Advisors speak out against “minimum premium” myopia

By Stéphane Desjardins | September 19 2004 08:13PM

Motivated by mouth-watering commissions, many advisors are selling universal life insurance with minimum premiums by any means. Now, some advisors are accusing their colleagues of putting their own interests before the clients’.

Advisors and managing general agencies (MGAs) are denouncing the trend of selling universal life insurance (UL) with a minimum premium when term-to-100 insurance (T-100) or whole life could do the trick. “I am absolutely certain that advisors are thinking about their commission first,” said James McMahon, president of Force Financière Excel, a Sherbrooke, Quebec-based MGA.

“A T-100 offers a commission of between 40% and 50% of the annual premium. With UL, it’s 75%,” continued MR. McMahon. “That’s why many advisors are selling UL with a minimum premium. And the advisors are not the only ones making money. It’s also very profitable for the insurer.”

In the industry, the sales commission paid to advisors for the premium portion of a UL policy ranges from 60% to over 70%. The commission difference on the premium portion between the minimum and the maximum rarely exceeds 10%. Most often, it hovers between two and five per cent.

Mr. McMahon thinks that policyholders who do not pay excess premiums in their UL are taking the wrong approach. In general, a UL policy should be used as an investment when the holders have maximized their RRSP contributions, he continued. “I know, I know! It’s an age-old debate. But there are T-100s or whole life policies with guaranteed redemption values that are more advantageous than UL with minimum premium.”

Clients unaware

He went on to point out that many customers are not aware of the long-term capitalization requirements of UL. “Many clients do not channel any amounts into the excess premium for many years. In the seventh year, they find themselves with a huge problem because they must contribute large sums. Some insured will not have sufficient liquid assets. We’re talking here of a few hundred dollars a month. They will thus miss out on a major tax shelter.”

The government puts each UL policy to a tax exemption test to determine the maximum amount the insured can invest in the policy while keeping its tax-exempt status (capital gains and interest income not taxable). This test applies as of the 11th year of the policy, and is based on what the insured deposited between the 7th and the 10th year of the policy.

Clients’ interests secondary

Mr. McMahon heaped disdain on advisors that generate 80% of their sales from UL sold with the minimum premium. “I know a few. These advisors simply don’t think about their client’s interests. Especially because the management fees for the policy are so high.” He added that his organization is constantly training advisors to deal with these issues, notably the need to capitalize universal life by thinking long term.

Advisors are now facing a moral dilemma between defending their own interests or those of the client. Many are gleefully sidestepping the issue, said Steven Tung, an associate at Simon L. Jackson Insurance Brokers, a Toronto-based MGA.

“Advisors invariably suggest that insured should eventually put money in the excess premium. Meanwhile, they insist on selling minimum premium policies just to get the commission. The vast majority of advisors couldn’t care less about the client’s interests. This is selfish behaviour and an awful way to serve consumers.”

Mr. Tung noted that many people buy UL with a minimum premium when whole life or T-100 would have sufficed. They risk feeling the backlash when they are forced to make a gargantuan contribution seven years down the road. “Most insured simply don’t do it.”

He acknowledged the flexibility of UL. “But insurance needs are often different from investment needs. It is difficult to combine the two,” he added.

Byren Innes, an advisor, and senior-vice president and director of the consultancy firm, NewLink Group, does not think that generous commissions necessarily drive sales of UL with minimum premium. “In my view, commissions are generally nearly similar between whole life and UL. The comparison is clearer with T-100, where the commission is often less advantageous for the broker,” he explained. “Call me naïve, but I believe that most of the time advisors put the client’s interests before their own.”

Mr. Innes said he has seen clients pay lower fees with a UL than a T-100. Yet often, these fees are nearly identical. That is why he does not hesitate to recommend a UL because this product offers greater flexibility than whole life or a T-100. “I feel quite comfortable with earning a higher commission because I have offered my client better advice.”

Tamara Adamson, an advisor and CEO of Richmond Hill, Ontario-based Link Insurance, lauded this flexibility as well. “UL has advantages that T-100 does not, such as the possibility of a policy paying for itself after a few years. And the client also has an investment opportunity.”

She added that advisors should compare UL with minimum premium to whole life with a redemption value. “It’s true that UL offers a good commission, but I would not rule out whole life if it’s the best option for my client. Good advisors will explain the pros and cons of all the products and will offer their opinions based on the client’s long-term needs. You should never recommend a product that will eventually disappoint the client. A disappointed client is a lost client, and the future referrals vanish with them!”

Detractors doubt that the flexibility of being able to make payments later is enough to make UL with minimum premium clearly superior to T-100. “Financial planners usually consider that the management fees charged for the investment portion within a UL are too high. They usually exceed 3%,” said Jack Schaffer, president of Pinnacle Partners Financial Services, a Vancouver-based firm.

“UL is an excellent insurance tool but insurers did not do themselves any favours when they sold UL as an investment vehicle. It invariably begs comparisons with other investment modes. In terms of UL insurance coverage, a good T-100 could do the job in most cases.”