Fee-only life insurance has advantages


With the growth of insurance and other financial products, as well as the number of providers, there are advantages for both businesses and individuals to work with an advisor free from conflicts of interest.

According to the National Association of Personal Financial Advisors (NAPFA), an association of fee-only financial planners, more than 90 percent of financial advisors are paid fully or partially by commissions.

While fee-only financial planners are becoming more prevalent – NAPFA boasts 1,600 fee-only financial planners and affiliate members – and the Center for Fiduciary Studies reports an up tick in interest in fiduciary care, the life insurance industry remains dominated by commission-based providers.

Even the most well-intentioned insurance agents suffer from an inherent conflict of interest because they are compensated based on what they sell.

Fee-only life insurance advisors receive no commissions or incentives. These advisors, or insurance subject matter specialists, serve in a true fiduciary capacity for their clients, providing independent, unbiased advice. They receive no other form of compensation other than the hourly fees paid by their clients. 

“The correct way to compensate people who are giving advice about life insurance and related matters is purely for the time they spend and not related in anyway to what a person might purchase,” said Joe Belth, professor emeritus of insurance, Indiana University Bloomington, and author of “Life Insurance: A Consumer’s Handbook.”

Fee-only insurance advisors meet with clients to determine objectives and needs, and then explore a variety of insurance options from a number of companies. Advisors then present clients with the choices that will best meet their objectives. Clients then buy life insurance from the agents representing the best choice.

For fee-only advisors, there is no financial incentive to steer clients toward a particular agent or company and there is no compensation derived from insurance products clients may ultimately decide to purchase. Other than providing clients with the most knowledgeable and expert advice they can offer, fee-only life insurance advisors have absolutely no vested interest in the insurance decisions their clients make.

While clients pay a fee for the counsel, the savings from a typical case outweigh the fee by a wide margin. Most consumers are not aware that there is great deal of flexibility in the amount of agent commissions on whole life insurance policies, and agents may be naturally inclined to design and sell the type of policies that maximize their commissions.  Additionally, unlike other areas of financial services, there are no agent compensation disclosure standards in the life insurance industry.

“I’ve spent my entire professional career arguing for price disclosure in life insurance,” Belth said. “People basically have no idea what they are spending. They can ask but they may not get full disclosure or completely accurate information.”

Blaine Aikin, managing partner and director of training for Fiduciary 360, which coordinates the Foundation for Fiduciary Studies and Center for Fiduciary Studies, said, “How one is paid is less of an issue than the client knowing what they are paying for.  The clarity of a fee-based program is extremely desirable.”

Fee-only advisors have access to the entire universe of insurance products, while many agents are either contractually obligated or may be financially motivated to place their business with a certain company. 

Policy design is another area where life insurance consumers can benefit from consulting first with a fee-only advisor. For example, policy design is absolutely critical for accumulation-oriented policies and there are several key technical decisions that can greatly influence long-term values.

Fee-only insurance advisors can service policies in an optimal manner. And if a policy is no longer needed, fee-only advisors can assist their clients in the life settlement market, where consumers desperately need a knowledgeable advocate in their corner.

William Ochowicz, 45, purchased life insurance for him and his wife five years ago from his wife’s uncle. With no children, Ochowicz suspected he bought more than he needed and wanted to know what his options are. So, before he bought or sold anything, he consulted with a fee-only insurance advisor. He learned that he does indeed have a policy appropriate for his objectives and now is having his advisor review long-term disability and elder care insurance options.

“It’s not that I don’t trust my uncle. But these days, I’m always thinking, ‘What’s in it for them?’ when someone makes a suggestion about my money.”  Ochowicz said. “With fee-only professionals, I have peace of mind in knowing the advice I’m getting is based on what’s best for me, not the guy across the table talking to me.”

Scott J. Witt, FSA, MAAA is president of New Berlin-based Witt Actuarial Services LLC, a fee-only insurance advisor and an expert witness in insurance litigation.

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