Ameritas and other no-load insurance products

[joe8]

Anyone have any experience with Ameritas or other no-load insurance produces.  As a fee-only RIA I am looking into insurance investment vehicles to support my clients risk management needs.  Are there other no-load carriers as well.  Doesn't seem easy to find them out there.  Commission seems to dominate in the insurance world.

[the observer]

For all fee-only planners... there is no such thing as a "no-load" insurance product... it is a "no-premature use charge" product. There's a huge difference.

Try and understand that the premature use charge (surrender penalty) is what makes the NPUC policy look better in the early years because it would be deducted if the policy where surrended during the time when the PUC charge applied. In comparing policies with, and without PUC's, if they both pay identical interest rates and both have identical "expense ratios" and other charges for certain extra features, the cash surrender value is likely to be pretty identical AFTER the expiration of the PUC..... So when the insurance agent gets paid on commission, he's being paid one time to provide service to the contract for life. When the fee-only planner gets paid to provide the advice, he's getting paid by the hour to service the contract and a majority are being paid illegally because they don't have an analyst or counselor license in the 33 states that require it. I always recommend a client sue the planner for the fees back when I encounter this because it's illegal to collect those fees when not licensed. JUust like it was illegal for ichael Jackson's "planner" to act illegally as an investment adviser, which is why he couldn't collect his millions owed in a CA court a couple of years back.

I guess the only good thing to come out of the July 08 changes to the CFP Board code, making this kind of advice fiduciary advice in nature, is that CFP® Certificants could then be held civilly liable for punitive damages based on actions for breach of fiduciary conduct and breach of fiduciary duty in addition to administrative to criminal charges ranging from a slap on the wrist to a misdemenor conviction in CA and a felony conviction in AL for such conduct. After all, the licensing requirement is well documented, ignorance of the law is no excuse and the conduct is willful and deliberate.

Of course, we still have to overcome the hurdle that; the CFP Board has already publicly stated they WILL interpret whether a planner violated the Investment Advisers Act, but will NOT interpret whether a planner violated state insurance laws (because they do not see their task as interpreting state law) But that's OK, there are more ways of killing a cat than skinning it and the CFP Board has way too much dirty laundry tucked in a basket under the stairs in Washington to be proactively chasing small fry all over the country anyway.

[anonymous]

My best guess is that commission dominates the insurance world because paying commissions, thus far, has proven to be the most cost effective way to distribute insurance products.

You're out of luck.  You are going to need to switch to fee-based or simply give the insurance business away.  I have never seen a situation where the "no-load" products are the best for the client.  The term products aren't competetive.  WL doesn't exist.  UL isn't competetive.  The only advantage is that UL doesn't have the giant surrender charges.  Therefore, the "no-load" route only is the best if someone shouldn't have bought the insurance in the first place.   No load DI and LTCi doesn't exist. 

It's an unfortunate reality that the fee-only folks can't handle the protection needs for their clients. 

[Lucullus]

I've always found it curious that many of the critics of commissionable insurance products blame the producer network (the selling agents) for the allegedly "bloated" commissions and the perceived impact of those commissions on policy performance.  Occasionally, a critic will point the accusing finger at insurance companies, blaming them for the current situation (in which, as was noted by another forum participant, there are no commisionless DI or LTC products out there and where the commissionless life products don't signfificanlty outperform - if they outperform at all -  the commissioned ones).

Why aren't there zero-commission (AKA "no load")  high-performance life, disability, and long term products out there?

Because the DEMAND for such products is not high enough for insurer to find it profitable to SUPPLY them.

And why is that?

Because insurance products, unlike investment products such as mutual funds, are almost always purchased because somebody SOLD them!

This may not fit the world view of some people, but it's the way things are.

John Olsen

[joe8]

I am not a big fan of cash value Life Insurance as an investment vehicle.  I'd rather get Term for my clients who need insurance and invest the rest.  Are there any recommended providers for fee-only planners who want to get Term for their clients?

Not much positive response to options for Variable Annuities or Life from the board.  Are there any fee-only advisors out there that have some input or guidance?

[Lucullus]

Joe,

You say that you're not a big fan of cash value life insurance as an investment vehicle.  How about as a vehicle for providing life insurance protection for as long as the insured lives, regardless of how long that is?

John Olsen

[joe8]

Most people don't need life insurance for their whole life.  I think most needs are temporary so why not use Term as a low cost solution to risk management that doesn't trap you into a longterm commitment.  I see so many cases where peoples interests change and they are stuck with expensive cash value or it fails. 

[The Wedge]

You're right.  Most people don't NEED life insurance for their whole life.  They NEED auto and homeowners insurance, but not life insurance.

But they WANT it.

Especially if the client learns how they can use it as a wealth replacement tool to allow them to have greater income and lower risks during their retirement years.

[joe8]

How do they have greater income and lower risks?

[The Wedge]

When a permanent policy is used as a wealth replacement tool, you can freely spend down your assets and even take out a reverse mortgage - because you have a life insurance policy to replenish those assets.  You also have the dividend income that grows during retirement years as well.

Term insurance is really DEATH insurance.  Because it only has a value if you die while it is in force during the term.  It just gets too expensive to keep past the term period.

Permanent LIFE insurance has a living value.  Learn about this, and you will do a great service for your clients and make more money at the same time.

[joe8]

I do understand it but find that in almost all cases the fees outweight the benefits.  I've seen so many of these products go bad.  In general cash value is mostly good for the very wealthy to support some estate planning goals.  Otherwise the lower net worth client has no idea what they are getting into.

[Lucullus]

Joe,

I agree that MOST life insurance needs are temporary - income for family while kids are growing and assets are modest, mortgage cancellation (this is often, but not always, a temporary need; some people never pay off their mortgages), education funding, etc.

But some needs don't expire.  Final expenses, of course. Debt payoff (permanent debt becoming more and more common these days), charitable bequests, a legacy for heirs.   And last, but not least, SURVIVOR INCOME.  The notion that we should carry life insurance only until our assets are sufficient to fund all our future needs AND THOSE OF OUR FAMILY assumes not only our ability to accumulate assets in a confiscatory tax environment, but also that the lifestyle that those assets are expected to fund doesn't keep rising with our net worth.

In my experience, people tend to spend more as they earn more.  That doesn't bar them from accumulating assets, but it makes the required accumulation a constantly increasing value.

Permanent life insurance (which generates cash value primarily to ensure that the premium and death benefit can remain level over time) can make sense for a lot of our clients because it "explodes" in value at the very time that cash is needed. 

Will a cash value life insurance policy generate an Internal Rate of Return competitive with investment vehicles with the same risk/reward characteristics?  The answer here can only be "maybe" - because it depends upon the measurement period.

If you promise me that you'll live another fifty years, I will suggest that you avoid buying additional life insurance, because the premium dollars would very likely produce a higher AFTER TAX future value - after FIFTY years - if invested even "conservatively".  Indeed, if you can promise me that, I'll suggest that you drop any life insurance you now own.

All you have to do is promise to die "on time".

The Internal Rate of Return on the death benefit of a life insurance policy (and Death Benefit is why life insurance exists) declines over time, as the likelihood that that death benefit will be paid increases.  But the out of pocket cost need not increase.   In Whole Life policies, it absolutely WILL NOT increase.  In Universal Life policies, it PROBABLY won't - provided you picked an adequate premium level when you bought it (which most buyers DO NOT do because most agents, who sell UL on "price", let them underfund the policy from inception).

By contrast, the IRR on DB of a term policy decreases over time while the likelihood of a claim increases, but also while the out of pocket cost of that policy increases.  In fact, a VERY small percentage of term insurance policies mature as death claims chiefly because (a) most people don't die young and (b) the cost of term insurance becomes progressively harder to budget the older one gets.

I don't disparage term.  I write millions of it.  But I don't pretend that it's anything but a temporary solution.  If the need it is designed to fill is also temporary - and it often is - that's fine.  I recommend term. 

But some needs are permanent - and require solutions that are permanent.

- John Olsen

[joe8]

Nice post.  That was a great summary of benefits of permanent.  I do not deny that there is a place for permanent and each story needs to be reviewed independently.  The issue I have is with clients who aren't the best at managing their own finances even with the assistance of a financial planner.  They are the ones who don't fully fund the policy and want to get out of it after a couple years and they are hurt the most.  That is why it is the planners responsiblity to judge the client's level of financial responsibility before putting them into a long term commitment.  I believe the story has to be really good and well thought out before putting a client into permanent life insurance.

That leads back to my original question.  How does a fee-only planner deal with providing insurance for their clients when the industry is so commission oriented?  There were some good comments but I would like to hear more from anyone who is a fee-only insurance producer.  I'm not afraid to write permanent or term insurance if it is best for the client.

[Lucullus]

Joe,

One reason why I refuse to go the "pristine fee-only" route (other than the fact that I find sanctimony annoying) is that a fee-only planner, working with a client who has a life or disability or long term care insurance need, has a problem. 

She can refer that client to a commission-compensated insurance pro.  If the pro in question really IS a pro AND is willing to keep the referring planner completely in the information loop, this can work reasonably well.  But who will make the insurance need computation?  If the original planner will, then the client will be paying a fee for those hours AND a commission on the policy (which commission should, in a perfect world, pay for that needs computation).  If the agent will do the calcs, should the planner assume it was done as she would have it done (assuming she knows how to do those needs calcs)?  If not, then the planner will be billing the client for reviewing those calcs.

There are no-commission insurance products, but, at present, those that exist are no better than commissionable products (and, often, not as good) - and some types of coverage aren't available on a no-commission basis.

Any way you slice it, a FEE ONLY planner - who MUST refuse to accept a commission - will end up either doing a less than adequate job for the client or billing that client for work that a commission could have paid for.

How could that work?  "Fee with Commission Offset", WHERE STATE INSURANCE LAW PERMITS, allows the planner to charge his normal fee, with the proviso that IF (and only if) the client decides to buy a commissionable product (not necessarily insurance) FROM THE ADVISOR, then the advisor's fee will be reduced (but not below zero) by the commission.

Some critics say that the solution is for insurers to offer zero-commission products that are genuinely better than the few now out there.  The problem is simple:  THEY AREN'T GOING TO DO THAT.  And not because they don't WANT to.  Every insurer in the industry would LOVE to stop paying commissions.  But they know very well that if they don't pay commissions to agents for selling their products, they won't move enough of those products to stay afloat.

Why?  Because VERY, VERY FEW PEOPLE BUY INSURANCE WITHOUT BEING PRODDED INTO DOING SO BY AN INSURANCE AGENT.  You don't have to believe that.  Some readers of this forum will insist that it's not true.  But every executive of every insurer knows what drives their revenue.  And it's not Do It Yourselfers calling them up, asking to buy insurance.

- John Olsen

[The Wedge]

Joe, you said:  "The issue I have is with clients who aren't the best at managing their
own finances even with the assistance of a financial planner.  They are
the ones who don't fully fund the policy and want to get out of it
after a couple years and they are hurt the most."

While I don't disagree with you, this is the problem with SOME agents who don't properly know their product and sell it improperly.

IMO, if a client is going to "minimum fund" a UL or VUL, then sell them term.  UL or VUL products work best when you can OVERFUND them in the beginning.  Term is less of a financial burden on them and will be in force for the duration of the term as long as premiums are paid.  It can still remain in force after the term, but will increase in cost each year in an exponential way that it becomes too costly to keep.

I blame the agent who may misrepresent the product and tell the client that they can have "whole life for half the premium".  The client believes the agent and then proceeds to minimally fund the policy.

The agent did a disservice to the client and the client continues to manage their policy improperly.

Just my opinion.

[Lucullus]

Skippy,

AMEN, Brother! 

There are remedies to this condition.  One would be to permit, if not MANDATE, the use of stochastic projection in life insurance illustrations.   Dick Weber (who has forgotten more about Due Diligence in life insurance than most agents know) has been advocating this for years.  He was involved in the development of a Monte Carlo based illustration system using "industry benchmark" policies that is still marketed by EISI, Inc., under the name "Insurance Insight". 

To my knowledge, NOT ONE insurer is allowing agents or brokers to illustrate its UL or VUL policies using stochastic projections.  This is NOT, as I understand it, because the SEC and/or FINRA won't permit same.  It's because INSURERS DO NOT WANT US TO USE THESE PROJECTIONS.  Why?

Well, one answer is "it will be very costly to develop regulator-approved methodologies".    That, in my opinion, is a Cop-Out.  The potential INCREASE in REVENUE that should result in widespread use of stochastic projections in life illustrations is huge.  Why?

Because such projections will demonstrate that an "indeterminate premium" policy requires A LOT HIGHER PREMIUM than most agents are willing to ask clients to pay, IF THE POLICY IS TO HAVE A DECENT CHANCE OF PERSISTING FOR THE LIFE OF THE INSURED.

So why don't they Go For It?  Well, consider that the insurer who encourages such illustrations is tacitly admitting that its earlier, deterministic ("you'll earn this rate of interest every year for the entire policy period") illustrations were pure fiction!

Who wants to go first in THAT race?

I don't claim that regulators' allowing - or mandating - stochastic projection is THE solution to the problem of widespread UL and VUL policy failure.  But I believe it's a pretty good start.  Certainly, increasing the enforcement of reasonable compliance standards would help.  (Caveat: "reasonable" is a slippery term.  Have you seen an NAIC-compliant UL illustration lately?).  DECENT AGENT TRAINING would be nice, too.  (I've been at this long enough to remember when agents were actually TRAINED in how policies work - and don't work).

And better - and more understandable - secondary guarantees in UL and VUL policies would be also be nice.

OK, I'll get off the soap box now.

- John Olsen

[anonymous]

"How does a fee-only planner deal with providing insurance for their clients when the industry is so commission oriented?"

1) The fee-only planner has to recognize that he is simply not in the position to do what is best for the client with insurance since commissionless products either don't exist or aren't competitive.  

2) He also must make sure that he is even legally allowed to give insurance advice. 

3) He must make sure that he has the expertise.   It's awfully tough to get the necessary insurance expertise without writing hundreds or thousands of policies. 

4) If he does have the expertise and can give insurance advice, the client must understand that he will be paying a fee to the advisor and then a commission to the seller. 

5) If the fee-only planner accepts AUM fees, he and the client must understand that insurance causes a huge conflict of interest for the advisor since all money that goes into insurance products directly negatively impacts the advisors compensation.

 

[Tad Borek]

It's an unfortunate reality that the fee-only folks can't handle the protection needs for their clients.

It's broader than that though, right? These insurance discussions always focus on Life but what about all the other types of insurance, including the mandatory ones (e.g. auto, usually homeowner's)? The same criticism applies, and it's not just a fee-only issue. Anyone who isn't licensed to sell health, auto, homeowner's, professional malpractice, D&O, DI, LTCI, and on and on can't handle the protection needs for their clients either. That's not the end of the world, obviously, unless this is a regular need among your clients and a significant component of the work you want to do for them.

To the OP - with respect to insurance have you considered focusing on "issue spotting" and a reality check on any proposals? That's what I do, really (9 years fee-only). Use auto as an example rather than life and I think it makes more sense. Client comes in, your info-gatherer asks about auto coverage, and they have the bare minimum liability. You might suggest upping that but of course you're not going to get too deep into auto insurance, right? You can take the same approach to life insurance.

Or...if you regularly find yourself wanting access to the products, because you believe the approach is the best for the types of clients you work with, why not become fee-based so you can recommend either the commissioned products or the no-loads, whichever is better? Select products first, determine how to access them, and then get licensed as needed or find a referral to someone who is. To me that's the generalized approach to use with any advisory practice. If it's infrequent (like, say, LTCI would be in my practice) a referral makes sense. If it's regular and core to your business (opening & managing a rollover IRA) get licensed to do that. What business are you in?

-Tad

[joe8]

Tad,

You said that you are fee-only?  Does that mean you only do financial plans and you do not sell insurance products?  I am a fee-only financial planner (and I hold an insurance license) and refer out LTC, auto, home, etc and try to find alternatives to cash-value life and annuties but of course there are times when these products make sense for the client.  Clearly the insurance industry makes it difficult for the fee-only.  The reason I am avoiding fee-base (to collect on insurance commissions) is that I believe that model creates a conflict of interest.  I would rather spread out my compensation (% of AUM) evenly over time so that if the client is unhappy with my services they can go elsewhere without having paid out a significant amount for my services at the beginning.

Joe

[anonymous]

Joe, I'm confused.  How does collecting insurance commissions give you a greater conflict of interest?   Like you mentioned, you need to make an effort to find alternatives to cash-value life and annuities, but they make sense sometimes.   It sounds like the fact that you have to try to find alternatives is your way of admitting that you do have conflicts.   Wouldn't you be least conflicted if you could get paid regardless of what someone decides to do?

I think a SPIA is a good example of this.  SPIA's make sense for some people for some of their dollars.  I think that we can all agree with that.   Let's assume that you charge 1%.  If you recommend that a client puts $500,000 into a SPIA, it costs you about $5000 in annual income.  We should be able to agree that this is a huge conflict.   If you could earn commissions,  you would earn between $15,000-$20,000 on the annuity sale.  

As fee-only, you will either earn $5000/year or $0 depending on what the client does.  This makes a big difference.
As fee-based, you will either earn $5,000/year or $20,000 lump sum depending on what the client does.  This is more 6 of one or half dozen of the other.  Your wallet doesn't care what the client does. 

Anyway, this is why I think that fee-only + AUM fees actually is the most conflicted way to do business.

Let me clear that I have no problem with someone choosing to do business in this mannner, but I think that any anti-conflict arguments with this simply don't hold water.    AUM fees mean, from a conflict standpoint, that you don't care how the money gets invested, but it must get invested, and it must stay away from most insurance products.

[Tad Borek]

Joe, fee-only means I only charge hourly fees and asset-management fees, not commissions. It sounds like you are fee-based (licensed to earn both fees & commissions) but aren't actually selling anything? If you're coming across a lot of cases for cash-value life and annuities, why not leave yourself open to the option of placing them in either commissioned products, or the no-load products? By going fee-based you leave both options open. It really depends on your client mix, and the types of work you want to do for those clients (back to my example of - not doing health, auto, LTCI).

-Tad

[Rain City]

Joe, actually, there is a no-commission insurance product from Symetra (www.symetra.com/complete) out there that performs quite well. It is on a new actuarial deseign -- i.e. it is not on a whole life or universal life chassis. It's called "Complete" and it is pretty much like no-commission annuity except with slightly higher mortality charges. The fees are completely transparent and it does not (cannot) lapse given no policy loans. Also, there is no surrender charge.

 

The only potential "downside" is that it is a modified endowment contract (MEC). That is, policy distributions are treated like annuity for income tax purposes -- gain first. But then death benefit is income tax free, unlike annuity.

 

Bob Veres wrote an article in this magazine's September, 2007 issue. http://www.financial-planning.com/asset/article/528423/new-life-life-insurance.html?pg=

[Lucullus]

Observer,


I've been contacted by a fee-only advisor (NAPFA member who is not currently licensed as an insurance agent) in California who has asked me what he must do to be able to offer advice regarding IMMEDIATE ANNUITIES to his clients. I recall your postings about the peculiar CA requirements for "Insurance Consultants" and I would greatly appreciate hearing what this fellow needs to do.



You can email me at [url=mailto:jolsen02@earthlink.net]jolsen02@earthlink.net[/url]



Thanks in advance,



John Olsen