Why Many Financial Advisors Who Sell Insurance are Wolves in Sheep’s Clothing & How to Find a Good Advisor

Summary: Romneycare and Obamacare decreased health insurance commissions to the point where most insurance agents cannot make a living from health insurance. This forced an increased reliance or complete dependency on disability and life insurance commissions to make a living. Insurance agents, financial experts, financial advisors, and CFP professionals all have the ability to sell disability and life insurance if they have a life license, but only CFP professionals have required training and certification to have their title. Financial experts and advisors have no required training above an insurance agent, yet they can use the title to mislead customers about their personal finance and retirement knowledge into spending large amounts of money on sub-optimal retirement strategies.

If you bought life or disability insurance from a financial advisor or friend, you may want to review and compare it to other policies on the market. It is likely that you will be able to save dramatic amounts of money by investing that money in investments outside of insurance policies or be able to earn much more in a different kind of insurance policy. For example, there are clients who are able to save thousands on their life insurance or increase their life insurance cash value by over $2 million by retirement age without increasing any payments.

Health Care Reform and Unintended Consequences:

My first few years helping families and small businesses with insurance, I was oftentimes told that I was a rarity in the space. Families and small businesses had trouble finding people to help them through the confusing maze of insurance, especially health insurance.

I was always left scratching my head why there were not more people who were in the business. After all, I was having a good go at it and was enjoying the freedom of being self-employed (i.e. embarrassingly, not working before noon my first year) and not having to worry about being fired or forced to do something I did not want to do.

After some time, I learned some of the history and ramifications of Romneycare which was the act that the Patient Protection and Affordable Care Act (aka as the ACA or Obamacare) is based upon.

Like a historian, I simply needed to the follow the money to know why so few people are helping small businesses and families with insurance.

Romneycare did not simply change the rules governing health insurance. It fundamentally decreased the distribution network of insurance agents sitting down to review and compare insurance with individuals, families, and businesses.

Prior to Romneycare’s enactment, health insurance policies had fewer regulations and definitions regarding what could be called insurance. Simply put, motorcycles could be passed and sold as the same thing as SUVs. The new regulations made sure that every health insurance policy had to pass stringent rules in order to be called and sold as health insurance. This is why many health insurance policies and plans were eliminated. They did not meet the minimum coverage requirements to continue being sold as insurance.

Additionally, both Romneycare and the ACA required that insurance companies could not make too much profit. This was enforced due to requiring a high Minimum Loss Ratio (MLR). The MLR is the amount the company pays out in medical claims compared to the revenue they collect in premiums from their insurance subscribers. If the insurance companies do not pay enough in medical claims in a year, they are forced to give money back to subscribers as an apology for charging too much for the plan.

What does any of this have to do with why financial advisors who sell insurance are, in reality, insurance agents posing as financial advisors?

Prior to MLRs being law, health insurance policies were paid on commission. Insurance agents in Massachusetts could make upwards of $500/year per subscriber on a health insurance policy. If an insurance agent sold 4 insurance policies per week, they were making more than $100,000/year. They were living high on the horse.

However, nothing lasts forever. The golden faucet for insurance agents went from overflowing to barely dripping after Romneycare and ACA.

In most of the country, there are no commissions at all on health insurance. Fortunately, for now, commissions still exist on almost all health insurance policies in Massachusetts. If the carrier decides to pay commissions at all, the amount ranges from $48–$204/year per subscriber on a health insurance policy. The average tends to be about $100/year. Now with the new commissions, 4 insurance policies a week amounts to $20,800/year — less than running the cash registrar at Dunkin’ Donuts due to Massachusetts’ high minimum wage.

This change in commissions forced insurance agents to quit or adapt and make their income from other insurance like life and disability.

One way to make up this loss of income was to focus more on disability and life insurance.

Insurance Agents, Financial Experts, Financial Advisors, and Financial Planners:

Sometimes businesses can engage in the same services or sell the same products but get wildly different sales by changing the name, the colors, or the design. Little marketing ideas make big differences.

This is no different when discussing the difference between insurance agents, financial experts, financial advisors, and certified financial planners (also known as CFP certificants or professionals). When it comes to these four titles, only one title is different than the rest: CFP Professionals.

CFP professionals require rigorous study over months, sometimes years, and a passed exam in order to have the trademark of CFP professional. It is illegal for someone to call themselves a CFP without having taken this exam.

The CFP license is the most rigorous of all the financial certifications and has the highest fiduciary responsibility in the industry. If the CFP Board discovers that a CFP professional is not acting in the best interest of the client, they will revoke the CFP professional’s license.

Selling insurance policies requires health and life licenses. (A life license is required for disability insurance as well). Acquiring a health and life license takes far fewer hours of study than acquiring a CFP certification. A license is required to call oneself a licensed insurance agent.

No licenses or certifications are required to call oneself a financial expert or advisor. But many financial experts and advisors provide free consultations in order to make 100% of their money from the sale of life and disability insurance. Rather than being upfront about their income and livelihood being solely from the sale of insurance, they leverage the title of expert or advisor that requires no training, licenses, or certification to gain an additional level of trust from clients to close the sale on insurance policies.

None of this is illegal, but the ethics are highly questionable. There are thousands of people who meet with financial advisors from companies like New York Life, Northwestern Mutual, Guardian, Primerica, and MassMutual thinking that their financial advisor has been educated in personal finance and retirement strategies beyond life insurance. The name “financial advisor” manipulates people into trusting the advisor more and thinking that they have acquired optimal knowledge and best practices for helping people retire. Clients walk in with the hope of relaxing on the beach once their stock investments reach their retirement goal and walk out thinking Whole Life or Variable Life insurance policies are the silver bullet of retirement.

Permanent life insurance as an excellent or primary retirement vehicle is a farce. It is a lie. For almost anyone who is not wealthy, buying term life insurance and investing the difference in price between the term and permanent life insurance is the vastly better route to retirement.

Permanent life insurance can be a good diversification tool for people who want tax-deferred growth or who ardently believe income taxes and capital gains taxes are going to increase in the future. But it is far from a tool that the average person should have.

I once ran into a household with two working adults and three kids with total income under $50,000. Instead of having term insurance like they should have, they were spending $497.78/month on three permanent New York Life insurance policies on the children and three term policies between Primerica and New York Life. This household was spending more than 10% of its income on life insurance and did not have enough death benefit because the financial advisors did not compare the term policy prices to other companies in the market.

This would never be advised by a CFP professional or anyone who understands the life insurance market and cares about the family’s financial situation.

How to Find a Good CFP Professional:

Finding a good financial advisor is easy: Find a fee-only financial planner who does not sell insurance.

A fee-only CFP professional who does not sell insurance is the best fiduciary that exists. With a fee-only financial planner, you pay them a flat fee to have their help and advice without giving them a significant portion of your profits.

If you have a financial planner who you do not pay to see, you have a fee-based financial planner. I highly recommend calculating how much you are paying the financial planner in fees and costs for your investments and assets under management. Most people are shocked at the amount they actually pay their advisor in fees. The fee of 1.5% or 2% for fee-based financial advisors can sometimes end up taking as much as 33% of investment profits.

After calculating these management fees and costs, it may become obvious that switching from a fee-based financial planner to a fee-only financial planner can help you retire several years sooner.

If the fee-only financial planner does not sell you insurance, you can be confident that they have an insurance agent who will help you acquire the insurance you need. In my experience, fee-only financial planners introduce me to their clients and tell me the amount of life or disability insurance they need after assessing their financial situation.

This is the best way to handle both your retirement strategies while protecting yourself with insurance.

Interested in a free review of your existing life and disability insurance policies to save money or optimize your coverage? Learn more at InsureWithNGI.com or send us an email at Sam@InsureWithNGI.com.