Follow the Money! How Conflicts of Interest Shape Insurance Recommendations
Virtually everywhere a consumer turns, the insurance industry presents a conflict of interest. Whether it’s life insurance, annuities, or long-term care insurance, consumers are getting pulled in multiple directions from advisors who may be experts in their fields but suffer from unavoidable conflicts of interest. Let’s look at the most common conflicts of interest and how those conflicts may shape recommendations:
Commissions on Insurance Products
The most obvious conflict in the industry is that agents are compensated for selling policies. The adage of “when all you have is a hammer, everything looks like a nail” is often used to describe the insurance industry.
Making matters worse is that the amount of compensation is not only typically hidden but is mostly paid when policies are sold – not as they are serviced over time. Between the lack of financial incentives and agents continually leaving the business, many consumers hold policies that are not being serviced properly – and a common “service” is that an agent will try to replace the existing policy with a new policy, because that’s the only way they can be compensated. Often there is nobody attempting to put the best foot forward on retaining the existing policy.
On some products, agent compensation can be reduced dramatically. On a smaller set of products, it can be eliminated entirely. Reduced agent compensation usually leads to higher consumer value – money has essentially been moved from the pocket of the insurance agent to the pocket of the consumer. Agents have little reason to present those designs, and they may not even be appointed with the companies that offer them. Without access to the entire universe of carriers, it is difficult — and sometimes impossible — to deliver an optimal result.
Assets Under Management Fees
Any financial advisor – even those that are described as “fee-only” – that is compensated on an assets under management (AUM) basis is subject to massive conflicts of interest in the insurance industry.
In my experience, the typical AUM advisor:
- Opposes most permanent life insurance and prefers term,
- Opposes most annuities, including those that can provide guaranteed lifetime income, and
- Is lukewarm on long-term care insurance and prefers self-funding when possible.
What do all these views have in common? They preserve the asset base that generates the advisor’s fee.
Perhaps the clearest example is with an income annuity. Numerous studies have suggested that a sliver of portfolio devoted to an income annuity can both increase probabilities of retirement success and peace of mind – let’s say for the sake of argument that an agent is trying to annuitize 20% of the portfolio. If a consumer annuitizes 20% of their portfolio, that is an immediate and permanent 20% reduction in compensation for the AUM advisor. It’s easy to see how consumers can get pulled in opposite directions with conflicting advice – and neither the agent nor AUM advisor may even know that is possible to get income annuities that have no agent compensation at all!
A similar phenomenon occurs with cash value life insurance. It is possible to design low-commission policies from high-quality companies that maximize consumer value. In the right situation, these policies can be an upgrade to fixed income investing – usually for high-bracket individuals that already have some conservative assets and have an eye on leaving a legacy for heirs. AUM advisors are naturally reluctant to embrace this type of asset because of the compensation incentives, yet in my experience hourly or retainer-based advisors have a much friendlier view toward optimally-designed cash value life insurance.
Quid Pro Quo Between Estate Planning Attorneys and Life Insurance Agents
Many estate planning attorneys and life insurance agents have a co-dependent relationship when it comes to estate planning and life insurance matters. The agent is a continual referral source to the attorney for planning, trust documents, wills, etc., and in turn the attorney is a continual referral source to the agent for the placement of life insurance policies, often with full commissions.
Neither the agent nor the attorney wants to disrupt that business flow by finding out that there are other options worthy of consideration, including some that may have little or no agent compensation.
Accounting Firms with Insurance or AUM Affiliates
Accountants are well-positioned as a trusted center of influence, but consumers must be aware that many accountants are subject to the same conflicts of interest when they (or an affiliate) have an insurance license and/or manage money on an AUM basis.
All the same issues with respect to the available universe of products, the design of products that can reduce or eliminate agent compensation, and whether the recommendation is even a good idea apply here.
What If Your Advisor Is a Fiduciary?
That’s great – you are more likely to get good advice from a fiduciary than a non-fiduciary. But even a fiduciary has views that are shaped by the way in which they are compensated. How do I know? Because in 20+ years as a fee-only insurance advisor, I have continually observed that an advisor’s viewpoint on things like life insurance and annuitization are affected by how they are compensated, even if they are labeled as a fiduciary.
Where Can You Obtain Conflict-Free Insurance Advice?
Fee-only insurance advisors are paid only on an hourly or project-fee basis. There is no commission, no trail, no AUM haircut, and no referral fee tied to the insurance decision. The advisor is paid the same no matter what insurance decisions are made by the consumer.
That structure improves outcomes in two ways.
- First, it opens a wider universe of products and makes it possible to minimize or eliminate agent compensation when that is in the client’s interest.>
- Second, it adds peace of mind.
Witt Actuarial Services is one of just a few true fee-only insurance advisors in the entire country – 100% of compensation comes from hourly or project fees – no product compensation, no kickbacks, no referral fees, and no switching of hats to sell a product after providing advice.
If you or your clients need a conflict-free review of a new or existing life insurance, annuity, or long-term care insurance policy, then please contact us for assistance.
This information is general in nature. Advice applicable to a specific policy or insurance decision is available only through an engagement.