Chuck Hinners recently sent me a free review copy of his short book, Insider Trading in the Life Insurance Market, subtitled “A Smart Buyer's Guide.” The book was quite good (I'll have a few criticisms later as usual) but more important than a book review, the book reminded me of a concept I had vaguely heard of in the past, but really had never learned a lot about or written about. That is the concept of a Fee-Only Insurance Advisor. This is not the same thing as an insurance agent. In fact, those few people who do this work don't actually sell life insurance. They simply advise on the subject.
I'm sure there are a few fee-only advisors who would consider themselves sufficiently smart about insurance that they could do this work for the vast majority of docs, but as long-term readers know, I've been both underwhelmed by the average competency of advisors, (including fee-only advisors but especially commissioned insurance and mutual fund salesmen masquerading as advisors) and disheartened by the price at which this advice is usually offered. There are a handful of people out there who are fee-only advisors where all they advise on are insurance related topics. Of those I've found, I've been impressed by their credentials. Many of them sold insurance for years. Some were attorneys or accountants. Often they've acquired the highest credentials available in their fields including CFP, CLU, and ChFC. They typically have years of experience.
Why Fee-Only Insurance Advice?
Why would you see a fee-only insurance advisor? For the same reason you'd see a fee-only advisor about your investments. The guy selling you the insurance cannot give you completely unbiased advice about how much insurance you need, what type of insurance you need, which company to go to for that insurance, how to get rid of a policy, when to replace a policy etc. But a fee-only advisor can. When you need to actually purchase insurance, he can then send you to a solid agent knowing exactly what you need to buy. Most importantly, he can make sure your policy is a “minimal commission” policy. More on that later.
Does Everyone Need One?
Now, before you run out to find a fee-only insurance advisor, the truth is that most doctors don't need one. All most doctors and other high-income professionals need when it comes to insurance is a term life insurance policy, a reasonable disability insurance policy, an umbrella policy, a health insurance policy, a malpractice policy, and the usual auto/homeowners policies. Where these fee-only insurance advisors really earn their fees is with cash-value life insurance policies, which are completely optional for almost everyone. But if you have one and you need advice about what to do with it, if you're the type who might actually need one, or if for some reason you want one, I would highly recommend getting and paying a fee-only advisor prior to buying the policy. I think the term life insurance market is sufficiently competitive and sufficiently straightforward that it's fine to go without formal advice as long as you educate yourself a bit. Disability insurance policy commissions don't vary all that much between policies. I think if you're seeing a good independent agent who is clearly looking at policies from all of the big six companies and showing you why one is better than the others for your gender, state, specialty, and health, then I think you're fine. I wouldn't expect much good advice from a fee-only advisor on malpractice, umbrella, auto, homeowners, or health insurance policies either. So this is a bit of a niche field for the handful of people doing this.
Let's talk for a few minutes about Insider Trading in the Life Insurance Market. Chuck Hinners is NOT a fee-only insurance advisor. Instead, he is an experienced (started the year before I was born), high-volume insurance agent who works with at least one fee-only advisor to place minimum-commission insurance policies. He has degrees in business and law and admits that unlike most successful insurance agents, “Frankly I sucked as a salesman, and shared many of my customers' frustration with lack of disclosure by the insurance companies.”
The book, despite being short (only 51 quick pages,) provides a general overview of the various types of life insurance. However, the main point of the book can be found in the preface-
“Fortunately….[in 1985 the] best insurance companies began designing life insurance that allowed agents to reduce both premiums and commissions. Most agents that bothered to learn the details thought it was a dumb idea since their commission income declined. These agents are generally all great sales people. They work very hard to get buyers to buy their products. They tell me that their sales process is generally confrontational and ends when either they or their customer gives up.”
Sound familiar? It does to me and many of my readers. Who hasn't been “confronted” by a Northwestern Mutual agent to buy some whole life insurance by the time they've been out of residency a year or two? At any rate, I find this idea of a reduced-commission life insurance policy very interesting. Henners, and his favorite fee-only advisor who wrote the preface, Scott Witt, both claim that commissions can be reduced up to 85%. Now the main problem I have with the use of cash value life insurance is the low returns, which are frequently caused, at least in the early years, by high commissions. Eliminating that ought to help, no? So I read on.
How To Reduce Commissions
So how do you reduce the commissions on a whole life policy? You buy a “blended” whole life policy and Hinners loves them. What does blending refer to? It refers to mixing whole life with term life in order to reduce the commissions. According to Hinners there are actually three components to a Blended Whole Life (BWL) policy:
- Whole life or base coverage, which can actually be kept quite low,
- Term insurance or additional protection with either an increasing or level premium, and
- Additional premiums.
The key to the whole scheme is that the commission on the additional premiums, or paid up whole life, is dramatically lower than the premium on the base coverage. The Bank On Yourself folks also take advantage of this fact by buying as much paid up coverage as policy. This gives you a lot more cash value in the policy early on. If your plan is to Bank on Yourself, that's the money you can then borrow against to buy your car. If your plan is simply to get a better return on your cash value life insurance, it lowers your commission, gets your cash value up quicker, and ought to dramatically improve short-term returns and significantly improve your long-term returns on the policy. For example, Hinners says a typical million dollar whole life policy with a $16K a year premium could have a cash value of $55K after 5 years but a blended (minimal commission) one could have a cash value of $80,000 at that same point. The first policy would have an annualized return those first 5 years of -12.2%. The second, a return of 0%. Yes, I know it's hard to get excited about a 5 year return of 0%, but as whole life goes, that's actually pretty good, and it does eventually get better.
The Book Review
While we're on the subject of Hinners' book, let's finish off a review of it. You know I think it's a good book when I tell you every single thing I think is wrong with it. I disagree with enough in most books that I can't include all the bad stuff in a review. So don't take this section to think I didn't like the book.
In the introduction, he says “you are better off keeping your policy because if you surrender it you must pay income tax on the cash value in excess of the premiums paid.” That told me right off the bat that his experience with cash value life insurance and its purchasers was dramatically different from mine. The majority of those I interact with who own a whole life policy don't have a gain at all. Surrendering or exchanging the policy for something else is often the right thing to do for these folks. Even with a gain, exchanging it into a variable annuity or even a long-term care insurance policy may be a better option. So that's my first criticism of the book. I think Hinners should have acknowledged more clearly that the vast majority of whole life insurance sales are inappropriate and 80% are surrendered prior to death. I think it would have also been nice if he had pointed out the low returns issue on these policies and had a much more robust discussion of why buying term and investing the rest is the right answer for almost everyone. In fact, at one point he says he thinks the best way to buy life insurance is to get a Blended Whole Life policy. If you read carefully, however, you'll see he doesn't really mean it. For example, he later gives a list of those who should not buy a whole life policy including
- “Buyers who do not have a permanent need” (who should buy term)
- “Buyers who do not value cash value and are willing to take on the incremental guarantee risk associated with Guaranteed Universal Life policies” (most of those who have a need for a permanent death benefit.)
I would argue that's almost everyone, so I had a hard time reconciling those statements.
“Vanguard” From An Insurance Agent?
I was extremely impressed to be reading along in Chapter 1 and see a reference to Vanguard. That would be the first time I've seen that in a book written by an insurance agent. He discusses it while talking about how he thinks mutual life insurance companies are better than publicly traded life insurance companies. I've always felt that way too- I mean what bad can come out of eliminating shareholders that expect to be paid a decent return on their money? However, I have seen smart people argue that mutual companies aren't always better than stock companies, and in fact may be worse on average.
Hinners' discussion of whole life insurance was interesting as he pointed out that the illustration is not the product and that despite The Life Insurance Illustrations Regulation (which wasn't even put in place until the 1990s) companies can still monkey with lots of things like projected mortality improvements, interest rate bonuses, and lapse supported pricing to make their illustration look better, even though their product actually isn't!
Universal Life, VUL, GUL, IUL, SLI
Hinners dedicates five short chapters (2-4 pages) to each of these various types of life insurance.
His brief chapter on Universal Life is perhaps the most concise and explanatory review I've ever seen on the subject. He follows it with a good, short chapter on VUL. He has a very different opinion on the product than Larson Financial by the way, mostly because they are exempt from the Illustration Regulation but also because good investments like index funds are rarely found in them (although to be fair the ones Larson recommends do have them.)
I liked the chapter on Guaranteed Universal Life, my favorite life insurance product for those who have a need for a permanent death benefit. His chapters explains why I like it so much. A GUL policy with a million dollar benefit may have a premium of $6K a year whereas a WL policy with the same benefit may run $16K a year. It's just the cheapest way to get a guaranteed permanent death benefit. No cash value to borrow in retirement, of course, but it's not like whole life buyers get both- their death benefit is reduced by any cash value they've borrowed out of the policy. Hinners is also quite negative about indexed universal life insurance, as am I. He also has a nice chapter on survivorship life insurance and its role in estate planning.
The last third of the book are case studies, each of which illustrates a very costly mistake made by a very wealthy person in choosing the right permanent life insurance policy for his situation. The moral of the stories is that if you're going to buy a permanent life insurance policy, you should see a fee-only insurance advisor first.
Hinners has an annoying habit in his writing. Four or five times in the book he refers to a company or two who is different from the others in a certain respect, but never actually names them. For example, in the VUL section he mentions there is one company that offers a commission free product, and I happen to know it is TIAA-CREF, but you'd never know it from reading the book. I'm not sure why he does that, perhaps so you come and hire him, because he doesn't think it's important, because he's worried about some kind of liability, or because he thinks it might change and make his book out of date, I have no idea. But as someone who likes specifics, I found it annoying.
The Bottom Line
So, if you are in the market for permanent life insurance, I would suggest seeing a fee-only insurance advisor. A quick Google search found me 2 or 3, and I'm sure there are more out there. Reading Insider Trading in the Life Insurance Market would also be a good idea.
What do you think? Have your read the book? What did you think of it? Have you ever hired a fee-only insurance advisor? Who? What was your experience like? Have you ever bought a minimum-commission policy? How much lower was your commission than the industry standard (50-110% of the first year premium?) Just want to rant about the fact that you were sold a full commission policy? Comment below!