Switch term life company to save?

Posted: Fri Nov 18, 2011 11:52 am Post Subject:

Sorry, maybe insurance laws in your state are not as severe as they are here in California. Especially so for transactions with seniors. But we're licensed under the mandate I have described.

Posted: Fri Nov 18, 2011 07:52 pm Post Subject:

Max, please help me to understand something because I'm really seeing a conflict.

You have mentioned elsewhere that you have a fiduciary responsibility. You have to do what is best for the client based upon the products that you can sell. How does this jive with not replacing something unless it is better in all material ways?

Let me give you an example. Jim is paying $500 for his 20 year term policy. He has been paying for 3 years. You can get him a new 20 year term policy for the same exact price. The company's are of equal strength.

It is in his best interest to switch because of the extra 3 years on the back end. Everything else is identical.

From a fiduciary standpoint, you should be telling him to switch. However, from the standpoint that everything has to be materially better standpoint, you can't advise him to switch.

Posted: Fri Nov 18, 2011 10:03 pm Post Subject:

Well, the scenario you present is not necessarily a conflict. But you seem to be torn between understanding a legal responsibility and a fiduciary one. They are intertwined.

A new term policy at a three-year-older age for "the same exact price" would have to mean that over the next 17 years (the duration of the existing term policy) there is no cost difference in that time. If true, then I have a fiduciary responsibility to SHOW the client that. The client makes up his.her own mind with the information I present.

But if the original term policy is renewable (usually the only kind I will recommend), it may be renewable in some way other than annual renewable as most policies would after, say, age 45 or 50. I cannot simply do a price comparison at today's cost and say that I've met my fiduciary responsibility. (But most agents would stop there.) A price comparison would extend into the renewal period and have to be based on as close to an apples-to-apples discussion as possible.

If the replacement policy is not renewable under the same terms and provisions as the original policy, then I have to go to the "math" and calculate equivalency over a stated period of time, such as the next ten years. To materially improve the client's situation, the math must continue to be equal or more beneficial to the client over that extended period. I may have to calculate the cost of an annual renewable term policy for the next ten years -- I cannot simply say, "When you renew this policy, the cost will be $xxx per month," when I know that will only be true for 12 months. Especially if their existing policy is renewable under more favorable terms, even if the first year renewal premium is higher. It's the total math that makes the difference.

[And there are recent court cases/appellate decisions] that have painted UL policies as nothing more than term insurance, because the case was being argued as the difference between "term" and "permanent" insurance, and the court disagreed with the characterization of UL as permanent insurance. (I try to point this out to students, and for more years than I can remember, I have only discussed life insurance as "term" or "cash value" -- not term or permanent, as the textbooks do.]

But I do that math when presenting any replacement solution, or even a new 20-year term option compared to two 10-year term renewals back-to-back. Having learned several years ago how to use Excel correctly has streamlined the time it takes to do the math, but it's still a time consuming project, which is why most agents don't ever do it. Unfortunately, that's to their discredit.

In some cases, I can see that the client has a particular need for the next ten years (like the youngest child is age 10), What their need is ten years from now may be the same, or more, or less, and we have to discuss that. If they believe their need will be the same, then I can show the cost of a 20-year level premium level term policy starting today, and a 10-year level premium level term starting today with a 10-year level (or increasing) renewal down the road.

In fairness to the client, I always use the GUARANTEED (aka: highest) renewal rates shown in the contract, because that's the worst-case scenario. The actual result will probably be lower, but I have to make this as materially-strong as I can. After calculating the next 10-year cost, I can add that to the first 10-years' total and come up with a 20-year MAXIMUM possible cost. With that, I can present an apples-to-apples cost comparison with a 20-year policy today. That's my fiduciary responsibility. One solution or the other will be less costly -- maybe by only a few hundred dollars.

At this point, the client has all the material information needed to decide how to proceed. The choice is theirs and we proceed according to their desire. If they choose the more expensive option, it's because they see something beneficial for their circumstance today -- not because I've only shown them what is most beneficial to me today. That's a big difference.

Honestly, if I don't go to this length, the replacement could appear to be nothing more than a commission-generating transaction on the part of the agent -- even if the two initial policies have the "exact same price" at slightly starting different ages. You know that we get paid commissions for new life insurance business based on the value of the new premium.

Do you see what I'm saying? Replacement laws for life insurance have never capped commissions based on the difference between the existing premium and the new premium (which would mean no commission if the new policy was the same or less cost), but Long Term Care and Medicare Supplement transactions do. Wonder why (or why not)? Because the "senior products" are too easy to replace simply on the basis of price, and only after the insured drops their former coverage and discovers that the new coverage is less than what they had, despite what the agent told them, they are now stuck with an inferior product.

That is both a fiduciary and a criminal violation -- but unless it is reported, it goes unnoticed. Most people would not be terribly harmed in most life insurance replacement transactions (other than perhaps getting stung with higher premiums somewhere along the way -- but they still have a death benefit as long as they can afford to pay -- which is the inherent hazard in Universal Life), so the state sort of casts a blind eye toward some of the aspects of policy replacement -- but it does not close its eyes entirely.

This is not to say that agents aren't out there doing this kind stuff improperly, because they are. And many of us are trying to do it right. There are no satellites in orbit keeping track of what every agent is doing to folks, and it probably won't come to the attention of the Dept of Insurance until someone complains.

Understanding fiduciary responsibility, abiding by state law, these are all things I try to do to the best of my ability, and the majority of the agents I've ever worked with or known mostly do/did the same. I've trained new agents to do the same, and I teach my students the same concepts. However, what someone else does with the information I provide is up to them. I'm not their mother.

But when I find evidence of an agent abusing clients, I also have a public responsibility to report it, and I have on a few occasions (each time to my insurance company's Office of General Counsel because the incidents were not criminal, they were ethical -- if they were criminal, I'd go straight to the Dept of Insurance). That's a form of fiduciary responsibility, too, but mostly it's a legal one. Although I haven't read all the various states' laws, the ones I have looked at tend to have a similar provision. Just one of the joys of licensing.

Although it has mostly to do with money/premiums, fiduciary responsibility is not only about the money. It's more than just the money. That's the part I think you're having trouble seeing. Many agents do not see that bigger picture either.

Hope this helps. When we aren't outright arguing, I think we can have some decent discussions.

Posted: Fri Nov 18, 2011 10:30 pm Post Subject:

Thanks for the explanation. I just follow one simple rule. Do what is best for the client.

Max, the reason why we argue and we'll keep arguing is what happens when one person shows that the other one is wrong. I'm wrong sometimes. When you have shown me that, I immediately admit to being wrong. When you are shown to be wrong, you simply stop posting. You lose credibility when you can't admit to your mistakes.

Posted: Fri Nov 18, 2011 10:45 pm Post Subject:

I just follow one simple rule. Do what is best for the client.

Posted: Sat Nov 26, 2011 11:42 pm Post Subject:

Not always possible. Most of the time you will not get a cheaper rate simply because you get a year older.