Most insurance agents are happy to reassure you they’re selling you a great policy, but there’s no getting around the conflict of interest.

Confessions Of A Former Agent

At the beginning of my career as a financial planner, I made my living selling various investment and insurance products, which gave me personal experience regarding the motivations that drive sales.

At one point I recall that fully one third of my commission revenue was a result of permanent life insurance and annuity sales. For every dollar that was placed in these products, the commission rate far exceeded those earned for the sale of term insurance, mutual funds, stocks, and bonds.

I was not the only one who benefitted from selling high-commission products. The brokerage and insurance firms I worked for earned a higher profit on these products as well. The client was getting hit not only with high commissions, but also higher internal costs that contributed to fat profit margins for the firms.

A novice insurance agent is generally not overly analytical when evaluating policies. They are immersed in a corporate culture that encourages the sale of permanent policies above all else, and are not experienced enough to uncover hidden costs. Many agents and brokers are willing to overlook the high costs (to their client) of these policies and annuities and are sometimes unaware of them altogether. Most are talented at building rapport with prospective clients; and many are very good at gaining trust and in persuading clients to buy. Those skill sets do not always coincide with analytical ability, however.

Even those with analytical prowess seldom use it in the early years of a sales career. They become so focused on the primary goal of sales, that there is little energy left for anything else. In essence, novice life insurance agents believe the sales pitch themselves. Some stay in the sales career for the long term; continuing to believe that every prospect needs copious amounts of what they are selling.

Others begin to figure out that it is not in the best interests of their clients to be obtaining insurance advice from agents with judgment clouded by dollar signs. They begin to understand that the high costs and unsuitable sales are actually harming those who trust them. I attempted to overcome the conflict of interest by carefully assessing each situation for suitability; foregoing the lucrative practice of selling permanent insurance to anyone with a pulse.

This can be exceedingly difficult when your living depends upon commission revenue. I suspect that when an agent looks into a mirror and asks themselves whether a permanent policy or annuity is being proposed for the benefit of the client or for their own benefit, they struggle with the truthful answer. I know I did.

Why You Should Choose Fee-Only Advisors

But there is a better way. An unbiased, fee-only advisor can evaluate the need for life insurance, and can advise clients to apply for no-load permanent life insurance and annuities. From a compensation standpoint, the fee-only advisor is agnostic as to what type of product the client owns. This eliminates the conflict of interest and frees up the fee-only advisor to give honest, objective advice regarding insurance and annuities.

The results for clients are positive, to say the least. Here’s why:

  • Some investors have no business owning life insurance to begin with. I have worked with single clients who have no dependents, who were sold life insurance policies anyway. (Thankfully, those are now canceled.)
  • Many clients with a temporary need for life insurance were sold expensive permanent policies. Those have since been converted to cost-effective term life policies.
  • For the small minority of clients for whom permanent insurance is truly the best solution, the expensive policies are exchanged[1] into no-load insurance policies if appropriate[2].The difference over a long period of time is significant. Consider that with a typical whole life or universal life policy, the commission and fees are so large that the client cannot exit the policy without a loss for a long time period; often ten years or more. Contrast that with no-load policies which have no surrender charge, and are often worth more than the premiums paid after just one year’s time.[3] This makes no-load insurance a great “rescue vehicle” for those who are surrendering an expensive policy.
  • For decades, many permanent policies have been sold with illustrations that use unreasonably high rate of return assumptions. Unknown to the policyholders, these policies are in danger of lapsing. Policy lapse can have disastrous consequences beyond the loss of coverage, especially if there are outstanding policy loans.[4] A fee-only advisor who is experienced in permanent life insurance can analyze a policy to determine the likelihood of eventual lapse.
  • Since both permanent life policies and deferred annuities have cash value, there is a need for ongoing investment advice. The fee-only advisor is best qualified to design and manage the investment selections and coordinate them with the other investments in the overall portfolio.
  • Finally, effective ownership of permanent life policies and annuities depends not only upon initial design, but on the ongoing changes to premiums, withdrawals, loans, and death benefits. A fee-only advisor is aware of the client’s entire situation, and can manage the insurance policy with the entire plan in mind, including changes to goals, tax status, and estate planning situation. Fee-only advisors are not “transactional” in their business like a life insurance agent. They are accustomed to managing and monitoring the client situation on an ongoing basis.

Choose Wisely

In summary, consider this: it should stand to reason that the worst person to buy permanent life insurance from is an insurance agent. It’s far better to obtain objective advice from a fee-only advisor who is not motivated to steer a client into one insurance or investment product over another.

[1] By utilizing a 1035 exchange, the cost basis of the original policy is transferred to the new policy, and no tax is realized at the time of transfer.

[2] Consideration must be made for insurability and potential surrender charges

[3] This is dependent largely on the size of the cash value as compared to cost of insurance. A no–load policy design that calls for the minimum death benefit relative to cash value will grow from day one using reasonable rate of return assumptions. On the other hand, a small cash value account will not earn enough to compensate for the cost of insurance in a policy with a high death benefit.

[4] Policy loans become taxable upon lapse.

James Twining
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