LIFE INSURANCE ADVISERS

Longtime readers recognize my cynicism about the entire investments/planning/insurance industry. While there is an undisputed recognition of a conflict of interest with commissions, paying fees to an incompetent adviser/twit  is far worse. Readers will also note that, though I teach life insurance continuing education courses, I still find/feel that an understanding of life insurance is unquestionably the most difficult area of all planning. Unlike the ability of reviewing detailed information that Morningstar or Value Line provides on mutual funds, such information on life insurance products is simply not available. It has been insulated by the insurance industry from the public consumer as well as the life insurance agent or adviser. As a result, any entity providing even remedial life insurance advice must have a considerable background. Such background is far beyond that- in most expert's opinion- as provided by basic licensing. By the same token, licensing of some type is absolutely mandatory in order to maintain reasonable levels of competency. From the major text, Life Insurance, by Black and Skipper, comes these quotes:

"Despite the widespread belief in the need for life and health insurance, and its vital importance to those who purchase it, few persons attempt to become familiar with the management, business policy and practices of the insurers backing their contracts. Even assuming that a considerable portion of policyowners could be induced to take an interest in the condition of their insurers, few would be sufficiently knowledgeable about insurance matters to ascertain intelligently the true state of affairs" and,

"A competent, informed, trust worthy insurance adviser is perhaps the consumers best insurance against making and unwise purchase decision. Regrettably, some agents and other insurance advisers, although well-intentioned, simply are not well-informed. Too often, a state agent's licensing examination is not sufficiently rigorous to disqualify those with the inadequate knowledge. Additionally, in most states, many persons who give advice about life insurance are not required by the state to demonstrate any level of professional competence in life insurance matters. The use of an unqualified adviser can result in any inadequate, poorly designed, or unnecessarily costly insurance program." (I could not have expressed it better.)

The authors do indicate what a reasonable consumer should do to seek out those who were qualified. My comments follow:

First, try to find those that have an additional level of education and training. The most notable, in my mind, are the Chartered Life Underwriter (CLU)  and a Chartered Financial Consultant (ChFC), both obtained from the American College. The CFP designation as always been relatively weak in insurance and, in fact, the College for Financial Planning eliminated their course in life insurance in 1995. Further, while continuing education in insurance is almost universally maintained by CLU's and ChFC's, it is not a requirement for maintenance of the Certified Planners. Most Certified Planners's are licensed in insurance and can sell the product. Most Certified Planners's providing fee advice on insurance have no license at all (and even with a license, you couldn't charge a fee AND a commission on the same policy without another conflict of interest). Anyway, that demonstrates such limited interest and current education that I would never suggest a client hire such an "adviser".

Secondly, the authors note that the adviser should have been involved in the life insurance business long enough to acquire the knowledge and skills to provide quality advice in service. They note a minimum experience of five years to assure professional qualifications. I feel that is acceptable assuming the experience also includes the minimum state licensing along with the mandatory continuing education. Some states do not have such education requirements. For those in such states, caveat emptor- you are apt to pay commission to someone limited in knowledge. And, as stated previously, even within the states that require licensing, most of the fee only planners are actively violating the law since they have never been licensed in any capacity, nevermind as advisors. In California, you MUST have five years of experience, about 115 hours of continuing education - after taking an initial 52 hour licensing course (with 14 hours in ethics)- and have taken two exams. No more than 2 CFP's offering fee insurance advice and none of the NAPFA reps (who get all the press) in California have the license to provide comprehensive fee advice. Hard to believe? Check out the March 1998 issue of Dow Jones Investment Adviser where NAPFA admitted that its reps had been violating the law but simply hoped that California would not enforce their Life and Disability Analysts laws since, if they did, other states might follow. Pretty sad rationalization for violating their own ethics codes and the law.

Thirdly, it is necessary to determine whether the agent or adviser has maintained current knowledge in the field which is, at a minimum, represented by  the licensing continuing education. Unless you are taking those, you effectively not only show little knowledge, but also little interest. Why anyone would pay for advice like that is beyond me.

Fourth, is the adviser or agent able to review policies with more than one insurer? This is most notable as a problem with captive agents who are effectively insulated from looking beyond the one company that controls them.

Fifth, does it appear that you could trust the individual? They note this to be irrespective of the advisers competence and designations. I disagree. Trusting someone who lies and is unethical is stupid. Find those with the adequate level of competence and THEN select one of those few that you can trust. TRUST IS NOT THE ANSWER- COMPETENCY IS! 

So when you read these basics, consider the background of most planners- and particularly the fee only planners. Without licensing in insurance and the mandatory continuing education, one neither has the experience, interest or competency to perform financial planning, retirement planning, estate planning, long term care planning  and, obviously, risk/insurance planning. Fees are normally the way to go. But paying fees to idiots, incompetents, frauds or liars- regardless of designation and national planning/brokerage relationships- can be a waste of money and lead to financial disaster later in life when you can least afford the problems.