The Insurance Scam (May 2008)

Dominick Paoloni

Most people who buy life insurance don’t understand how life insurance works, and the insurance companies would rather not let them know. Insurance companies are making millions of dollars on policy holders that are unknowingly paying considerably more than they should or could be paying for the benefits to which they’re entitled.

To explain this insurance scam I must first educate you on how insurance works. When you buy a life insurance policy, the insurance company puts you in a class. They evaluate a plethora of assumptions from mortality rates, life style, current health, family history, etc., and then evaluate the probability of death. The cost of insurance, which increases as you get older, is based on the actuarial assumption made at the time of application. The key is “at the time of application”.  This is the Rosetta Stone and the hidden detail in your policy that is overlooked.

All of your policy’s future cost is based on “time of application”.

Most people believe that as you get older, insurance costs more. My experience has taught me that this is not entirely true. In fact, it’s my experience that 80% of people that rewrite their insurance policies when they are older can actually get a less expensive policy.

How is this possible? If you are older, your chance of dying is greater. How can the insurance be cheaper?

The Devil is in the Details

What does change since your “time of application” for insurance is the mortality rates. They go down.  As people have been living longer, insurance costs have been dropping. If you bought an insurance policy in 1985, and the insurance company used 1980 mortality tables, by 2008 you are paying insurance costs based on 1980 actuary assumptions. The insurance companies do not update insurance costs in your policy based on current changes in mortality. This is a hidden profit margin that insurance companies rack in every year.

I recently evaluated an old insurance policy for one of my clients. He bought his insurance 15 years ago and understood it would last forever. What he didn’t know was that even though he was still paying the planned premiums and had cash value, his internal insurance costs, because of outdated embedded mortality costs, were exploding. He was months away from his policy lapsing.

With a little quick analysis we were able to find a policy with current mortality costs at a fraction of his current cost. We transferred the cash value of the old policy to the new policy, paid the same exact premium as the old policy and guaranteed his policy through age 100. This was all accomplished even though he is 15 years older and is not as healthy as he had been 15 years ago.   

I’ve seen clients save thousands of dollars a year by getting a second opinion on their policies. However, not all clients can benefit from this phenomenon.

If you’re not currently insurable, or the insurance company comes back with a rating that doesn’t make economic sense, then do not exchange the policy. A policy should never, ever be surrendered until you are approved with the new company at the rating you expected.        

If you have an old insurance policy and would like it to be evaluated, give our office a call and one of the team will be happy to take a look at it.