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  • Writer's pictureJoe Cardello

Feeling Lost in the Insurance Maze? A Fiduciary Advisor May Be Able to Help You

May 23, 2024


Have you ever felt overwhelmed by the complex jargon and hidden fees of insurance products? I know I have. While insurance can be essential for some people’s financial security, navigating the options can be a frustrating experience.

The Problem: Confusing Products and Conflicting Interests

Salespeople, skilled at their craft, might prioritize high-commission products over those best suited to your needs. This can leave you with insurance policies that can be expensive, confusing, or might not be meeting your goals.

Key Points of Confusion:

  • Opaque Product Features: Many insurance products bundle features known as riders that you might not need, making it difficult to compare insurance policy costs and benefits.

  • Fear-Based Marketing: Focusing on worst- case scenarios can pressure you into buying unnecessary insurance policy coverage.

  • Hidden Fees and Commissions: Understanding how salespeople are compensated can be unclear, clouding your ability to understand salespeople’s motivations in selling you a policy.

The Solution: An Insurance Licensed Investment Advisor

An investment advisor is legally obligated to put your interests first. We, along with all investment advisory representatives, are fiduciaries and, as such, we are required to put the interest of our clients ahead of our own. This requirement is designed to ensure consumers understand why a product is consistent

with their particular financial needs, situation and objectives. i They can:

  • Identify Your Needs: Through personalized analysis, the advisor assesses your unique financial circumstances, investment goals, and personal risk tolerance.

  • Simplify Options: They explain different policy types in clear language, helping you compare apples to apples. When appropriate, they can also suggest alternative solutions to insurance products.

  • Advocate for You: They negotiate with insurance companies to ensure you get the best possible value.

A Real-Life Example:

Everyone’s personal needs and circumstances are different but consider a recent client of Howie Greenberg seeking life insurance. They received three substantially different quotes from three different insurance providers for similar coverage revealing a staggering difference of $36,536 per year! This highlights the importance of understanding not just the death benefit, but also the long-term costs and potential returns.

Elaborating on the Real-Life Example with Client and Insurance Quotes

Let's delve deeper into the example of Howie Greenberg's client to illustrate the confusion surrounding insurance products and the potential benefits of an investment advisor.

The client was being engaged by a life insurance salesperson, and he wanted to understand if it was a good deal. The client, a healthy male in his mid-40s residing in Colorado, was being pitched a $3.2 million guaranteed death benefit whole life insurance policy. Howie decided to explore various other insurance carriers to do some price discovery.

The Issues and the Price Disparity:

The first issue is that the client’s primary goal was to obtain life insurance coverage. However, the

salesperson pitched a whole life policy; this product has life coverage, but also has elements of an investment product. This isn’t what was requested, and this can be confusing.

Howie obtained whole life insurance quotes from three reputable insurance companies, all boasting similar or higher Comdex scores. ii All the policies were reviewed (tables were provided from each carrier) to obtain as close to an apples-to-apples comparison as possible. Here's where additional confusion sets in:

  • Policy A: This policy had the highest annual premium at a staggering $137,308.

  • Policy B: This option offered the same death benefit but with a significantly lower annual premium of $100,772 – a difference of $36,536 per year!

  • Policy C: This policy fell somewhere in the middle with a premium of $112,064.

The Confusing Sales Pitch and Hidden Costs of the Whole Life Policies:

The salesperson promoting Policy A might argue that the higher premium translates to a greater accumulated value over time. However, the client's primary concern is life insurance, not an investment vehicle. This highlights how a salesperson might prioritize products with a higher premium, rather than products that best meet the client’s needs because they are incentivized to do so.

Let's break down the potential financial implications for the client:

Death Benefit vs. Premium Paid: If the client tragically passed away at age 57, Policy A, because of the larger annual premium paid would pay out an additional $398,246.

o Policy A pays total death benefit of $3.959m

o Policy B pays total death benefit of $3.561m

Is Policy A worth the extra premium?

The Questionable Return on Investment: This extra death benefit comes at a hefty cost – the client would have paid $365,360 more in premiums over 10 years! This equates to a very low return on investment, especially considering alternative investment options with potentially higher yields. For example, hypothetically, if one were to invest that extra $36,536/year in an investment account earning (after tax) just 3% per year, the account balance at the end of 10 years would be $467,945 (before fees).

Why didn’t the salesperson offer Term Life Insurance? Term Life Insurance is considerably cheaper than Whole Life. For example, a 30-year term policy could ensure this client until age 77 at which point the policy would expire. The total cost of the policy would be less than $15,000 / year (instead of $100,772 / year). At age 77 years old, you are unlikely to be the person earning and supporting a family. You will have less need for life insurance. If you took the approximate $85,000 / year in premium savings, and hypothetically contributed annually into an investment account, there are some important benefits:

o At 3% after tax growth, your account would grow to $1.09m

o At 6% after tax growth, your account would grow to $1.284m

o If your insurance needs change, it’s easy to get out of a term policy, you just stop paying your premiums. It provides flexibility.

Where Does the Money Go?

A crucial question remains unanswered: where does the significant premium difference from Policy A go? Does it benefit the insurance company, the salesperson, or both? How is it benefiting the client? Without transparency, the client is left feeling confused and unsure if they're getting a good deal.

The Role of an Investment Advisor

An investment advisor can be valuable. Here's how:

  • Comparative Analysis: An investment advisor would have compared quotes from various insurers, including the three mentioned, ensuring all options had similar coverage and financial strength.

  • Needs Assessment: They would have clarified the client's goals, whether pure life insurance or a combined life insurance and investment product and tailored the recommendation accordingly. Perhaps Term Life is most appropriate along with an investment account.

  • Transparency and Education: An investment advisor would explain the different components of the insurance policies, including premiums, benefits, fees, and potential returns, empowering the client to make an informed decision.

This is not an exhaustive analysis by any means, but by working with an investment advisor, the client could potentially save a significant amount of money (there are also risks in investing) while securing the appropriate life insurance coverage to meet their needs. This example underscores the importance of having a financial professional on your side who prioritizes your best interests without the potential bias to sell certain products. iii iv

i Insurance professionals are not subject to the fiduciary standard. However, an insurance professional would be subject to Regulation Best Interest if they are conducting their business through a broker dealer.

ii Comdex scores are an indication of an insurance company. The higher the score, the better the financial strength of the insurance company is perceived to be.

iii The above illustrations are based on various assumptions and are therefore hypothetical in nature and are for informational purposes only. You should consult your tax and/or legal advisors before implementing any transactions and/or strategies concerning your finances.

iv Investment advice offered through Stratos Wealth Advisors, LLC, a registered investment advisor. Stratos Wealth Advisors, LLC and August Wealth Advisors are separate entities.

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