims reviewer, say, or a school nurse. The state insurance department reviewed the language in the policy and case law, and determined that the nurse was entitled to collect on the policy.

Delayed claims. Keep careful records as your claim moves through the insurance company's procedures. Take notes indicating whom you've spoken with at the insurance company and the issues discussed. Keep copies of all documents that you send to or receive from the insurer regarding the claim. During the claim process, the insurance company may ask for copies of medical records from you or your physician. Work with your doctor's office to see that requests are handled appropriately and quickly. The sooner the insurer receives the necessary medical records, the less chance your claim will be delayed.

Disability policies offer many additional features you might want to consider, typically at an additional cost. Here are some common riders:

Residual disability benefits. Some policies will pay the full amount of the coverage only if you are not at work and are under the care of a licensed physician. But what if you’re able to work some but not at full capacity? A “residual” disability benefit can provide a percentage of the coverage amount based on the percentage of predisability income you are no longer earning. Say your income was $8,000 a month and you had a disability policy that would pay you $5,000 a month. You were injured, but you’re now working part-time as you gradually recover. If your income has declined by 35 percent, to $5,200 per month, you would receive $1,750 a month--35 percent of the coverage amount--from a residual disability benefit.

Cost-of-living adjustment. This feature increases your policy’s benefit in step with inflation, but it can be expensive.

Future purchase rider. Such a rider gives policyholders the right to increase their coverage--and, of course, pay a higher premium--without having to take a physical exam.

One way to economize is by choosing an extended “elimination,” or waiting period, which is the amount of time you must be totally disabled before receiving benefits. Your choices can be anywhere from the 31st day of a month to 12 months (even 2 years, in some states) after the onset of a covered total disability. You will pay less in premiums by selecting a longer elimination period, but you’ll have no income from the policy in the meantime.


What not to do

When buying individual coverage, you’ll probably need to undergo a medical examination, and any pre-existing conditions may be excluded from coverage.

Don’t be tempted to cut costs by fudging the facts, either about your medical history or your occupation. Giving false information on your application for coverage might lower your premiums, but it could cost you benefits when you need them.

Although classifications differ from one insurer to another (a construction worker might be a 1A or 2A, for example, while an office worker might be a 5A), they reflect the likelihood you will become disabled. The less risk-prone your occupation, the lower the policy’s cost and the more generous its definition of disability.

Daroff describes the case of a prospective client who owned a contracting company. His insurance agent told him to state on his disability policy application that he spent all his time on white-collar activities in the office--estimating, supervising, designing, etc.--to get lower premiums. He was still a contractor, though, and he got hurt on a job site when a pallet of bricks fell on him. An investigation determined that he spent most of his time on job sites and not in the office. His claim was denied.

That’s not to say, though, that every claim denial is justified. Daroff tells of a “classic type A” executive who suffered a heart attack. As soon as he was released from the hospital, he insisted on stopping at the office to show everyone he was on the mend. In fact, he called the office every day. His disability claim was denied because he was “at work,” according to the insurance company.

His insurance agent took up the man’s cause, pointing out that he was under strong medication and may have been there physically, but not mentally. The denial was reversed. So if you have disability insurance and you’re unable to work, you shouldn’t take the first no for the final word.

----------------------------------------------------------------------

BTW, has anyone read this book:

http://premiumvalue.net/

Excerpts from the book:

=>How can you save 80% beyond what is available through any agent or online discount site?

=>How can you get permanent life insurance for virtually the same cost as term life insurance?

=> How can you insure that your life insurance policy will be an asset and not just a monthly liability that you never realize any value with?

=> Why do life insurance agents and representatives sell what they don't buy themselves and why this will cost you dearly?

=>How do you get the best policy for the best price? Even better than buying online or through a group.

=>Why do 99% of term life insurance policies never result in a paid claim?

=>How can anyone make much more money with their life insurance policy than they ever put into it without paying excessive premiums?

=> What really is the best way to buy life insurance and who truly are the best companies to deal with?


Last edited by Vig Oren on Sun Dec 02, 2007 2:49 pm, edited 1 time in total.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ | "One of the greatest piece of economic wisdom is to know what you do not know"{John Galbraith}

prh2s
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Post by prh2s » Sun Dec 02, 2007 1:31 pm

Since I'm not an insurance professional (though I should disclose that I once worked, briefly, as a paper pusher for a major life insurance company), I'll offer a disinterested opinion. Insurance Guy and bluemarlin08 are correct: from the consumer's point of view, it really shouldn't matter who is getting paid or how, so long as the end result is good coverage at a good price.

Since disintermediation is an important element in the Diehard approach to investing--we're mostly DIY types, and we generally avoid commissioned salespeople--there is perhaps a tendency to think that all financial services and products can and should be similarly disintermediated. But while you can save a bundle by avoiding loaded mutual funds and commissioned brokers, it's not the case that you can reap similar savings by avoiding agent-sold insurance products (and for some kinds of policies, like DI and LTC, there simply isn't a "direct" sales channel). Perhaps some day this will change, if insurance companies find cheaper but equally effective ways to sell complex products like DI directly to consumers. But for now, an agent is often the best option, and sometimes the only one.

One caveat: while I agree that a good agent can be a valuable resource, I think it's still important for consumers to do their homework before meeting with an agent. If you're not educated about the product you want to buy, you'll have no idea whether your policy gives you everything you need (and nothing more than that), or whether your agent is any good.

Patrick

Insurance Guy

Post by Insurance Guy » Sun Dec 02, 2007 1:46 pm

Patrick, great post!

Vig, Again, I just don't get it why everybody has to come from the angle that salespeople aren't trustworthy.

By all means, if you don't trust your agent, go see a fee-only planner or a CPA. There is just a couple of problems with this. There is nothing in a CPA's background or training that gives them any knowledge in this area. It makes as much sense as asking for car care advice. Most fee-only planners also don't have the requisite knowledge. Even if they do have the knowledge, just keep in mind that you will be paying twice. Once for the advice and once for the product. Since the best insurance products are commissioned products, one can't escape the commission.

By the way, the "needs analysis" for disability insurance for most people is very simple. It is one question. "Are you working because you need the income?" If the answer is "yes", then DI is needed.

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Post by White Coat Investor » Sun Dec 02, 2007 2:58 pm

Insurance Guy wrote: To put it another way, if one invests $100 and there is a 5% load, one needs to know that they are paying $5, but it shouldn't matter how much of the $5 is landing in the pocket of the salesman.

1) Worry about the value that you are receiving instead of being concerned what the salesman gets.

Vig, Again, I just don't get it why everybody has to come from the angle that salespeople aren't trustworthy.

.


It DOES matter what the salesman is paid. It helps you to decide whether or not to trust their advice. What if you went to a doctor and he gave you two options. Both of them take him the same amount of time and produce comparable outcomes. They both cost the same to you but one of them pays him twice as much. Which is he most likely to recommend if you ask him "What would you do doc?" How about if the one that paid him the most was 5% less effective? 10%? At what point do you trust that the doc is looking out for you more than him? And this is someone with "fiduciary" duty, who has sworn the hippocratic oath and all that. A non-fiduciary salesman has none of that incentive to "do what's right." Do they do it most of the time, probably. But how can you be sure?

The reason I don't trust salesmen is I have been ripped off time and time again by them including at least one I would trust with my life (who was duped by his Northwestern training)
Last edited by White Coat Investor on Sun Dec 02, 2007 4:10 pm, edited 1 time in total.
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Post by bluemarlin08 » Sun Dec 02, 2007 3:57 pm

It DOES matter what the salesman is paid. It helps you to decide whether or not to trust their advice.

If you use the amount one is paid as the barometer of the quality of their advice is certainly your option. I prefer to judge the advice based on whether it meets my objectives and/or solves my problem. I am often willing to pay more for advice. I personally have clients pay me fees for my advice and buy their insurance from me generating additional income, what I am paid is irrelevant to them.

This thread was about disability not about commissions as I recall.

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Post by tfb » Sun Dec 02, 2007 3:58 pm

prh2s wrote:Insurance Guy and bluemarlin08 are correct: from the consumer's point of view, it really shouldn't matter who is getting paid or how, so long as the end result is good coverage at a good price.


This is true, but the second part is an unknown. We can't it assume it's going to be the case. How do we as consumers know the end result is good coverage at a good price? We are buying 3 components (1) the coverage; (2) insurance company's profit; and (3) the agent's cut. If one product is more expensive than another, how do we know that it's because the coverage itself is better or it's because the company is booking more profit or the agent is taking a bigger cut? Often it's a mixture. The coverage itself is perhaps a little better, the company is also booking more profit and the agent is also taking a bigger cut. In such case, how do we determine that the better coverage is worth the higher cost? Or could it be the other way? The product is more expensive, the coverage itself is worse, the company is booking more profit and the agent is taking a bigger cut? We simply don't know. I think most people would prefer to have the 3 components spelled out. They'll make better decisions that way.
Harry Sit, taking a break from the forums.

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Post by White Coat Investor » Sun Dec 02, 2007 4:09 pm

tfb wrote: I think most people would prefer to have the 3 components spelled out. They'll make better decisions that way.


That would be transparent. Insurance companies (and the agents who sell for them) don't do transparent, it isn't as profitable.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

Insurance Guy

Post by Insurance Guy » Sun Dec 02, 2007 4:34 pm

It's as if you think that we're here trying to sell you something. Bluemarlin and I are anonymous people on a bulleting board. We wouldn't be anonymous if we were fishing for business.

We understand how disability insurance works. If you want to refute what we are saying, refute it with facts.

If you don't buy from someone whom you trust and verify what they are telling you, you'll never know that you are doing what is best. This statement isn't about insurance. It's about virtually every single good and service that you purchase.

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