Insurance Insights

DOL fiduciary rule can also be applied to insurance

Finding a policy that works in the best interests of your clients not as hard as you think

Jun 12, 2016 @ 2:15 pm

By Barry D. Flagg

What's the best type of life insurance? That question has been been debated for decades. In the 1980s, universal life products were considered the best. In the 1990s, it was variable universal life products, and in the 2000s, it was guaranteed universal life products. Now, indexed universal life and whole life products are most often recommended. So, which is it? None of the above actually.

Instead, thanks to new Department of Labor regulations, we have a new way to define and discuss the best type of life insurance — a best interest contract that can be applied to life insurance.

In an industry that seems to rival the military for acronyms (e.g., BOLI, COLI, CHOLI, DOLI, EOLI, STOLI, TOLI, etc.), I suggest a new acronym: BICOLI (pronounced bic-o-lee) to identify best interest contracts of life insurance and those life insurance products offering rates and terms and features and benefits that serve clients' best interests.

'HIGHLY SUBJECTIVE'

Opponents of the DOL rule argue that defining clients' best interests is highly subjective and open to interpretation. However, because the DOL chose to define it in the context of prudence, the term has a very specific meaning based on about 200 years of case law, legislation and regulation.

While the DOL rule doesn't include life insurance, applying the BIC concept to life insurance gives advisers the opportunity to discuss the difference between prudently advising clients about their life insurance versus selling products designed to appear attractive during certain periods.

Ask clients and prospects: Does your life insurance qualify as BICOLI? Ask centers of influence and referral sources: Do their clients own or are being presented a BICOLI policy?The process for identifying a best interest contract of life insurance is broadly defined by the Uniform Prudent Investor Act adopted as the law of the land in most states.

A BICOLI policy is one where internal costs are appropriate, where expected performance is reasonable, and where reasonable care, skill and caution are exercised. Recognizing a BICOLI policy involves objectively measuring internal expenses against peer-group alternatives, evaluating performance expectations relative to historical performance of invested assets underlying policy cash values, and avoiding illustration comparisons now considered misleading, fundamentally inappropriate, and unreliable by financial, insurance and banking industry authorities.

OBJECTIVE AND SIMPLE

Objectively measuring internal policy expenses is as simple as com- paring cost of insurance charges, fixed administration expenses, cash-value-based wrap fees, and premium loads against representative industry benchmarks for average policy expenses.

With as much as an 80% variance between best-available rates and terms and worst-available rates and terms, a BICOLI policy will have expenses that are 30% to 40% less than benchmark averages.

Evaluating performance expectations is similar to that for most other financial assets. For instance, best practice standards give us an acronym to remember that a reason- able RATE of return is most influenced by: Risk tolerances of the client, Asset class preferences, the Time horizon and Expected outcomes. A BICOLI policy has cash values allocated according to the clients' risk tolerance and illustrates a rate of return consistent with actual historical performance of invested assets underlying policy cash values.

BASIS FOR DECISIONS

Instead of making decisions based on the questionable practice of com- paring illustrations, a BICOLI is identified by searching for the rates and terms and features and benefits that best meet the clients' needs, goals and objectives over time, to include but not be limited to 1) financial strength and claims paying ability of the insurer; 2) cost competitive- ness of the product; 3) stability of the insurer's pricing representations; 4) accessibility of cash value; and 5) actual historical performance of invested assets underlying cash values.

It's time for a new type of life insurance — a best interest contract of life insurance. So tell your centers of influence and referral sources how to recognize a BICOLI. And as you're helping clients and prospects, ask if their life insurance qualifies as a BICOLI.

Barry D. Flagg is the founder of Veralytic Inc., an online publisher of life insurance pricing and performance research, and product suitability ratings. Follow him on Twitter @BarryDFlagg.

0
Comments

What do you think?

View comments

Recommended for you

Upcoming Event

Jul 10

Conference

Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video

INTV

Advisers should look beyond 529 plans for college planning

Editor Fred Gabriel talks to reporter Ryan Neal about how college-savings strategies are more important than ever as tuition costs soar.

Latest news & opinion

New ways to pay for college

Experts respond to real-life scenarios of people struggling to afford higher education.

How technology is reshaping the advice business

Artificial intelligence, Amazon and robo-advisers are some of the topics on the minds of tech experts.

Best- and worst-performing sector funds and ETFs this year

A rising tide may lift all ships, but a bull market doesn't lift all stock sectors. Here are the best- and worst-performing sectors this year, with the top and bottom fund in each sector.

Betterment slapped with $400,000 fine from Finra

Robo-adviser cited for violating customer protection rule and not maintaining its books and records correctly.

Supreme Court ruling on SEC judges unlikely to upend advice industry

But it could give rise to new hearings for some advisers who are already in litigation with the agency such as Dawn Bennett.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print