Vol 11 No 2		February 2009

Katt & Company is a national fee-only life insurance advising firm. The June 2002 Forbes magazine, and a July 16, 2003 Wall Street Journal article, name Peter Katt as one of only four nationally recognized advisors. The Forbes article states that, "…advisers are well worth the money… These savants are working for no one but you…" For references please contact us.

Beware the Agent!

"It is my consistent experience that even astute businessmen can be putty in the hands of a manipulative agent because life insurance is so damned complicated."

As we reach the peak of winter (with no global warming in sight here in the upper Midwest), it is time to heat things up a bit and discuss life insurance commissions that range from 50% to 100% of first year target premiums for the selling agent. Rather than theoretical musings about the bad influence they have let's consider an actual case that resulted in litigation and has been settled. The agent, William, met the client, George, in 1997. William introduced himself as a fiduciary estate planner, charging George quite substantial fees for estate planning ideas. For slightly more than 10 years, George (trust) paid life insurance premiums and associated expenses of some $800,000 and then terminated the final life insurance policies with no value. During this period William was paid first year commissions of some $400,000 and renewals of around $70,000. Other first year life insurance expenses consumed the bulk of the $800,000.

During this 10 year period William sold the same estate planning life insurance need three separate times, and was trying for a fourth when George terminated the relationship. The first policy was a conventional UL. Three years later a VUL replaced the UL because William showed lower premiums by using an assumed 10% constant investment return. Two year later William argued against the volatility of VUL he sold (even though the cash values were at all times in the money market sub-account). George was convinced to return to UL, but this time using premium financing for all premium payments and interest. William's comparison of continuing the VUL vs. the premium financed UL used a 6% assumed VUL yield (how handy to be able to chose). Also, LIBOR was at an historical low and used for the entirety of the analysis. When the premium financing ended up more than $200,000 underwater, William tried to resell this with a higher crediting UL from the same company that started this daisy-chain. George exited estate planning life insurance and after months of fuming, filed suit against William. The case went right up to trial before a settlement was reached.

George, retired now, was one of the nations top business leaders and spent some years running a mega-corporation. Nevertheless, it is my consistent experience that even astute businessmen can be putty in the hands of a manipulative agent because life insurance is so damned complicated. Indeed, George didn't realize what had truly occurred until he read my report. The problem doesn't lie with George getting smarter. The problem is the adverse incentive huge first year commissions offered William. I don't believe, nor do I advocate, any change in the life insurance commission structure. But be aware the next time you see the William's of the world emptying out of their $80,000 Mercedes at the local four star restaurants that their success may be coming at their estate planning customers' great expense.