posted on:  10/14/2006     revised: 3/9/2010

A fee-only adviser wrestles with life insurance

This article started while I wondered why no-load life insurance had not caught on, then realizing it was an issue of economic supply and demand.

Why does it seems that every life insurance agent chases business owners and corporate executives while there are few professional life insurance resources available to the rest of the population?  Why haven't the vast changes bought about by the Internet really affected life insurance sales?  And most importantly, why is really useful information so hard to find even for financial advisers and diligent consumers?

It is interesting to look at this life insurance issue from a marketer's perspective.  In other words, if we were in charge of making a marketing plan for a life insurance for our company, how would we distribute our product?  This mental exercise leads us to understand the structure and focus of the life insurance industry.

Rich people usually already have lots of life insurance and easy access to qualified financial advisers.  In fact, life insurance is a significant tool used to transfer wealth from one generation to the next.  In other words, rich people are already heavy users of life insurance so opportunities for additional distribution of insurance are limited.  At the other end of the economic strata, poor people simply cannot afford life insurance.  The only market segment that remains for consideration is the middle income population.  It is a huge market, but with little commonality.  Middle income people under age 50 tend to look for the highest available return on investment; life insurance does not make the grade.  Life insurance is cheap and widely available to them, but most people choose to be either uninsured or underinsured.  For those who do purchase insurance, the cost is so low that professional advisers are not warranted.  A typical insurance policy's annual premium of less than $500 would not cover the costs of even a few hours of a qualified financial  adviser's time.  Most people buy this coverage from career sales agents or enroll through employer-based or online sales systems.  Many career agents promote whole life insurance or variable life insurance as a "Swiss army knife of financial products" implying widespread suitability.  Non-insurance advisers are not convinced.  The October 2006 issue of Investment Adviser magazine included a passage that summarizes the problem "Insurance agents tend to be genuinely nice people who haven't yet discovered the hidden dark side of the products they've been trained to sell to unsuspecting consumers"¹.

By age 50 life insurance looks far more attractive to most people both on a rate of return as well as the usefulness of death benefits for their survivors.  But by that age, premium rates are so much higher that amounts of insurance that can be purchased are minimal, especially for those with deteriorated health conditions.  These baby boomers require an individualized level of solutions and service that have become the hallmark of the life insurance sales industry.

So for these practical reasons mentioned, the financial adviser's niche is essentially limited to those people moving from the middle income sector into the wealthy sector.   So who does that leave as the primary candidate for life insurance from a professional financial adviser?  An affluent upwardly mobile individual over age 50 in good health.  This means corporate executives and business owners are the target of the bulk of marketing efforts of the life insurance industry. 

The vast majority of life insurance agents (certainly more than 99%) operate on a commission basis despite the trend toward fee-based services in other area of financial advice.  That means they are working for the insurance company, not the policy buyer. Still, this method seems to turn out the good results for the majority of insurance buyers.  It would be difficult to speculate on whether better results could be obtained with a non-commissioned approach.  While a fee-based approach may be warranted with some larger insurance policies, there is not a critical mass of market share that would be required for insurance companies and consumers to take this approach seriously.  The savings that would be generated by a typical policy holder would not warrant the fee charged by an adviser.

Insurance companies have tried to involve accountants, stockbrokers, employee benefits specialists and financial planners in the life insurance distribution process with little results to show for their efforts.  The majority of life insurance is still sold the old fashioned way from commission-based career agents.

There is no real economic impetus for change in the life insurance industry so things will remain as they have been.  Other forces, such as government intervention, are unlikely.  Sure it would be great if every middle income family had access to advice without a conflict of interest and easy access to accurate information about life insurance.  But this is not likely to happen.  The most notable thing about the life insurance industry lately is the lack of change in the midst of the financial services industry that is otherwise changing rapidly. 

There is nothing on the horizon that will change the way most of us think about life insurance or how we buy a policy.  (Compare this to the health insurance industry where the majority of agents feel that the current system will be dramatically changed within 5 to 10 years). An increasing number of people will purchase smaller policies online. The majority of personal financial advisers for middle income people will continue to mention life insurance in the financial planning process but, in the end, have little impact on our client's pre-determined behavior in this area.

Consumer advocate groups like NAPFA continue to call for promotion of no-load life insurance but at this point I feel like my advocacy would be just like spitting into the wind.

¹This quote is attributed to Gene Balliett, a writer, adviser and educator in an interview conduced by James. J. Green titled "Light Shiner", page 38, in the October 2006 issue of Investment Adviser magazine.

keywords:   life insurance

related topics: Online life insurance options: Great Start Child Life Insurance, Guarantee Trust term life Insurance, International Term Life, Simple whole life insurance

Copyright 2010 by Tony Novak. Originally produced and published for the "AskTony" column syndication prior to 2007. Edited and independently republished by the author in March 2010. All rights reserved.