The Internal Revenue Service has just issued new guidance about 419(e) welfare benefit plans funded with life insurance. It appears the federal agency intends to crack down on 419(e) single-employer plans.
In response, a couple of insurance companies have already put out position papers, signaling they are not going to take any more single-employer business.
There is precedent for this. A few years ago, multiple employer trusts were used in 419 plans–before the IRS shut them down. Likewise, the investor-owned/stranger-owned life insurance business boomed at first–only to be shut down by companies and regulators worried about people selling their insurability to investors.
Those are problems created by producers who focus more on finding loopholes to sell life insurance than on meeting insurance needs. But certain insurers have problems that need addressing, too. These are what may be called problems of carrier product integrity. Consider the following examples:
o Some insurers have specialty products that are designed only for term conversions. These products aren’t generally sold; they are just used for conversions.
The problem: Why are the costs on these specialty contracts higher than on other similar contracts? Do customers know about these differences? Does the producer? And should this information be disclosed by the issuing company at time of the term sale?
o Some companies have developed life insurance contracts that can be dialed down or blended with a term-like rider.
The problem: The producer may not offer such a product, even if the customer would be better off, because these contracts typically pay lower commission than a full permanent contract. (That is, the current and guaranteed insurance charges and expenses are exactly the same as the base contract, but at the expense of lower producer commission.)
o Some companies have developed life products that illustrate with very competitive non-guaranteed values–values that greatly “beat” the non-guaranteed illustrated values of a competitor, or groups of competitors.
Problem: The products with the very competitive values will likely win the business, but will the customer really be better off?
Consider this actual example: Company A was in competition against Company B to cover a 1-year-old child. The prospective owner, a dentist, was stunned that Company B, on an illustrated basis 64 years later, showed significantly better values than Company A. Company B had assumed interest bonuses, mortality refunds, etc. The agent, seeing the displeasure of the dentist, offered to recommend another company. The agent also advised against taking B’s contract–because its illustration would likely never come true. The dentist thought otherwise and bought B’s contract. But later on, Company B went into receivership and is no longer in business.
o Some companies offer 2 nearly identical life contracts, the only difference being producer commission and contract cash values (obviously an inverse relationship).
Problem: In effect, such companies have created both an “agent friendly” and “customer friendly” contract. Doesn’t this put the producer into a very difficult position? What about the issuing company? If the customer buys the “agent friendly” contract and later discovers a better contract was available from the same carrier but was never presented, is the company at risk of a major lawsuit?
Some states (such as New York) do watch to make sure 2 products that are identical except for commission differentials and, as a result, lower policyholder values, aren’t both approved for sale in that state. But this is the exception, not the rule.
The chart shows an example of the problem. The case involves a 45-year-old man, best nonsmoker class, evaluating 2 index universal life policies, both available outside of New York. The only difference in the products is the producer compensation (one being non-N.Y. comp and one adhering to N.Y. regulations).
What if the producer really doesn’t know there are basically 2 identical contracts from that company? Would that stop a lawsuit against him by the customer? It’s doubtful. What if the producer does know but sells the “producer friendly” version anyway? Could the customer get the contract rewritten to the “customer friendly” version? Probably doubtful, at least on the first attempt.
There is no question that many life insurers have absolutely stellar reputations among customers and producers. But others appear to be going for short-term gain at the expense of good judgment. So, more carrier product integrity needs to be on the table for 2008.
Michael S. Pinkans, CFA, CFP, CLU, ChFC, is products and markets director for Brokerage Resources of America, Barre, Vt., and a registered representative and investment adviser representative of ING Financial Partners, Inc. His e-mail address is email@example.com.