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Journal of Financial Planning - July 1993 Piety and Perils of Low-Load by Peter Katt, CFP, LIC FINANCIAL PLANNER: Your Honor, Swampland Life sells low-load life insurance policies. JUDGE: Yes, but it was placed in receivership. You recommended its policies during a time the company's financial strength ratings were below average. FINANCIAL PLANNER: But Your Honor, they sell low-load policies. I'm a good guy. I don't take commissions! JUDGE: Guilty! Just because you may claim the high moral ground as a fee-only financial planner doesn't allow you to ignore performing due diligence on companies offering low-load life insurance policies. A reduction of, say, $2,000 in selling expenses on a $500,000 universal life policy due to your low-load recommendation isn't much solace for your client if the company becomes insolvent. A sufficient number of life insurance companies have very substantial financial strength ratings, including four that offer load-load policies. There is no reason to recommend life policies, low-load or not, from companies with less that substantial financial strength ratings. Commitment Is Another Issue A company's commitment to the low-load market is another due-diligence issue we should consider. For example, two companies -- Life of Virginia and Colonial Penn -- offered, and subsequently withdrew, low-load policies. Whether the holders of these policies will be treated as fairly as the holders of actively sold policies remains to be seen, but we should be concerned when policies our clients buy are withdrawn from the market. Market-commitment due diligence is strictly a judgment decision.
This second due diligence concern reduces the number of low-load companies I recommend to three: Ameritas, Lincoln Benefit, and USAA. Low-load life insurance policies have two distinct advantages. One, they drastically reduce the very large policy acquisition costs, which is calculated by discounting (7 percent) the difference between a low-load and full-load policies' illustrated fifth-year cash value. (Observing differences between projected cash values for low-load and full-load policies beyond five years is not very useful.) This kind of savings will either translate into lower premiums or higher values for the low-load policy. The other advantage, while subtle, is perhaps more important. If the planner removes any financial interest in the decision the client will make, the planner is rewarded for objectivity. Being rewarded for objectivity is far more important than saying we are objective, yet being rewarded based on what a client decides. However, these advantages are meaningless if the company selling low-load policies doesn't pass your due diligence tests. Even if you are a fee-only planner you can recommend life insurance policies that pay a commission -- you just don't receive it. Advantages of Commission Policies In my practice, there are three main reasons I would recommend a commission-paying policy:
There are many companies with excellent financial-strength ratings that have commission-paying policies that can be restructured to minimize the acquisitions costs. This is done by blending term insurance with the base whole life. When done to reduce acquisition costs (in contrast to simply reducing premiums), blending can be very advantageous for your client. Generally, I prefer to work with a life insurance agent I know and who will follow my instructions. If the client owns a business, one might use the client's property and casualty agent. In either case, the agent retains the entire commission. But the choice of the agent is up to the client. Don't ignore due diligence issues in your eagerness to recommend low-load life insurance policies. If a commission-paying policy is a better choice for your client, recommend it. Reprinted with permission by the Financial Planning Association, Journal of Financial Planning, July 1993.
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