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.

Agents and “independent” brokers do not and cannot serve as a client’s fiduciary, always putting the client’s interest first. They are paid by life insurance companies, and they owe their primary, and sole contractual, duty to those companies with which they are licensed.

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

  • 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 receives a higher commission by recommending a cash value policy rather than term insurance. Cash value policies have a much higher initial premium than term insurance, and the agent usually pockets at least half of that higher initial premium and sometimes more than 100 percent of it.

  • The agent can get a higher commission (or another incentive, such as a trip to Hawaii) 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 recommend a higher than necessary initial death benefit and premium rather than a lower death benefit that rises over time, because the first-year commission is based on the initial death benefit and premium. If you want to increase a policy’s rate of return over the long run, starting with a lower death benefit may be the smart thing to do.

• 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. 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. A source of knowledgeable and objective advice about life insurance, other than a fee-only life insurance advisor, will be very 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 a fee-only life insurance advisor is the only dependable source of objective advice about life insurance?