There is a long running anecdote about what is worse: Used car Salespeople or Insurance People. Other industries might be able to be thrown in there as well, but for the purpose of this article we will focus on insurance.
There are many memes out there of the sketchy things that insurance people use, and how they communicate. There is one group that uses the types of cars they drive as the reason why you should buy insurance from them.
Essentially, Insurance has a bad reputation, and because of that there is distrust about insurance. Enter Financial Advisers who might be the defensive line between consumers and insurance. Now there are many ethical and above-board insurance agents out there, the few examples of bad actors we know of similar to any industry there are people who are driven for reasons that are not about the client.
Focusing on the client’s needs, read fiduciary although that is a term that divides the industry, rather than the commission or revenue is taking a stronger hold in the insurance industry. However, fiduciary, in the sense it is applied, does not mean that commission is bad, or you should find the lowest possible price on insurance policies. Pricing, commission, and client’s best interest do go hand in hand, and may differ from product line to product line.
This is why advisers need to improve their relationship with insurance. The drive for the lowest price and that high price means people are sold” rather than helped needs to be changed, and that change comes from Financial Advisers.
First, the importance of insurance needs to be addressed and established for the client. Insurance can take a portion of their cash flow (let’s say 7% for all types of insurance: Life, Disability, LTC (if appropriate) Auto, and Home) and offload the greater risk. The offloading of risk is what advisers look at and because of that they want the lowest cost products to minimize what is spent in offloading that risk. When focusing on pricing though there may be some things that might be missed.
Auto and Home Insurance is an excellent example of this price to benefit picture. Auto and Home also share a distinction, unlike most insurance, where there are specific laws or forces requiring individuals to have these types of insurance. Homeowners or Property Insurance is usually required by the bank or a HOA or a lease, and auto insurance is required in all 50 states at some level. Because they are required, we go ahead and get the insurance, but we want to make sure we pay the lowest, thus we shop constantly for that lower price. When we get that lower price though, we are not aware of what we might be giving up to get that lower price, and because of the distrust of insurance agents inherent in society we may not fully listen to them explaining the differences and just push for lower pricing, and unfortunately find this out when we go to claim. But having insurance is a requirement so we meet the minimum requirements to do that and feel we covered as pricing does not always compute with consumers to value received.
Disability insurance is a splendid example of that. Many consumers obtain their disability insurance through work and obtain coverage at an extremely low cost and thus think they are properly covered. However, a lot of times that lower price has some sacrifices, benefit period, definitions, etc. Thus, an adviser may recommend a supplemental individual policy, but both the adviser and the client tend to be shocked by the pricing. Pricing for individual disability insurance pricing is more expensive for a few reasons: 1. You are paying the full premium, not being subsidized by your company, 2. It is calculated based on your age and your situation not in a general sense of your company, and your gender can affect it as well and 3. You are getting better definitions and value for what you are paying, thus you will pay more for that policy. If you do not have Disability Insurance through your employer, or you are the employer, and you try to obtain insurance on your own sometimes the price may be shocking. There are no legal requirements to own Disability Insurance, unless in some rare situations a bank requires you to have a policy, so this would be a luxury purchase by definition (not needed but a nice have). Thus, pricing is even more important with this product line, but if the only focus is price, then the client may not be serving their best interests.
The three types of policies I just mentioned here are all what are called definitional policies. This means that the definitions of the policies matter and will affect pricing but more important claims. Thus, they may become more expensive than what you originally thought, you pay less in premiums but do not cover what you were expecting and thus you pay more out of pocket on the claim and become more expensive for you.
Now, the policies I have not mentioned are what usually cause a lot of issues. Permanent policies. There are three permanent policies that are based on a term chase, Universal/Guaranteed Universal Life, Variable Universal Life, and Indexed Universal Life, and there is one true policy that is whole life, Whole Life. The UL policies all have good fits for an insurance portfolio. The Guaranteed UL is a permanent death benefit, does not build cash value for very long, and provides a long-term death benefit. Usually, these policies are used for estate planning or to provide a pure death benefit. The current Assumption ULs are outdated and used more for conservative options; Whole Life is a better fit for that (explain later). The Indexed and Variable Universal Life Policies are where some controversy occurs. They are market adjacent or dependent, and VUL’s can have fees that may make them more expensive than other options. However, IUL’s especially have a good fit in the industry and for solutions.
The problem with IUL’s is they are often implemented underfunded or funded at simply the target level (read commission) and may not perform the way they are designed. Although sometimes they do perform, usually they are shown as a cheaper option, but because of how they are being designed, and may not be getting the maximum value out of them.
Whole Life Policies also get a bad rap. They are the most expensive cash value policies, but they do provide true guarantees. Because of the minimum guarantees, whole life policies can be a great addition to the portfolios of clients. Business owners and several cultures like the guaranteed columns on the illustrations and look at everything else as extra.
Term, though, can cover most of the needs a client has for insurance. Cash Value policies should not be used to cover an insurance need completely, but to provide for the permanent needs a client has for insurance. If a client has a 2MM need, I personally feel a majority of that need can be covered by term, but maybe a 100 or 250,000 should be with a cash value policy. This will provide a death benefit for the client’s life, but also can provide some supplemental needs if appropriate. Determining the permanent need is easy. Most financial advisers make the decision or have the opinion that as assets grow the insurance need decreases. While this is true for the overall need, liquidity of those assets], although large, may be hard to free things up, so I always advocate what would be needed if there is all the net worth in the world and someone dies for 3-6 months. That is the permanent need, so that fire sales do not need to be done.
There are scenarios where large death benefits on a cash value policy do make sense though. Usually when you are doing a shorter pay strategy, you need to put more money in, thus, to provide for a non-modified endowment contract, the death benefits need to be larger. These shorter pay strategies are generally when you have robust portfolios elsewhere and you are transferring some value into a different structure. These are common but they are not a 40-year payment commitment, usually a 10-20 year. I know there are many out there that will counter this in different arguments, but this is simply my opinion.
Changing the relationship advisers have with insurance, and subsequently consumers have with insurance, form simply a commodity to offload risk, but to a tool to where it can minimize exposure but we need to identify what that exposure is, becomes vital to making sure we are not under or over exposed.
Advisers that look at insurance products as a tool rather than a competition to their advice or as a bad thing, help clients protect their risk, minimizing their cost, but having the most accurate exposure identified. This is why advisers need to change their relationship with insurance. Instead of it being a negative or a cost, how can we make insurance be a part of the planning process and be part of the solution?
I am not advocating selling the most expensive products here, instead, trying to find a balance. We know that Home and Auto is usually required. Life, Disability and in most states LTC is not required, consequences of not having these though can be pretty severe if they are not held. The advocation here is to focus on the definitions of the policies and embrace what these insurances do for the client and look at their best interest beyond just the cost, but what value are they getting for it.
There are many memes out there of the sketchy things that insurance people use, and how they communicate. There is one group that uses the types of cars they drive as the reason why you should buy insurance from them.
Essentially, Insurance has a bad reputation, and because of that there is distrust about insurance. Enter Financial Advisers who might be the defensive line between consumers and insurance. Now there are many ethical and above-board insurance agents out there, the few examples of bad actors we know of similar to any industry there are people who are driven for reasons that are not about the client.
Focusing on the client’s needs, read fiduciary although that is a term that divides the industry, rather than the commission or revenue is taking a stronger hold in the insurance industry. However, fiduciary, in the sense it is applied, does not mean that commission is bad, or you should find the lowest possible price on insurance policies. Pricing, commission, and client’s best interest do go hand in hand, and may differ from product line to product line.
This is why advisers need to improve their relationship with insurance. The drive for the lowest price and that high price means people are sold” rather than helped needs to be changed, and that change comes from Financial Advisers.
First, the importance of insurance needs to be addressed and established for the client. Insurance can take a portion of their cash flow (let’s say 7% for all types of insurance: Life, Disability, LTC (if appropriate) Auto, and Home) and offload the greater risk. The offloading of risk is what advisers look at and because of that they want the lowest cost products to minimize what is spent in offloading that risk. When focusing on pricing though there may be some things that might be missed.
Auto and Home Insurance is an excellent example of this price to benefit picture. Auto and Home also share a distinction, unlike most insurance, where there are specific laws or forces requiring individuals to have these types of insurance. Homeowners or Property Insurance is usually required by the bank or a HOA or a lease, and auto insurance is required in all 50 states at some level. Because they are required, we go ahead and get the insurance, but we want to make sure we pay the lowest, thus we shop constantly for that lower price. When we get that lower price though, we are not aware of what we might be giving up to get that lower price, and because of the distrust of insurance agents inherent in society we may not fully listen to them explaining the differences and just push for lower pricing, and unfortunately find this out when we go to claim. But having insurance is a requirement so we meet the minimum requirements to do that and feel we covered as pricing does not always compute with consumers to value received.
Disability insurance is a splendid example of that. Many consumers obtain their disability insurance through work and obtain coverage at an extremely low cost and thus think they are properly covered. However, a lot of times that lower price has some sacrifices, benefit period, definitions, etc. Thus, an adviser may recommend a supplemental individual policy, but both the adviser and the client tend to be shocked by the pricing. Pricing for individual disability insurance pricing is more expensive for a few reasons: 1. You are paying the full premium, not being subsidized by your company, 2. It is calculated based on your age and your situation not in a general sense of your company, and your gender can affect it as well and 3. You are getting better definitions and value for what you are paying, thus you will pay more for that policy. If you do not have Disability Insurance through your employer, or you are the employer, and you try to obtain insurance on your own sometimes the price may be shocking. There are no legal requirements to own Disability Insurance, unless in some rare situations a bank requires you to have a policy, so this would be a luxury purchase by definition (not needed but a nice have). Thus, pricing is even more important with this product line, but if the only focus is price, then the client may not be serving their best interests.
The three types of policies I just mentioned here are all what are called definitional policies. This means that the definitions of the policies matter and will affect pricing but more important claims. Thus, they may become more expensive than what you originally thought, you pay less in premiums but do not cover what you were expecting and thus you pay more out of pocket on the claim and become more expensive for you.
Now, the policies I have not mentioned are what usually cause a lot of issues. Permanent policies. There are three permanent policies that are based on a term chase, Universal/Guaranteed Universal Life, Variable Universal Life, and Indexed Universal Life, and there is one true policy that is whole life, Whole Life. The UL policies all have good fits for an insurance portfolio. The Guaranteed UL is a permanent death benefit, does not build cash value for very long, and provides a long-term death benefit. Usually, these policies are used for estate planning or to provide a pure death benefit. The current Assumption ULs are outdated and used more for conservative options; Whole Life is a better fit for that (explain later). The Indexed and Variable Universal Life Policies are where some controversy occurs. They are market adjacent or dependent, and VUL’s can have fees that may make them more expensive than other options. However, IUL’s especially have a good fit in the industry and for solutions.
The problem with IUL’s is they are often implemented underfunded or funded at simply the target level (read commission) and may not perform the way they are designed. Although sometimes they do perform, usually they are shown as a cheaper option, but because of how they are being designed, and may not be getting the maximum value out of them.
Whole Life Policies also get a bad rap. They are the most expensive cash value policies, but they do provide true guarantees. Because of the minimum guarantees, whole life policies can be a great addition to the portfolios of clients. Business owners and several cultures like the guaranteed columns on the illustrations and look at everything else as extra.
Term, though, can cover most of the needs a client has for insurance. Cash Value policies should not be used to cover an insurance need completely, but to provide for the permanent needs a client has for insurance. If a client has a 2MM need, I personally feel a majority of that need can be covered by term, but maybe a 100 or 250,000 should be with a cash value policy. This will provide a death benefit for the client’s life, but also can provide some supplemental needs if appropriate. Determining the permanent need is easy. Most financial advisers make the decision or have the opinion that as assets grow the insurance need decreases. While this is true for the overall need, liquidity of those assets], although large, may be hard to free things up, so I always advocate what would be needed if there is all the net worth in the world and someone dies for 3-6 months. That is the permanent need, so that fire sales do not need to be done.
There are scenarios where large death benefits on a cash value policy do make sense though. Usually when you are doing a shorter pay strategy, you need to put more money in, thus, to provide for a non-modified endowment contract, the death benefits need to be larger. These shorter pay strategies are generally when you have robust portfolios elsewhere and you are transferring some value into a different structure. These are common but they are not a 40-year payment commitment, usually a 10-20 year. I know there are many out there that will counter this in different arguments, but this is simply my opinion.
Changing the relationship advisers have with insurance, and subsequently consumers have with insurance, form simply a commodity to offload risk, but to a tool to where it can minimize exposure but we need to identify what that exposure is, becomes vital to making sure we are not under or over exposed.
Advisers that look at insurance products as a tool rather than a competition to their advice or as a bad thing, help clients protect their risk, minimizing their cost, but having the most accurate exposure identified. This is why advisers need to change their relationship with insurance. Instead of it being a negative or a cost, how can we make insurance be a part of the planning process and be part of the solution?
I am not advocating selling the most expensive products here, instead, trying to find a balance. We know that Home and Auto is usually required. Life, Disability and in most states LTC is not required, consequences of not having these though can be pretty severe if they are not held. The advocation here is to focus on the definitions of the policies and embrace what these insurances do for the client and look at their best interest beyond just the cost, but what value are they getting for it.
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