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Increasing transparency for the life insurance industry

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In the battle between the fiduciary sales model for mutual funds and the opaque, commission-driven model for the life insurance industry, guess who has been winning over the past three decades? To find the answer, let’s go back in time and take a look at the numbers.

In 1985, the insurance industry took in just over $12 billion in cash value and term life insurance premiums, according to the Life Insurance Marketing and Research Association. About $68 billion of new money flowed into mutual funds, per statistics compiled by the Investment Company Institute.
Since then, the insurance industry’s growth has been fitful and incremental, with new premiums reaching an all-time high in 2007 of $18 billion, before falling in the economic crisis and never again achieving those heights. And 2007 also happened to be a peak year for the mutual fund industry, which, counting funds and ETFs, took in $1.029 trillion.

While total mutual fund assets have grown from $495 billion to more than $17 trillion over the past 31 years, the number of life policies sold annually has fallen by almost half, from 17 million to fewer than 10 million.

Just how different are the life insurance and mutual fund sales models?

In the early 1980s, the fund industry transitioned from a commission distribution model to no-load products purchased directly or recommended by fee-compensated advisers. Funds provided full disclosure of fees, expenses and point-to-point investment performance out to two decimal points, and services such as Morningstar made this information easy to access.

The insurance world, meanwhile, continued to rely on a dwindling number of commission-compensated agents to peddle permanent life and variable annuity contracts that appeared deliberately engineered to be confusing to the consumer in structure and design. To put it gently, they also did not go out of their way to disclose their sales loads.

Of course, it’s never too late to recognize the advantages of a fiduciary model. Whether it’s the result of the Department of Labor’s rule, the fact that insurance agents are aging out of the business or that the industry is facing a skeptical millennial generation of new consumers, it appears the industry is slowly rethinking its sales approach.

Quietly, a host of no-commission variable annuities have been made available to fee-compensated advisers by, among others, Vanguard, Jefferson National, TIAA, Schwab (written through Nationwide), TD Ameritrade Institutional (written through Great West Life), Transamerica, Ameritas and, most recently, Lincoln Financial.

Progress has been slower for cash-value (aka permanent) life contracts, including whole, variable, universal and variable-universal. What these policies have in common, and where they differ from term life, is that they all include a cash account from which the policyholder’s annual term life premiums, known as the cost of insurance (COI), are deducted to pay for the actual life insurance coverage.

The interaction between these two moving parts can be complicated. How much of the premium dollars are actually invested on behalf of the policyholder versus being paid to the sales agent? How fast is the investment account growing thereafter, and exactly what fees are being deducted?

The COI goes up incrementally every year as the policyholder gets older, but how fast does it rise, and does the COI remain consistent with the rates the company is offering on term policies?

Mutual insurance companies also offer dividends, which can be thought of as excess premium that was collected and is now being returned to the policyholder.

Even though they’re called permanent policies, if the COI exceeds the cash value, the contract is canceled or the face amount is adjusted. When policies are overfunded, the face amount, and therefore the COI, automatically goes up to maintain a corridor between cash value and face amount.


I see the potential for greater transparency in the form of a new app called Assurance, which turns insurance policy illustrations into comparison charts that even a financial columnist can understand.

Fiduciary advisers are reluctant to recommend products that they themselves have a hard time deciphering, and until now there has been no Morningstar in the insurance world to help them. But I see the potential for greater transparency in the form of a new app called Assurance, which turns insurance policy illustrations into comparison charts that even a financial columnist can understand.

“We’re trying to take a very complex product and make it more visual, which the insurance industry has never done,” says company co-founder John Lefferts, who, in a previous life, was president of AXA Advisors and, following that, founding CEO of a broker-dealer called Lion Street.

Assurance pulls data for virtually any life product directly from WinFlex, the insurance industry’s comprehensive database of life insurance policy data. You input a face amount and WinFlex provides the annual target premium policyholders are expected to pay — which, if paid, will guarantee that the policy will stay in force.

“We’re trying to take a very complex product and make it more visual, which the insurance industry has never done,” says Assurance co-founder John Lefferts.

You can specify an assumed rate of return on the cash account, and Assurance calculates, from the policy illustration, the various costs that will be deducted from the investment account, including the annual COI based on the client’s most likely underwriting risk class. Everything is visible in graphs, so you can do what you already do with mutual funds: run side-by-side comparisons of different contracts over different time periods.

Initially, I expect fiduciaries to use Assurance for replacement calculations — that is, to compare that variable-universal policy a new client purchased from his brother-in-law with a lean fiduciary-friendly contract from, say, TIAA-CREF, with an eye to possibly doing a 1035 exchange from the former into the latter. So you call up the current policy and look at the illustration at, say, a 7% rate of return, compared with the no-load policy.

In the most important graph, Assurance will show you the internal rate of return on the cash value in the policy, after fees and COIs, assuming the annual investment return specified. Obviously, the higher IRR will reflect a leaner, less-expensive policy, assuming everything else is equal.

What’s interesting, in the illustration I looked at, is that the difference in return can change over time. That is, an old policy might become more efficient and competitive at higher age brackets than it was initially.

You can also run an illustration that shows the death benefit rising as the cash values start to approach the original face amount, or simply look at the growth in aggregate premiums, or the aggregate growth of the investment account assuming the various expenses and your specified investment rate of return.

Right now, there aren’t a lot of fiduciary policies, but Lefferts says most life companies are looking at creating leaner commissionless products.

“As the demographics of the agency field force gets older,” he says, “the insurance companies are looking at pricing their products for different markets and different distribution platforms. When they do, we’ll be making it easier for the next generation of agents and advisers to show clients their options.”

Assurance is not a perfect window into the life world, in part because it doesn’t give the historical investment performance of the different contracts it deconstructs. You can find that elsewhere for variable life and variable-universal life policies, which mostly use mutual funds as their investment choices.

Assurance won’t model dividends, which are returned to policyholders at the discretion of the mutual company. Also, be warned that insurance companies have the option of raising their COIs for policyholders in later years. In other words, the expense data in the policy illustration may not reflect future policyholder experience.

Assurance is the first tool I’ve seen that provides output comparable to what Morningstar offers in the fund world.

But Assurance is the first tool I’ve seen that provides output comparable to what Morningstar offers in the fund world — a new level of clarity and transparency into the most complicated, hard-to-understand area of our financial landscape.

It’s long past too late for the insurance industry to catch up to the mutual fund world with regard to total assets. But for the first time in my 30-year career, I’m starting to hope the industry might eventually catch up in the more important areas of trust, transparency and a fiduciary mindset.

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