Conflicts and Limitations of Life Insurance Agents

Several problems with the way life insurance is sold and serviced by life insurance agents frustrate consumers and lead to costly mistakes. The following factors create consumer uncertainty and suspicion that insurance recommendations are primarily designed to benefit the agent.

Traditional agents and “independent” brokers do not serve as a client’s “fiduciary,” i.e., a trusted advisor required to put the client’s interest first. They do not disclose commissions or attempt to minimize them. They only discuss products of companies with which they are licensed. And they do not suggest or consider the possibility of a no-commission alternative.

• Commissions create an unavoidable conflict of interest for life insurance agents and brokers. Here are some of the inevitable ways that life insurance sales practices prevent consumers from getting the best advice from agents and brokers:

  • There is no disclosure of commissions or of the fact that commissions can often be reduced or avoided in ways that substantially increase rates of return on many policies from the best-rated companies.

  • The agent can get a higher commission by recommending one company’s policy rather than another’s. Commissions and other benefits vary from one company to another. What incentive does the agent then have to make you aware of policies and policy designs that will substantially lower or even avoid commissions?

  • If a policy has a flexible design that permits commissions to be substantially reduced, the agent typically hides this fact and sells the high-commission alternative. Commissions can be slashed dramatically, often by 80% or more, on many policies issued by top-rated companies, and the commission savings produce significantly greater cash values and either lower premiums or higher death benefits.

  • The agent has an incentive to avoid explaining the negative features and risks of a recommended policy for fear of losing the sale. That same concern may cause the agent to make the policy features seem simpler than they really are.

  • Agents are an unreliable source of advice about the performance of an existing policy when the only way the agent will be paid for such advice is to recommend that you replace or sell your existing policy to generate another commission. Some existing policies are worth keeping and some aren’t, and some policies that look bad in their current form can be salvaged by taking advantage of the available options. But the agent will only be paid if the policy is replaced or if it can be sold in the secondary market.

  • Agents are in no position to detect or question the frequent unreliability of company illustrations and projections of future policy performance. Sound decisions cannot be made by simply comparing one policy’s illustration with another or accepting all projections at face value.

  • Agents cannot help a consumer review all the possible best options since the agent will only be paid for selling the product of a company with which the agent is licensed. Similarly, they have no incentive to suggest a policy that pays no commission.

  • Other professional advisors – such as lawyers, accountants, and “wealth managers” – fail or decline to ask probing questions about life insurance proposals because they don’t fully understand them, and they depend on the life insurance agent as a referral source of business. Many of them sell life insurance themselves, as almost all banks and brokerage firms do these days. For these reasons, a source of knowledgeable and objective advice about life insurance – one who takes a fiduciary approach - will be extremely hard to find.

All of these problems and conflicts with typical life insurance sales should make it clear why more and more smart consumers recognize that the only dependable source of unbiased advice about life insurance is an advisor who is a fiduciary – one who puts the client first and can assure that all the best options and alternatives are considered, regardless of the compensation impact on the advisor.