Outside voices and views for advisers

Good luck picking the "best" insurance product

Hint: There's no silver bullet for evaluating the best insurance products

Oct 19, 2017 @ 4:25 pm

By Barry Flagg

The question I get asked more than any other is: "Which insurer offers the best products?" However, this question is just as silly as: "Which mutual fund company offers the best mutual funds?"

In fact, while there's no general agreement about which mutual fund company offers the best funds for all clients and all situations, it's even sillier to think that one life insurance company could offer the best products for all clients in all situations, for the following reasons.

There are thousands of mutual funds, and yet no mutual fund company offers the highest-rated funds for all clients in all situations. Some offer highly rated equity funds. Others offer funds highly rated for their fixed-income performance.

Others are highly rated for their international, or small-cap, or high-yield-bond fund performances. Some are no-load funds while others charge a commission. Some are passive, while others are highly rated for their active management.

Even with all these variables, life insurers offer many more products, each with upwards of 10,000 pricing combinations and permutations.

For those who find that hard to believe, let's do the math. Life insurance products have a different price for every age, often ranging from 20 to 85.

That's 65 different prices right there, times two for gender, times three to five for the different health-risk classifications, times two to three more for smoker, non-smoker, or never-smoke rates, times four to six for volume break points on larger face amounts, times at least three different prices for single-pay, abbreviated-pay, and level-lifetime pay premium payment plans, times four or more different prices for the different levels of commission discounts.

Altogether, that's well over 10,000 prices for each and every product.

And unlike many mutual funds that remain similar in their form and fees over time, life insurance products work more like closed-end mutual funds. Primary insurers typically co-insure part of each death benefit with reinsurers but only for a certain aggregate amount of insurance. When that aggregate amount of insurance is placed, that product is no longer available.

So the primary insurer negotiates a new reinsurance treaty and introduces a new product, with another 10,000 new pricing combinations and permutations.

(More: It's time for the insurance industry to ditch illustration comparisons.)

With such an understanding of life insurance product pricing, it's easy to see how pricing combinations and permutations for all products from all insurers is well into the millions of different prices.

And while costs are certainly not the only consideration in the selection or recommendation of any product, knowing the costs charged inside life insurance products is particularly important because they can vary by as much as 80% from competitive prices versus excessive charging, and are too often overlooked or hidden by hypothetical illustration comparisons now considered "misleading," "fundamentally inappropriate" and unreliable by financial, insurance, and banking industry authorities.

Qualitative considerations

In addition to cost considerations, the prudent selection or retention of any life insurance product also involves qualitative considerations like the financial strength and claims-paying ability of the insurer, the stability of the insurers' pricing representations, access to or restrictions on policy account values, and actual historical performance of the invested assets underlying policy cash values.

Altogether, the answer to the question of which insurer offers the best product for a given client depends on many more costs and quality considerations than the answer to the same question for mutual funds.

And if there is no general agreement about which mutual fund company offers the best mutual funds for all clients and all situations from a market of just thousands of alternatives, then thinking that one life insurance company can offer the best life insurance products for all clients in all situations given a market with millions of different prices and many more qualitative considerations simply defies reason.

Moreover, with so many more different prices and so many more qualitative considerations, it's at least implausible and more likely impossible that any agent or broker can know which insurers offer the best products for a given client or prospect.

Instead, the only way to know which product is right for which client is to a) search for products that offer the financial strength and claim-paying ability, the pricing stability, the liquidity and the historical performance that meet client circumstances, goals and objectives, and b) measure internal policy charges against the universe of peer-group alternatives.

Such an approach is also a terrific way to develop new business by building trust with clients and prospects using the information essential to the prudent selection and proper management of life insurance as an asset, while eliminating competition against those still using "misleading," "fundamentally inappropriate" and unreliable illustration comparisons.

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.


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