In the world of insurance, not all life insurance agents are created equally. In Birmingham, there are generally three types of insurance professionals you’re likely to come across:
- The captive agent
- The semi-captive, semi-broker (the hybrid)
- The independent broker
The Captive Agent
The captive agent is the traditional insurance professional and represents the largest percentage of agents in the market. Most agents come into the business of writing life and disability insurance in this way — myself included. The term, captive, means that the agent is in a contractual agreement to write insurance solely with that insurance company. Which from their perspective makes sense as an insurance company is interested in growing its bottom line and not another’s. There is usually a trade-off in this relationship between the carrier and agent; the carrier provides a desk and training in exchange for an agent’s new business.
Pros: The captive agent can provide an adequate service for you. The captive agent’s insurance will be financially suitable in the sense that it will take care of your need for insurance. Most captive agents represent older insurance companies with strong financials — which is important as you want to do business with an insurance company that will be there twenty years from now.
Cons: I counsel my clients to ask captive agents the following question: “is the life or disability insurance you’re quoting me, the best price or product for me?” There is an important distinction here as the captive agent can only answer that question based on the best that his company can provide. The person with the need for insurance has no way of knowing whether or not that insurance is the best available for them, much less if they are a good fit for that company’s underwriting as all insurance companies underwrite differently.
Another potential downside to the captive agent model is the level of experience of the typical agent. There is a great deal of turnover in the captive agent model — nearly 85% of all agents will not make it past the first year and even less in years two and three. My favorite example involves a good friend of mine who sold motorcycles for most of his adult life. He was tired of selling motorcycles and wanted to do something different. He was hired with a local, fraternal organization that sold life insurance. From one day to the next, he went from selling motorcycles to being a, “financial adviser.” How comfortable would you feel in the buying process if you knew more about insurance than your agent? Some good examples of the captive insurance company would include nearly all of your traditional home and auto companies as well as most of the insurance companies ending in the words, mutual or fraternal.
The Semi Captive, Semi-Broker (the Hybrid)
The hybrid insurance agent has characteristics of both professionals. They have a primary company that most of their insurance is quoted and written through. The hybrid’s primary carrier may require a certain percentage of business be written through them or some arrangement that allows for the primary carrier to get the first shot at underwriting the client. The difference though is that the hybrid insurance professional’s primary carrier will be flexible enough to allow the hybrid agent to get “off the reservation” and use a pre-approved life insurance company. This flexibility allows the hybrid agent to have options available when underwriting doesn’t go so well on the first insurance application.
Pros: Hybrid agents are more flexible than the captive agent as they maintain other options in the event that underwriting doesn’t go so well. Hybrid agents, in my experience, tend to have more industry knowledge than their captive counterparts as these arrangements are generally a landing spot for experienced agents.
Cons: More flexibility is great, but in my experience, when there is a requirement that your first application be with the hybrid’s primary carrier, do you really want to waste 45 days in underwriting to find out that there was a better option available? Personally, I would rather get it right the first time. I’ve found too that the hybrid, even though having other options available, tend to be less familiar with their secondary options. Knowing a company’s underwriting requirements is vitally important in getting the best coverage, options and premium.
The Independent Insurance Broker
In full disclosure, I’m heavily biased when it comes to brokering insurance. I began my career in financial services years ago with a registered investment adviser (RIA) in the Birmingham area. True RIA’s are strictly fee-only when it comes to how they make money. They tend to earn less than other financial professionals because they refuse to take commissions on investment advice and hidden mutual fund fees. My years of working as an IRA has greatly affected my philosophy on how my advice should be given because I’ve seen prudent financial planning. When I transitioned from the RIA into insurance based planning, I began as a captive agent with a fraternal organization. I did so thinking that it would be a great way to get industry experience. But I learned quickly that there was some very bad financial advice being given and products pushed for the sole purpose of making a commission rather than taking care of the client’s best interest. The crisis point came for me while working with a client with diabetes. I knew my captive insurance company and their history of underwriting diabetics was not in the best interest of my client. Knowing that, I did what was in the best interest of my client and found a company who offered him a better premium and a longer term. When I crossed that boundary, I was introduced to a better way of taking care of my clients.
Pros: So in my professional experience, being a broker allows me to find the best fit for my clientele rather than trying to make one company be a fit for everyone. If someone is looking for the most cost-effective option; I can do that. If someone wants to look at the five most competitive companies for insuring them to age 120, I can do that. More options allows me to be competitive in just about any market. I do this by having access to over thirty of the most trusted carriers in the business for life, disability, LTC and annuities. Being a broker allows me to be less biased. I think it’s impossible to remove all bias but brokering allows me to shop the market for the very best insurance to fit my client’s need. Finally, being a broker allows me to help more people. Many of the people I work with find me because they’re paying too much for coverage or have been declined due to their health. Brokering is never 100% successful. But more often than not, there is an insurance company willing to offer coverage if you know where to find it.
Cons: So there are cons to what I do. For people who want all their insurance with one company, there are times where I may recommend separate carriers for a couple when it makes good sense to do so. There are also occasions where I may not be as fast as other agents. I do not take applications when I sit down with a client for an introductory meeting — unless they genuinely need to do so. I like to learn as much as I can about my client’s needs. As a side note, taking an application when you just met someone is a red flag in most cases. If your agent, whom you just met, is asking you to submit an application, you need to consider getting a second opinion. I take my time with my clients. When there is an issue with a client’s health, I want to speak to as many underwriters as I can. If I’m able to spend a little more time on the front end of the process with someone, I can be laser-beam accurate in my quoting and carrier selection. But I realize to some that it may seem like I’m complicating matters.
I hope I’ve educated you a little on the nature of the people you work with for insurance. In Birmingham and the greater Alabama market, you will literally have thousands of agents to choose to work with. Working with a professional who is genuinely concerned with providing the best for your needs can make all the difference on the amount of coverage, premiums or whether or not you even receive coverage. Consider your options and get a second opinion if you feel like you need to — your insurance may well be the most important decision you ever make for your family or business. If you’re looking for a second opinion or you haven’t looked at your coverage in a while; email or shoot me a quick phone call. I’d love to help you if I can.