Updated: Oct 15, 2020
This myth is an interesting one. And this myth strikes at the core of how ethical one’s profession and conduct really is. Is the life insurance profession one of moral and ethical character? The industry at large… might not be of the highest moral character! But individual agents, advisors, and consultants… SHOULD be of the highest moral and ethical character!
Just about 3 years ago or so, I heard a clip from a radio show of VERY well known investment advisor talk about “770” or ‘702” plans to a caller. (I already debunked “investment advice” from Warren Buffett, so this is nothing!) That particular clip and article is gone… but the original Facebook post is still there… with my comments on it from that time.
After Ric ranted about how deceptive it was (and I’d have to agree to an extent)… he then proceeded to talk about how all the agent wanted was a $10,000 commission and insinuating that the agent is simply trying to RIP OFF THE CLIENT by selling something that (according to HIS perspective) is not in the client’s (or ANY ONE'S) best interests.
Now, the original blog or article post from 2015 is gone… but this is his current one published in 2017:
Notice Ric’s bias: “Unfortunately, there are still a lot of insurance agents around who make their living selling high-commission policies known as whole life, variable life and universal life. But these agents have a problem: People are better informed today about insurance than they were, so they’re better able to resist sales pitches that are not in their best interest. This forces those agents to devise ever more creative ways to sell a very old product.”
Notice the bottom: “By the way, the name was borrowed from the Internal Revenue Code. Section 7702 deals with taxation of life insurance. I’m not sure why it’s called a 770 account and not a 7702 account. Maybe those insurance agents can remember only up to three digits.”
I wonder who brought THAT to his attention, hmmm?? 😊
I have a core fundamental belief about insurance and financial products: Every legitimate financial product is a solution to one or more financial problems for various markets or client situations – even and especially cash value life insurance. Find the problems and determine how it fits (or if it doesn’t).
For example: Many years ago, Reverse Mortgages were deemed to be “rip-offs”. However, even FINRA has backed off of their previous advice and only advised caution since there were changes in how these reverse mortgages worked:
Permanent cash value life insurance policies have been around for well over 150 years. Certainly they are legitimate products in their own right (as opposed to participating in a Ponzi scheme or some illegal venture).
The real problem is when AGENTS that are not properly informed or skilled (nor are the owners of some of the largest investment advisor firms in the country). You can see some of the other misconceptions on my blog, how they came about, and what the truth really is.
Compensation drives behavior
Let’s get something straight as it is the “elephant in the room”: compensation DOES drive behavior. If there wasn’t enough compensation in the endeavor, most people wouldn’t do ANYTHING. Would you show up at YOUR job if you weren’t compensated enough? (You might not be compensated enough as it is!)
Does High Compensation Automatically Mean Low Ethical Standards? What Is The Compensation Driving Them To Do?
I find there are two directions of this behavior:
1) The Lazy Agent just looks to ‘pitch’ their product or just find people who want to buy it. (Unfortunately, the public doesn’t necessarily know what they don’t know… so selling the higher commission products won’t happen on accident.) Often, because they have a hard time selling life insurance products properly, they get securities licensed so they can “be a full advisor” and they believe that “all the money is in money management” rather than in problem solving.
That doesn’t mean they are unethical. It just means they may resort to working in a “less than stellar” manner in order to be successful. They don’t necessarily understand that most people will buy what life insurance DOES, rather than what life insurance IS. And they won’t be interested in what life insurance DOES until they can see how it can help to solve a problem that the client has.
2) The Consultative Agent seeks to add to their knowledge base through many sources: designation studies to broaden their knowledge base, learning how to solve various problems with their products, understanding the economic viability and advantages of their products, and helping their clients to make more informed decisions that feel right to them.
One of these paths works for the long-term viability and builds a far more rewarding career than the other. I’ll let you decide which path they should be taking.
Unfortunately, In My Opinion, Laziness Is What Ends Up Happening More Often Than Not:
There is a stereotype of The LAZY Agent. I call them lazy, not because they don’t work hard, but because they haven’t studied their craft well enough, but want to earn “the big bucks” of those who have and do. They are trying to “short-cut” their success… through disguising their product, pitching it as something it may not really be, and, through such efforts – end up trying to find people who are gullible enough to buy from them. I say gullible because often the agents don’t know enough about their products to make a coherent persuasive presentation, so people may be “duped” into buying without clearly knowing why. (Of course the reasons MAY have been clear at the time, but without documentation of the discussions… memories often become “selective” as to what they remember.)
The LAZY life insurance agent PITCHES their product or strategy without doing the following:
1) Determining what needs or wants the product can solve.
2) They use a lot of hype and or confusing language in order to disguise what they are REALLY trying to sell. (Such as the 7702 example; we never see anybody pitch an IRA plan as IRC Section 408 plan, do we?)
3) They don’t have enough technical information to back up the claims that they say their product can do. (See my post on “Infinite Banking Explained” for an example: https://davidkinderfinancial.wixsite.com/davidkinderfinancial/single-post/2018/09/21/Infinite-Banking-Explained)
4) Putting their recommendation in writing as to why it fits the client’s financial objectives and outlining the advantages and terms of how the product works.
By not doing these things, they exhibit the behavior of a “pitchman”, not an advisor or consultant. They sound more like a (bad) “infomercial” rather than as a professionally trained advisor or consultant. This is why the industry has its reputation… and it is well-earned. It’s no wonder why Fiduciary Securities Advisors feel a heightened sense of “moral superiority” when they make their recommendations and feel justified by steering their clients away from these “pitchmen”!
The Proper Behavior Should Be To Serve, NOT to “Pitch”:
1) Asking a lot of questions and determining how their products can fit the client’s needs. 2) Studying the aspects and mechanics of the products they sell so they can explain them properly, factually, and with all the disclosures needed so people can make an informed decision. 3) Making complex concepts simple and understandable. 4) Determining how life insurance can actually be SUPERIOR to a 401(k), IRA, Roth IRA, 529 plans, and after-tax brokerage accounts. (I actually have a comparison chart comparing all of these various accounts on 24 different points. I use it in-person for my appointments and left with each person who chooses to buy a policy from me.)
What are the commissions for selling life insurance contracts based on?
Commissions on life insurance policies are based on the amount of death benefit secured as well as the length of time that policy is expected to be in force.
1) If I sell a $100,000 10-year term contract, I earn a certain amount.
2) If I sell a $1,000,000 20-year term contract, I earn a certain amount – which would understandably be higher than #1. 3) If I sell a $500,000 cash value contract, I earn a certain amount (that’s probably higher than #1 & #2 combined because it will be securing a death benefit for a longer period and requires a higher premium).
That makes logical sense. How about some real numbers? Okay, let's compare two different scenarios. Let's compare the following: 1) $10,000 a year permanent life insurance policy premium for 20 years
2) $200,000 into an investment portfolio.
Let's remember that life insurance is a multi-year contract.
I now explain my compensation is generally: 5% of the total anticipated premiums to be paid to the insurance company for 20 years. (For a 10-year term policy, it's probably closer to 10%, while a 10-year permanent plan is probably closer to 3%.) The math works out to be 5% of $10,000 x 20 years = $10,000. Yes, there is an ongoing renewal compensation that is generally negligible and varies by company and contract for each agent. This is built into the contract and not a separate "line charge" or anything like that.
But what about a $200,000 investment portfolio? Assuming a total 2% annual charge ($4,000 per year) over 20 years = $80,000 and that's with no long-term growth (or enough growth to "break even" for your charges). Your advisor may only see about half of that compensation for themselves (the other half may go to the actual costs of portfolio management), but I'm looking at the total cost to the portfolio.
While this isn't a true "apples-to-apples" comparison (one is building an asset while one is managing an asset), it can give some additional context for comparing agent/advisor compensation.
Blended policies help meet both accumulation and protection goals
One big problem back in the 60’s and 70’s was the notion that life insurance agents were only selling affordable whole life insurance policies and NOT necessarily doing the proper job of securing enough protection for families.
A.L. Williams founded his ENTIRE company (today known as Primerica) because of the experience with his father’s death and the life insurance he bought. His father only bought a whole life policy that he could afford. However, if he had bought a similar priced TERM policy… there could’ve been far more death benefit proceeds for he and his family.
Thus, he made famous the “Buy Term and Invest the Difference” philosophy that has so permeated the financial community. Again, while the “traditional” insurance industry seems to really dislike A.L. Williams… he’s right.
In fact, what A.L. Williams was talking about was really about Human Economic Life Value… and agents that do NOT promote or recommend proper amounts of coverage really should. Agents that have studied the writings of Solomon Huebner – the founder of The American College and the CLU designation – should be intimately familiar with the concept of “Human Economic Life Value”.
To not recommend full life insurance coverage is introducing a large deductible into a family’s financial security plan.
A deductible is an amount you self-insure for. If you have a home and you suffer a fire, you may have a deductible of $1,000 or $2,500 that you pay out of pocket in the event of a claim.
A deductible for human economic life value is the amount you self-insure for. Let’s assume that you earn $100,000 a year and you are 40 years old. And assuming a “standard retirement age” of 65, without raises, you have an economic life value of $2,500,000. ($100,000 x 25 years of working).
Can your family handle a deductible that large?
The Insurance Industry Wasn’t Doing That Back Then!
The culture of the insurance industry was selling small whole life policies instead of proper and full coverage. Which means… as an INDUSTRY… they (we) deserved what they got. Why? Was it because they were more concerned about commissions than proper coverage? I can’t tell you. I can only tell you that the best agents and advisors during that time was in the business of solving problems, not just selling products. Products are a solution to problems.
A Large Policy May Be The Most Ethical Sale To Make!
What? That’s almost sacrilegious to say! How could a large (high commission) sale be the right recommendation? That depends on the job, needs, and wants of what the client wants to accomplish… AND the expertise of the agent making the recommendation!
Let me ask you a question: If you played golf (I don’t, but this is an apt analogy), which advantage would you rather have?
- The world’s greatest clubs?
- The world’s greatest golfer’s swing?
You’d probably choose the skills of having the swing. (Then you can compete and buy new clubs with your winnings!)
The expertise on how to harness a life insurance policy so you become the greatest beneficiary of your life insurance policy isn’t something that can usually be done by “The Lazy Agent”. They may memorize a few “soundbites”, but they may not really know how their product works – especially compared to other investment accounts.
Here’s an example:
Let’s suppose that your next door neighbor needs to sell their house fast and leave the country. (Let’s assume this is for legal reasons.) They need to sell it so fast, they’re willing to sell it to you for ONLY $100,000!!! Let’s assume that YOUR house is worth $300,000… so this is an exceptional deal.
You’ve GOT the money to do it too! Your 401(k) plan has $200,000!! Can you access it for the $100,000 that you need?
No, you cannot. Why not? Loans from a 401(k) plan are limited to 50% of your plan balance… or $50,000… whichever is SMALLER. That means your 401(k) plan will EXCLUDE you from other outside investment opportunities as they may arise.
And since this would be a second property, you couldn’t tap into your plan using IRS Hardship provisions either.
What if you had $150,000 in a cash value life insurance policy? You could easily borrow $100,000 against that policy by simply signing a quick form! You’d have the money in a couple of weeks… or even sooner. No taxes, no penalties, no restrictions, and no asking the IRS for permission to access YOUR asset on these terms!
That’s just ONE example of a benefit towards having a larger life insurance policy over other investment accounts.
It’s not that life agents earn substantial commissions… it’s about the experience, wisdom, and expertise that they bring to the interaction that brings about the value of these policies. Without such experience, wisdom, and experience… it becomes a boring sales pitch without any additional value.