Some Misguided Agents Push Variable Life Insurance
Question: You recently fielded a question from a single mother of three children who made $30,000 a year and who had been sold a variable life insurance policy. I found your answer very insightful and interesting, given the fact that my firm sells and administers variable life insurance policies. I agree that the product is designed for high-income earners and should be sold that way. I typically advise clients to utilize variable life as a supplemental savings plan when they max out their 401(k) plan and have a substantial need for life insurance. Variable life policies have many tax advantages for such clients, because their money grows on a tax-deferred basis, they can withdraw money on a tax-favorable basis and their heirs receive a tax-free death benefit. I would disagree, though, with your statement that these products come with “hefty commissions,” since commission schedules vary from company to company.
Answer: It sounds like you and your company understand this complex insurance product and for whom it’s best suited.
You’re right that commission schedules vary. But you’d agree that commissions for variable life policies--indeed, almost any policy that combines life insurance with an investment feature--are higher than those offered for plain old term life insurance, which has no investment component.
Some insurance agents are so enamored of variable life insurance’s tax features they fail to fully appreciate that such policies aren’t for everyone. In fact, they aren’t for most people. Many people don’t need insurance at all. Those who do often can’t afford to buy as much coverage as they need if they purchase variable life, because variable policies are so much more expensive than plain-vanilla term policies.
In other words, there are more than a few agents out there like this one:
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Question: I am an insurance agent who disagrees with your answer to the single mother who bought the variable life policy in 1998. If she’s making only $30,000 a year now, I wonder how she will help provide some money for her children when it comes time for college if she cashes in this policy now. How will she fund a new roof for her home if she can’t take out a loan on her policy? If she buys term and it ends in 20 years, she has paid $150 annually for 20 years and has nothing to show for it.
Answer: Are you seriously suggesting the woman’s only option is a $1,100-a-year variable life insurance policy?
The scary thing about some insurance agents is that they’re simply unaware of alternatives beyond insurance. This is not true of agents who have financial planning credentials, such as the Certified Financial Planner (CFP) mark or the Chartered Financial Consultant (ChFC) designation. But many agents have no such credentials and get little education in the wider world of finance.
If this woman continues to make $30,000, for example, her children probably would qualify for need-based scholarships and grants. Someone making a higher income might qualify for some financial assistance, but it probably would be in the form of loans.
If she’s not paying $1,100 a year in premiums, she could tuck that money into a tax-deductible individual retirement account. If she invested in a Roth IRA, her contributions would not be deductible but her withdrawals would be tax-free.
She also could save some of the money in an emergency fund to replace that roof. She could also take out a home equity loan to fund such a major repair.
If she buys term insurance for $150 a year, she’ll be able to provide enough insurance coverage for her children and still have money to put food on the table, clothes on their backs and gas in the car. That’s hardly nothing.
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Question: I am concerned about that single mother who is trying to pay for a variable life insurance policy on $30,000 a year. As a former state securities regulator, I have some information I hope you can pass along to her. A variable life insurance policy is not just an insurance product. Because the person who buys it takes on some investment risk, the product also is a security and thus regulated by state and federal securities laws.
The “financial advisor” who recommended this product to her is similarly regulated by federal and state securities laws, as well as self-regulatory organizations such as the National Assn. of Securities Dealers (NASD). These laws and the NASD all have statutes making it illegal and unethical to recommend an unsuitable product to an investor. This woman should write a complaint letter to the compliance officer of her advisor’s firm, and also write to her state securities regulator (she can find out the address by visiting https://www.nasaa.org, the Web site for the National American Securities Administrators Assn.). Although there are no guarantees, she may be able to get back her original investment. She could then take her money to an ethical investment professional who could help her invest wisely for her and her children’s future.
Answer: Thanks for sharing those resources.
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Liz Pulliam Weston is a personal finance writer for The Times and a graduate of the personal financial planning certificate program at UC Irvine. Questions can be sent to her at moneytalk@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W 1st St., Los Angeles, CA 90012. She regrets that she cannot respond personally to queries.
