Archive for category Fiduciary Standards for Life Insurance Advice
A Campaign for Life Insurance Policy Cost Disclosure
Posted by David Barkhausen in Commission Disclosure, Fiduciary Standards for Life Insurance Advice on December 20th, 2010
My friend, life insurance agent Brian Fechtel, has been working assiduously over several months to interest insurance regulators, financial journalists, and consumer advocates in a long-needed, effective means of measuring the costs of traditional cash value insurance policies.
I have repeatedly made two related points in what I have written here and in the articles on my firm’s website – (1) that sales commission expenses can often be substantially reduced (and sometimes avoided) to improve significantly the returns from an investment in life insurance and (2) that, in any case, some insurance companies and policies can be expected to perform much better than others based on their past track records.
Brian’s approach, explained in detail on his website (www.breadwinnersinsurance.com), analyzes the two components in a cash-value life insurance policy: its annual costs and the assumed annual investment rate of return on the savings component. It then totals the costs for a given period of years, such as 20, and states them in terms of a current dollar, or “present value,” amount.
This analysis can be done on new sales illustrations, “in-force” illustrations for existing policies, and actual historical policy performances. This straightforward framework enables one to readily understand a life insurance policy and to make meaningful comparisons of different companies and policies. In looking for a good cash-value policy, one ought to seek a policy offering the likelihood of favorable results with respect both to the cost and investment components.
It is important to recognize that the projections of policy performance that one may be comparing are, in most cases, not guaranteed. Companies often use unreasonable assumptions in trying to make their policies more attractive and competitive. Reviewing the historical performance of insurers’ various cash value policies and identifying questionable projections of policy costs helps to flag illustrations that are overly optimistic and which rely on unsupportable assumptions. In many cases, for example, one can see that a company is projecting lower future costs than those which they charge on their current policies.
Brian’s cost disclosure methodology can be especially revealing in comparing policies from the same company, as certain policy designs, given the same death benefit and the same premium, can offer substantially better values (through lower costs, especially sales commission costs) than others. Companies and their agents do not disclose such potential cost savings, and consumers are left in the dark as, almost invariably, they are sold the high cost/commission alternatives.
Requiring policy cost disclosure in the manner Brian recommends would bring a new day to the life insurance industry. With such disclosure required in the sale of all other financial and investment products, its absence in the case of life insurance is impossible to justify. In any case, Brian’s “campaign” for life insurance policy cost disclosure deserves attention, publicity, and regulatory support.
Life Agents’ Group Fights “Suitability” Standard
Posted by David Barkhausen in Fiduciary Standards for Life Insurance Advice, General on July 10th, 2009
Two weeks ago on the blog, I suggested a fiduciary standard for life insurance advice sufficiently rigorous that no life agent or broker can meet it. Their dependence on commissions for compensation and, more so, the restrictive nature of the life company and securities licenses they hold inevitably stand in the way.
I pointed out that the sellers of securities products, such as variable life insurance and annuities as well as individual securities and mutual funds, are held to a much less demanding “suitability” standard in dealing with clients. It is a pretty nebulous criterion, and the aggrieved investor has a very difficult time proving a negative – that the recommended investment was not suitable for the investor’s circumstances.
Even so, the leading organization for life insurance agents, The National Association of Insurance and Financial Advisors (NAIFA) went on record this week opposing even the minimal suitability requirement for their members. They claimed that the May recommendation of the Financial Industry Regulatory Authority (FINRA; formerly, the National Association of Securities Dealers – NASD) would duplicate the regulatory activity of the states.
The claim seems dubious at best. Even to call it laughable would be kind. State insurance department regulations imposing any sort of suitabilty requirements either don’t exist or aren’t enforced. If you hae any experience to the contrary, we’d certainly like to hear from you.
One right-minded, contrarian agent quoted in the online Wall Street Journal article on the subject (”Compliance Watch: Suitability Standard Gets Chilly Reception”) had it right when he said, “For too long, too many sales have been based on questionable suitability only so the rep can make a commission.” Sad, but true. Now what do we do about it?
A Fiduciary Standard for Life Insurance Advice
Posted by David Barkhausen in Fiduciary Standards for Life Insurance Advice, General on June 25th, 2009
For several years, a debate has been raging among those who make their living selling investments and providing investment advice as to who among them, if not everyone, should be held to a fiduciary standard. With discussions of sweeping new Federal regulations, this internal squable is now producing major headlines.
“Fiduciary,” according to Webster’s, means “founded on faith or trust.” In the investment world, it means a willingness and ability to put the client first, without conflicting allegiances or obligations. It goes beyond the legal strictures of full disclosure. It requires serving the client with undivided loyalty.
Such a standard would seem commonplace, but it is the exception rather than the rule in the investment world. Only fee-only advisors, such as the members of the National Association of Personal Financial Advisors (NAPFA), can meet it. Their numbers have grown in recent years, but they remain a distinct minority.
Investment salespersons are held only to a looser “suitability” standard. The question is simply whether an investment is appropriate for a particular investor. Given this vague and ill-defined test, proving unsuitability is a daunting challenge.
The life insurance industry lacks even such minimal consumer protection rules. Neither a fiduciary standard, nor a broadly applied suitability requirement pertains. The latter only applies to “variable” life and annuities because they are funded with equities and are therefore subject to securities regulations. Otherwise, no effective and enforceable regulations of this kind safeguard consumers.
With rare exceptions, life insurance is sold by commission-paid salespersons. They can only sell the policies of companies with which they happen to be licensed, whether or not the products are likely to provide the best, or even good, value. There is no disclosure of policy costs except for the most straightforward products. In contrast to the purchase of securities, no rule mandates that sales commissions be revealed. Where policies can be structured to reduce commissions, lower costs, and increase returns, consumers are left in the dark about these money-saving possibilities.
Given the “Wild West” context in which life insurance sales take place, it’s too much to expect that fiduciary standards will soon rule the day. But a wider, if not universal application, of such guidelines should be the goal of consumers and those charged with protecting them. Here are my suggestions of what they should entail, with more detail on our website.
Full Disclosure: Commissions and other compensation should be disclosed along with any potential conflicts of interest.
Independence and Objectivity: The advisor should be free from obligations to anyone other than the client, such as to life insurance companies with which the advisor is licensed.
Maximizing Value and Reducing Expenses: Advice should aim to maximize returns from an investment in a life insurance policy with the least cost to the client, consistent with an acceptable level of risk. Reducing the cost impact of commissions and other compensation should be a major objective wherever possible.
Access to all Companies and Products: Clients should have access to all of the best product and company options that might be appropriate, which, in some cases, are no-commission products. They should not be limited to companies with which the agent or broker is licensed.
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Unbiased Reviews of Existing Insurance Policies: Independent reviews of the performance of, and potential problems with, existing insurance policies should be performed free from inevitable agent bias in favor of a policy replacement or other action (e.g., selling the policy) that will produce a commission.
While a fiduciary approach to life insurance advice is almost unique, I am not the only one offering it. To my knowledge, there are no more than half a dozen of us across the country advising individuals in this manner. How many of us represent clients who aren’t all very affluent is less clear. In any case, fiduciary life insurance advice is readily available and affordable. If consumers show they want it and know where to find it, a portion of the life insurance industry may, just may, begin to change.