The Practical Implications of Fiduciary Leadership in the Life Insurance Buying Process
Introduction & Background
The life insurance buying process may be understood to occur in eight steps. Some of these steps may be more distinct than others. Some may not be observed or fully appreciated by the client since they occur largely behind the scenes. Nevertheless, all of these elements are appropriate to buying life insurance with the client’s best interests in mind.
I wrote in a previous post that most people do not understand the difference between the various legal standards of care required of professionals in the life insurance industry. With this post, the first of three, I begin to explore some of the practical implications of those differences within the various phases of the life insurance buying process.
An Explanatory Note
On the left side of the page, beneath the blue bullets numbered one through eight, I explain the particular step of the life insurance acquisition process in detail, highlighting the aspects we emphasize as fiduciaries to ensure the best outcomes for the client.
On the right side of the page, beneath the yellow warning signs, I explain the implications of the lack of fiduciary accountability in that particular phase of the process.
Finally, at the close of each section, I highlight a key “takeaway” for that particular phase of the life insurance buying process. I do this for the readers who would prefer to skim rather than read in detail.
Step 1: Clarify Objectives & Parameters
Understanding the client’s goals and constraints is critical. Helping the client articulate and quantify those goals – and put them in market context – helps set proper expectations for what may be legitimately achieved. In cases where our clients have not already had the assistance of a planner in this area, we walk each client through a Survivor Needs Analysis to make sure they aren’t buying more insurance than they really need. Then, we provide extensive preliminary pricing data for the entire marketplace, information that can be cumbersome to collect, compare, and interpret using mere online quote engines. Through this process, we familiarize each client with the main variables that drive life insurance pricing and demonstrate how each might impact the budget. These variables include company selection, product selection, risk classification, term duration, riders (extra features), and of course product size.
Step 1 Without Fiduciary Leadership.
Agents operating under a suitability standard have no obligation to exhaust the entire market to find the best price. The most obvious example of this occurs with captive agents, such as representatives of USAA, TIAA CREF, Northwestern Mutual, State Farm, and other large mutual companies. These agents will frequently only quote the proprietary products of their “mother ship.” Indeed, most of these agents are bound by contract (hence the term, “captive”) to refrain from quoting any other companies. But even with independent brokers operating under a suitability standard, the range of companies quoted is frequently limited to the companies which A) pay the most commissions, B) provide the best spiffs, C) provide the sleekest technology to make it easy (for the agent) to sell their policies, or D) all of the above. In some cases, things will still work out fine and the best rates will be achieved. But eventually, limited quoting will lead to inferior pricing for your clients, even if they (and you) don’t know it.
Step 1 Key Takeaway
The limited quoting of traditional brokerage may work some of the time, or even most of the time; but eventually, it will lead to inferior pricing for your clients, even if they (and you) never know it. On the other hand, fiduciary representation demands exhaustive price shopping which yields the best price available for every client.
Step 2: Prepare Underwriting File
We help your clients put their “best foot forward” during the upcoming insurance underwriting process. To do so, we thoroughly and discreetly explore all of the factors that comprise their unique risk profiles including their current health, medical history, hereditary risks, and lifestyle risks (such as avocations, nicotine use, driving record, etc.). If appropriate, we may even order and review medical records and/or their Medical Information Bureau (MIB) reports to help proactively identify erroneous or misleading notes in their medical files or insurance history that might lead to unwarranted premium increases.
Step 2 Without Fiduciary Leadership
For better or worse, life insurance commissions are structured such that poor underwriting results for your clients lead to “pay raises” – sometimes enormous pay raises – for agents. The unfortunate reality is that there is an inverse relationship between agent compensation and the extra effort/skill often needed to help your clients get the best deal. An agent operating under a suitability standard has absolutely no obligation to coach your clients through the pitfalls of underwriting to help them secure the best deals. To the contrary, he/she is paid handsomely to them in the dark.
Step 2 Key Takeaway
Unfortunately, in life insurance, sloth pays. Letting a client stumble into underwriting pitfalls is both profitable and legally permissible under the common standards of care. The only protections are the character and commitment of the life insurance professionals you enlist to help your clients secure coverage.
Step 3: Anonymously Request Informal Offers
We distill all of your client’s underwriting details into a dense underwriting profile for the marketplace of insurance companies to consider and informally price in advance of any formal applications. We submit each client’s Request For Informal Offer (RFIO) without any of your client’s personally identifiable information. This protects your clients from unnecessary adverse reports to the MIB which might otherwise confound the future buying process (for not only life insurance, but also all other types of life and life and health insurance). During the process of submitting your client’s anonymous RFIO, we may comment or seek feedback proactively from underwriters on any areas of ambiguity or concern in your client’s underwriting profile that may, if left unaddressed, lead to extra underwriting delays or unexpected/unwarranted cost increases.
Step 3 Without Fiduciary Leadership
Without a fiduciary commitment, this step usually does not exist. Why? Because this part of the process adds time and expense to the sales process. And the results of those extra efforts and costs can only result in financial gain for one party to the transaction: your client.
Step 3 Key Takeaway
Submitting anonymous RFIOs, something only a fiduciary would be required to do, protects your clients from adverse “black marks” with the Medical Information Bureau (MIB). Just like black marks on a credit report can confound applications for loans, so can black marks with the MIB confound applications for future life/health insurance.
Coming Soon: Steps 3-8
In subsequent posts, I will continue this examination of the practical implications of fiduciary leadership in the life insurance buying process. If you would like to be automatically notified of future posts, please enter your e-mail in the subscription widget. You’ll find it on the right side of this page, towards the top, in the sidebar.
As always, I welcome your comments below.