Why advisers need to talk to clients differently about life insurance
Give clients an alternative to the auto-industry-like life insurance industry operating system
Life insurance is one of the last asset types to be brought under the wealth management process. For this reason, it is often the most-neglected asset on clients’ balance sheets and in their financial and estate plans. As with many other things, neglect breeds poor performance. It, therefore, comes as no surprise that life insurance has been among the worst-performing asset types relative to clients’ expectations for decades.
In fact, life insurance performance has been so bad that the life insurance industry is under investigation. For instance, “60 Minutes” recently broadcast a segment about audits of leading life insurance companies that uncovered a systemic, industry-wide practice of not paying significant numbers of beneficiaries. Over the past several months, a half dozen of the industry’s largest life insurers have been sued for overcharging. Neither advisers nor clients of the other insurers know what they are being charged or what they are getting in performance.
OPERATING PRINCIPLES
But the life insurance industry’s operating principles were never designed to deliver on expected performance. Instead, the industry’s operating principles more closely resemble those of the automobile industry. Consider the manner in which the automobile industry operates. When gas prices are high, auto manufacturers build — and dealers want to sell — electric cars, hybrids and other high MPG vehicles. When gas prices are low, manufactures and dealers build and sell SUVs and other full-size vehicles.
Similarly, when interest rates were at lifetime highs in the 1980s, the life insurance industry developed a new product called universal life (UL) specifically designed to appear attractive in periods of high interest rates. Some years later, as interest rates declined, and the dot-com boom drove the stock market to all-time highs, the life insurance industry developed another new product called variable universal life (VUL) specifically designed to appear attractive when client confidence in the stock market is strong.
So what’s the problem? The problem is most clients don’t look to the car salesman for advice on which car to buy, but do look to their financial adviser for advice on which life insurance product to buy.
When buying a vehicle, consumers have information available for comparison shopping that is generally reliable, so they know what they are getting. They also have lemon laws to ensure they get what we expect or have recourse when they don’t. On the other hand, the principal tool for comparing life insurance products is now considered “misleading”, “fundamentally inappropriate,” and unreliable by financial, insurance and banking industry authorities (e.g., think Volkswagen MPG claims and lawsuits); and industry guidance intended to protect the client is largely being ignored.
ESSENTIAL INFORMATION
In other words, the information essential to advice — such as cost disclosures and historical performance — is not even an output option from the life-insurance-industry operating system. Imagine trying to advise anyone about anything without knowing what is actually being charged and what is reasonable to expect in performance. No wonder advisers have struggled with the management of life insurance as an asset.
The advice industry has its own operating system, which I call the Prudent Investor operating system which has been tested in the courts and proven reliable for almost 200 years. It was also recently expanded to address life insurance in the West Point Draft for Life Insurance Stewardship, so advisers now have an operating system for advising clients about the prudent selection and proper management of life insurance.
With as much as $3 trillion, life insurance is the largest and most-neglected asset on clients’ balance sheets and is in desperate need of Prudent Investor advice and management. It’s time to talk with clients differently about life insurance. Give clients an alternative to the auto-industry-like life insurance industry operating system. Offer clients and prospects a Prudent Investor review of their policies.
Barry D. Flagg is the founder of Veralytic Inc., an online publisher of life insurance pricing and performance research, and product suitability ratings.
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