We've all had the experience of sitting in the gun sights of a insurance salesman. As he celebrates the virtues of a particular life insurance policy, you sit there wondering if the chief virtue is the fat commission the agent will earn when you buy it. Your interests and the agent's aren't necessarily in sync.
Scott Witt, proprietor of Witt Actuarial Services, in Milwaukee, Wisconsin, works a different way. He earns no commission on any policy you buy. analogous to a fee-for-services investment advisor, he charges a fee to his clients in exchange for unbiased advice on life insurance, annuities and long term care insurance. We picked his brain on two key concerns.
Should I Keep the Life Insurance Policy I Have?
This is a critical question for many people. They may be reluctant to jettison a policy if they've been paying premiums for years. A good advisor can tell them whether it makes sense to stay with the existing policy or exchange it for a better one.
Before even comparing one policy to another, says Witt, you need to understand whether you have an insurance need. In some cases, he'll recommend not carrying life insurance at all. "People get wrapped up in the emotion of it. You see bad decisions. They get hung up on mental accounting. They're not going to let go until the surrender value covers the premiums they've put in," Witt says. Yet it can be smarter to start from scratch.
Anther critical assessment is your current health status. "If your health has deteriorated, the policy is worth a lot more. Conversely, if you're still in good health, the value of policy is less," says Witt. Still, you may be able to improve on that policy by shopping in the marketplace for comparable coverage.
After that, Witt will evaluate the quality of the policy and its return on investment: how many dollars are pulled out in relation to premiums paid. "It's easy to have differences of 300 basis points over the lifetime of return. A great company over the last 40 or 50 years may have delivered 6%, while a crummy company delivered 3%."
Should I Borrow Against My Life Insurance?
Here again, the answer is neither simple nor straightforward. "I typically see people underestimating the true cost of borrowing from the policy," Witt says. "People say it's an 8% loan rate, but I'm getting 6% back, so the effective cost is only 2%." But the math isn't that simple. Sometimes that so-called 2% loan can actually cost you 7%. You need an expert to read and understand all the fine print.
Generally (but not always), Witt advises against borrowing. "I'm not a fan of haphazard borrowing. If it's an emergency fund and you will pay it back, I have no problem with that. Or if it's part of a systematic plan that you have elected to use as a living benefit rather than a death benefit. That's also okay. Even then there are ways to do it to maximize the long-term efficiency."
"Nothing about life insurance has a clean answer. That's why it's so critical to turn to someone who doesn't have a vested interest," says Witt.
Witt Actuarial Services website offers more information on various types of insurance coverage and how a fee-only advisor works with you.