Brian Fechtel: The Life Insurance Industry Is Built on Fraud

Brian Fechtel

Brian Fechtel, Hero of the Life Insurance Industry

“Financial problems should not need to have to drive our country to the edge of a financial abyss to warrant fixing; forty years of documented but unindicted frauds ought to be sufficient.”  -Brian Fechtel

Most insurance agents are poorly educated, but that can’t be said of Brian Fechtel. He’s a CFA and has a degree in economics from Georgetown.

Fechtel worked as an insurance agent for one of America’s largest insurance companies, Northwestern, for 21 years.

During his time at Northwestern, Fechtel witnessed and documented the company’s agents systematically fleecing their clients. He had spoken out against this for years, but the company’s executives always ignored him and tacitly sanctioned his colleague’s unethical, greedy behavior.

In 2008, after the misconduct of Northwestern’s agents received media exposure, Fechtel wrote to his company’s president to urge him to institute company-wide reforms before being forced to do so by regulators or the courts.

Less than two months later, Fechtel was fired.

If Northwestern’s executives were aiming to silence Fechtel, they failed miserably. His unjust termination galvanized him to become one of the most outspoken advocates for reform that the life insurance industry has ever seen.

Fechtel set up his own company, Breadwinners’ Insurance, with the aim of setting new standards for honesty and transparency in the industry. Fechtel wrote countless articles and letters to regulators, consumer groups, insurance companies, and the media, many of which are posted on his company’s website. All of the articles and letters are infused with the same purpose: exposing fraud and promoting transparency in the insurance industry.

In 2012, an industry body honored Fechtel with an award for “Regulatory Advocacy”, in recognition of “his relentless drive to improve transparency in insurance pricing.”

Impossible to Perform Due Diligence on Life Investments

Fechtel says that most cash value life insurance products (life investments) are so opaque that its impossible for a broker to perform due diligence. Brokers are necessarily selling blind, which means consumers are buying blind. To demonstrate his point, Fechtel invites people to answer the following questions:

  1. What was the total rate of return on your insurer’s investment portfolio over the last year? Over the past five years and ten years?
  2. What is the composition of your insurer’s investment portfolio? How does its risk profile measure-up with your risk preferences?
  3. How much are your insurer’s investment management costs? And its investment-related tax costs?
  4. What are your life insurer’s mortality costs? What are its costs per million dollars of coverage provided? How competitive are the life insurer’s average mortality costs, and what are the implications of uncompetitive costs for you? Also, what are your insurer’s reinsurance costs? How do companies that understand risk view your insurer’s existing and new business?
  5. What are your insurer’s general operating costs? How efficiently does your insurer operate?
  6. What are your insurer’s sales/distribution costs for both new business and existing business?
  7. Of the life insurer’s block of cash value policies a) what share was underwritten during the past five years, and b) remains on the books even ten years after being issued?
  8. What does the information on your insurer’s sales growth and persistency indicate and portend?
  9. What has been the rate of return on the insurer’s capital? And what are the components of such?
  10. How well, or to what extent, does your policy participate in your insurer’s financial performance? How does its ROR on life policy reserves compare with its ROR on capital? How fairly does the life insurer distribute its earnings?”

All of the above questions are difficult, if not impossible, to answer.

Full Disclosure for Consumers and a Level Playing Field for Investment Product Providers

In interview with Bob Veres, Fechtel says, “My hope is that as…cost and performance information gets into the mainstream, life insurance companies will be forced to show their real numbers, and provide disclosure the way mortgage and mutual fund companies do with their financial products and transactions. I believe if we can ever get to real openness, the life insurance industry would enter a golden age. This should be a product that people feel good about buying, and right now I don’t think that’s usually the case.”

Phasing Out the Poisonous Commission-Based Sales Model

Fechtel says, “The evidence of agents’ recommendations having been motivated by their own financial interests is irrefutable and overwhelming.”

He has devoted numerous articles to explaining the different frauds and misrepresentations that agents use to con clients into buying the crappiest, high-commission policies, as opposed to term insurance or low-commission “blended” policies. During Fechtel’s 21 years at Northwestern, he saw that nearly all of his colleagues, driven by self-interest, systematically ripped off clients:

“Northwestern agents, using company approved sales literature and presentation scripts, recommend policies with large sales loads [i.e., commissions] rather than policies with small sales loads. Virtually none of the company’s 7000+ sales force routinely recommend and sell Northwestern’s best value cash-value policies, a policy an informed consumer would demand – a policy a consumer, trusting in the company’s compliance with its own rules, IMSA, and state regulations, would expect that he or she would at least be shown. Northwestern agents not only do not show the best value policy, they often disparage it should their prospects actually have heard about it.”

Fechtel believes full commission disclosure would deter agents from behaving so badly, but he admits to Bob Veres, “I think ultimately, this has to be a fee business.” 

Whole Life Investments Are a Ripoff

According to Fechtel, “Whole life is a complete rip-off…especially considering how the policies are sold…with excessive commissions. I recommend term insurance, probably 99% of time. And even when there is a desire for cash value accumulation, it would not be straight whole life. It would be a max blended cash value policy, which means it would be mostly term insurance with a cash value investment account.”

Mary Rowland describes “blending” as “an exercise that mixes term insurance and whole life in a way that both decreases the agent’s commission and enhances the policy’s value.” Fechtel claims that blended policies are potentially attractive to wealthy Americans, because of certain tax advantages. 

These tax advantages do not exist for Hong Kongers.

A Collection of Fechtel’s Greatest Quotes

“The life insurance marketplace has always been and continues to be awash with misinformation, deception, fraud, and worse.”

“With both some levity and sincerity, I believe that several Insurance Commissioners ought to have to “stand in the corner” and then write on the blackboard a thousand times, “I will never again betray my public trust and responsibilities.””

“If Insurance Commissioners could be charged with dereliction of duty, they would all be in jail, having repaid their salaries, and forfeited their pensions.” 

“Inadequate life insurance policy disclosure is a regulatory “gap” virtually the size and age of an intergalactic asteroid.”

“Consumers trust regulators to protect them, to protect them [from] misleading sales representations, but insurance regulators wait until consumers tell them there’s a problem. And, yet it has been known for decades that consumers typically find cash value life insurance products practically unfathomable. In light of this, the regulators’ inaction/performance reminds me of the circus rodeo act where two trained stunt male donkeys chase each other’s tail. The trained jackasses, of course, are putting on an amusing show; what excuse the 50 state NAIC Commissioners offer for their continuous 40+ year ‘performance,’ I do not know.”

“The life industry’s chief regulators have never been known for their initiative nor for their willingness to rock the boat, even when the boat is in clear need of righting.”

“Financial problems should not need to have to drive our country to the edge of a financial abyss to warrant fixing; forty years of documented but unindicted frauds ought to be sufficient.”

“Industry data clearly show that some life insurers are really just commission generating enterprises as it can be statistically known at time of sale that their policies are much more likely to financially harm, than benefit, consumers.”

“No other consumer financial products provide comparable rewards for misrepresentations, nor have a marketplace where the pervasiveness of misinformation is as extensive.”

“If a manufacturer’s baby carriages functioned with the same statistical destructive certainty [as cash value life policies], thousands of toddlers every year would be crippled.”

“Certainly, there are lots of public policy scandals, but quite possibly no others that have literally spanned generations more destructively and disgracefully than those of the life insurance industry. This industry though, is a newsbeat essentially or effectively uncovered by any investigative journalists.”

“The general life insurance marketplace has always been and currently remains awash with absolutely pervasive and mind-boggling problems and frauds, and yet there have been no Pulitzer Prize winning series of articles on the industry. Good coverage by financial journalist could have long ago solved the fundamental problems in the life insurance marketplace.”

“Quite simply, the current life insurance marketplace is built upon sales presentations that rely upon half-truths, innuendos, misrepresentations and worse and which prey upon consumers’ misplaced trust, gullibility, irrational wishes (seeking to avoid costs that can’t be avoided) and faulty decisions.”

“This failure to provide proper disclosure creates myriad and pervasive problems best measured in billions of dollars and millions of individuals harmed every year. The industry’s inefficient, ineffective, and – to put it mildly – unsavory practices harm everyone.”

“While some might recognize the problematic representations or half-truths, no one should doubt that the…sales language and deceptive analytical tools are effective. Agents, after all, come from a breed who can assert to regulators that financial incentives have no impact upon their recommendations, and not only assert such but do so when the evidence of agents’ recommendations having been motivated by their own financial interests is irrefutable and overwhelming.”

“Mutual funds can’t do it, so why can insurance policies?…No financial advisor would illustrate how a mutual fund would grow using a current rate of return.  That is essentially what cash value life insurance illustrations do.”

“All life insurance…is fundamentally composed of term insurance. Whole life is called whole life because it was originally called “level payment term for your whole life.”…Different policies, in fact, are nothing but slightly different peas from the same pod.”

“The truth, in fact, is that the fundamental difference between whole Life and term, or permanent insurance and term insurance, arises from cash-value policies’ tax privileges.”

“Many within the industry have “fought” to retain life insurance’s tax privileges by, among other things, denying its policy’s investment character.”

“Misrepresentations are an essential part the current sales practices of agents because there is nothing about whole life that justifies the excessive sales compensation that the industry and its agents have always extracted from consumers. Whole life is nothing but term insurance and a tax-advantaged side-fund.”

“There can be and, of course, is some misinformation in all markets, but the difference between the misinformation in most markets and with that of the life insurance marketplace is like the difference between strolling in a neighborhood park and wading through the alligator-infested Everglades. The life insurance marketplace is a swamp of misinformation with pits of quicksand created by inadequate disclosure and with creatures poised to seize upon any and all. The proof of such is readily apparent by examining the very products life insurers and their agents sell.”

“While a select few cash-value life insurance policies can provide excellent competitive value, perhaps 95% of such policies sold provide value no informed consumer would accept.”

“Whole life is a complete rip-off…especially considering how the policies are sold….with excessive commissions. I recommend term insurance, probably 99% of time. And even when there is a desire for cash value accumulation, it would not be straight whole life. It would be a max blended cash value policy, which means it would be mostly term insurance with a cash value investment account.”

“Straight whole life insurance products are a rip-off.”

“I think that [long term care insurance], often privately referred to by its devoted agents as long term scare insurance, might really, with its widespread 20, 30, and 40% premium increases, heretofore have been called long term scam insurance.”

“For insurers and agents, however, the essential difference between whole life and term is the quantum difference in the sales commissions…The industry’s age-old compensation differential of paying commissions 5-9 times larger on whole life than on term cannot be sustained in a competitive marketplace; that is, it cannot be sustained in the face of informed consumers.”

“New agents are recruited by the thousands each year with enticing recruitment pitches built on compensation unobtainable if products were properly disclosed. Poorly trained and supervised, more than 4 out of 5 recruits within a few years fail, although not before wreaking much financial havoc.”

“The American life insurance system has been known to be terribly dysfunctional for generations, if not centuries.”

“White collar financial crime, although arguably the most destructive crime we face, goes virtually unpunished in America.”

“Life insurance policies may initially seem complex to the ordinary consumer, but that does not mean that their operations and mechanics cannot be readily and succinctly explained and understood.”

“Industry executives have for years acknowledged that no one would buy many of their companies’ products if they were appropriately informed.” 

“I think ultimately, this has to be a fee business.”

More Fechtel Quotes with Links to Sources

[Note: The quotes below were all pulled from articles written by or written about Brian Fechtel. Click on the titles to see the full articles.]

Life Insurance: An Industry Built on Fraud

“Belth has stated, “Life insurers have never provided the necessary and appropriate disclosure of their policies, in fact, they are categorically opposed to such.” Hunt, who is the Consumer Federation of America’s life insurance adviser and who in that role over 25 years has consulted with thousands of consumers has stated, “It doesn’t take long in the work I do to realize that hardly any policyholders understand how a cash value policy works.” This failure to provide proper disclosure creates myriad and pervasive problems best measured in billions of dollars and millions of individuals harmed every year. The industry’s inefficient, ineffective, and – to put it mildly – unsavory practices harm everyone.”

“Several years earlier, at a Society of Actuaries meeting, a Northwestern actuary, John Keller, had explained the company’s aversion to checking-on its agents’ sales presentations by stating, “I’ll respond briefly to the suggestion that we use focus groups to get the consumer point of view. We did consider that early on in our work and rejected it for a couple of reasons. One was the time constraints we were under and the cost of doing focus groups. But probably the most important reason is that if you get 15 people in a room who are recent purchasers of life insurance and then spend an hour or two dissecting the sales process and the use of their illustrations in that sales process, you’re likely to have 13 people coming out slightly or greatly disillusioned over what they just did. We found that our field force and our marketing department didn’t like that idea at all. So if somebody could think of a way to get to the consumer without causing real problems among recent buyers, who are our most fragile customers, we would like to hear it.” Such isolated incidents, where an industry executive has spoken some real truth about the problematic nature of the industry’s sales practices, however, have never led to any substantive reform. The life industry’s chief regulators have never been known for their initiative nor for their willingness to rock the boat, even when the boat is in clear need of righting.”

“Northwestern agents, using company approved sales literature and presentation scripts, recommend policies with large sales loads rather than policies with small sales loads. Virtually none of the company’s 7000+ sales force routinely recommend and sell Northwestern’s best value cash-value policies, a policy an informed consumer would demand – a policy a consumer, trusting in the company’s compliance with its own rules, IMSA, and state regulations, would expect that he or she would at least be shown. Northwestern agents not only do not show the best value policy, they often disparage it should their prospects actually have heard about it.”

“Former Northwestern actuary Scott Witt, who has also joined the ranks of the very few fee-only life insurance advisers in the nation, has stated that “agents are in a perpetual conflict of interests where they have to choose between their own best interest and the clients.” Fellow fee-only adviser Glenn Daily says he “can’t believe that there haven’t been lawsuits about this issue.””

“Agents’ misleading statements and innuendos regarding the whole life and term dichotomy come in countless variations, but they all have the same objectives – 1) to create an allure of whole life/permanent insurance based on invalid reasons, and 2) to prevent an accurate examination of a cash-value policy’s annual costs. Agents’ ultimate objective is to sell a whole life or other cash-value policy with their significantly larger commissionable premiums.”

“When challenged about their acquiescence of such problematic sales tools/materials, regulators typically respond that they have not heard any complaints from consumers about such (a classic catch-22 situation)”

“While some might recognize the problematic representations or half-truths, no one should doubt that the above sales language and deceptive analytical tools are effective. Agents, after all, come from a breed who can assert to regulators that financial incentives have no impact upon their recommendations, and not only assert such but do so when the evidence of agents’ recommendations having been motivated by their own financial interests is irrefutable and overwhelming. Agents’ presentations can be very effective, especially in the typical one-on-one selling that occurs in home and offices across the country. Every individual who has ever been an agent has seen first-hand and heard from fellow agents about the effectiveness of various sales presentations’ misrepresentations time and again. Such presentations are effective even among those who one would think would be financially, fairly-sophisticated. For instance, a leading Northwestern agent, who built his business calling on financial professionals, would explain the term versus whole life dichotomy as a way to transform an expense into an asset. Gosh, doesn’t that sure sound good? If only it were true. If only it were possible. But his sales presentations were exceptional effective. In fact, this Northwestern agent’s financial abracadabra of turning expenses into assets was so very effective that some years he was among the company’s top ten agents in its Eastern Region. Quite simply, the current life insurance marketplace is build upon sales presentations that rely upon half-truths, innuendos, misrepresentations and worse and which prey upon consumers’ misplaced trust, gullibility, irrational wishes (seeking to avoid costs that can’t be avoided) and faulty decisions.”

“The truth, in fact, is that the fundamental difference between whole Life and term, or permanent insurance and term insurance, arises from cash-value policies’ tax privileges. Tax privileges, though, are a free and non-proprietary input. Economic theory demonstrates that businesses in a competitive marketplace cannot extract value from consumers for a free, non-proprietary input.”

Fixing the Life Insurance Marketplace

““The life insurance market is characterized not only by an absence of reliable price information, but also by the presence of deceptive price information…the deceptive sales practices found in the life insurance industry constitute a national scandal.” So testified Professor Joseph Belth, an expert on the life insurance industry, before Congress in 1973. Can this statement, from almost 40 years ago, still be as true today? And is it possible for such deplorable industry practices to be occurring without being in the spotlight of public attention?

The short answers are yes. To this day the life insurance industry relies on inadequate product disclosure, misinformation, and fraudulent practices, thereby costing consumers billions of dollars annually. Industry executives have for years acknowledged that no one would buy many of their companies’ products if they were appropriately informed.”

“Empirical proof of the life insurance market’s dysfunction is readily apparent by examining the very products life insurers and their agents sell. While a select few cash-value life insurance policies can provide excellent competitive value, perhaps 95% of such policies sold provide value no informed consumer would accept. This marketplace’s dearth of information also afflicts tens of millions of policyholders at annual renewal, a large percentage of who, if properly informed, currently could readily obtain much better value.”

“Belth…has reported: “One company executive told me that companies could not survive disclosure of yearly prices,” and, “Yearly prices [of cash-value policies] are so revealing that the companies took extraordinary action to prevent disclosure of the information.” While the first statement is clearly hyperbole, the second is practically an indictment of the state regulators, as they have never confronted such matters and fulfilled their regulatory duties.”

“A cash-value life insurance policy’s unique intrinsic economic advantages arise from its Congressionally-granted tax privileges, not its highly touted permanence…These tax privileges, which are given directly to policyholders, however, are not a basis for which insurers can charge consumers. No one pays thousands of dollars to set-up an IRA.”

“Financial problems should not need to have to drive our country to the edge of a financial abyss to warrant fixing; forty years of documented but unindicted frauds ought to be sufficient.”

Letter to Federal Insurance Office – December 2011

“The life insurance marketplace is awash with misinformation. Without good disclosure, this should hardly be surprising. Life insurers actually run misleading advertisements and conduct training in deceptive sales practices. Evidence of such has been repeatedly submitted to state regulators. Moreover, given the industry’s commission-driven sales practices (commissions – which can make those of mortgage brokers, now notorious for their own misrepresentations – look tiny), sales misconduct is pervasive.”

“Data shows that over an eight year period approximately 40% of all the cash values policies of many life insurers are discontinued…Such lapses are especially financially painful to consumers, as the typically-sold cash value policy has huge front end sales loads; sales loads about which agents are trained to make misrepresentations.”

“Cash value life insurance policies that are sold to be lifelong products have extraordinary high lapse rates. Data shows that over an eight year period approximately 40% of all the cash values policies of many life insurers are discontinued…Such lapses are especially financially painful to consumers, as the typically-sold cash value policy has huge front end sales loads; sales loads about which agents are trained to make misrepresentations.”

“It is very important that all readers fully understand that contrary to pervasive misconceptions and misrepresentations, cash value policies do not avoid the increasing costs of annual mortality charges as a policyholder ages. The fundamental advantages of cash value life insurance products arise from the product’s tax privileges. Tax privileges, though, are essentially a free, non-proprietary input. In a competitive marketplace, firms cannot charge consumers or extract value for a free, non-proprietary input. No one pays thousands of dollars in sales costs to set-up an IRA.”

“Inadequate life insurance policy disclosure not only prevents consumers from being appropriately informed, it also is a main factor in their avoidance of the very product they so often need.”

“Admittedly, regarding their past purchases, disclosure could now well lead to litigation over agents’ and insurers’ prior misrepresentations. As I think you may now understand, inadequate life insurance policy disclosure is a regulatory “gap” virtually the size and age of an intergalactic asteroid.”

“Regulation of life insurance agent licensing is incredibly deficient. Agents should truly be financial doctors. Yet, state’s agent licensing requirements fail to make sure consumers are served by financially knowledgeable professionals; the licensing exams are a joke. While there are many competent agents, it is quite possible that the overwhelming majority of agents – many of whom are new and inexperienced, as more than 4 out of 5 recruits fail in the commission-based environment within the first few years – do not possess the basic knowledge necessary to accurately assess consumer’s needs or to properly evaluate different companies’ policies.”

The Life Insurance Industry Is Built on Fraudulent Practices

“No other consumer financial products provide comparable rewards for misrepresentations, nor have a marketplace where the pervasiveness of misinformation is as extensive. New agents are recruited by the thousands each year with enticing recruitment pitches built on compensation unobtainable if products were properly disclosed. Poorly trained and supervised, more than 4 out of 5 recruits within a few years fail, although not before wreaking much financial havoc. Those who “succeed” though, give proof to Upton Sinclair’s adage, “It is difficult to get a man to  understand something when his job depends on not understanding it.””

Fixing the Monolith

“Fechtel starts by explaining what you probably already know: that term and cash value life insurance are essentially the same thing: cash value products all have a lifetime term policy embedded inside them. “Cash value policies are nothing other than term with a tax-advantaged side fund,” says Fechtel.”

“With term, you know what you’re paying for your mortality expenses each year.  With cash value policies, the investment account is paying the premium on the embedded term policy on the other side of a closed door.  And Fechtel says that a lot can go on behind that closed door, including the insurance company raising the cost of coverage.

Understanding these basic principles is a good start, but it’s only a start; the problem with the life insurance marketplace, in Fechtel’s view, is that consumers never have enough information to comparison shop or know exactly what they’re buying.  You can walk into a hardware store and buy a hammer, and it’s not hard to compare prices and evaluate the quality of the various products.  But what if you paid for the hammer based on a 30-year projection of scheduled payments, and part of the transaction was giving the hardware store additional money that it would manage on your behalf and deduct a proportional cost to pay for the hammer every year?”

“Fechtel is licensed with a variety of companies, and although he no longer works with Northwestern Mutual, he sometimes recommends that his clients buy blended policies from them–at greatly reduced commissions.  He prefers to work for fees rather than commissions.  “I think ultimately, this has to be a fee business,” he says.  “When somebody retains me, I get paid a retainer, and that covers the cost of prodding them occasionally to get them through the process of buying,” he adds.  “If the commissions come to more than the retainer or hourly fee, then the client or advisor can specify the charity they want me to donate the excess to.”

Crashing Through the Insurance Industry’s Wall of Silence

“Let’s say a new client asks you to evaluate her portfolio and make recommendations. The funds and ETFs are easy; you can turn to Morningstar or Lipper and get the performance (for any time period) and yearly expense ratios out to two decimal places. Sales loads and 12(b)‐1 costs are right there in black and white.

But when you look at the client’s cash‐value insurance policy, all of that disclosure goes away. The policy is essentially a mutual fund investment account that pays annual term‐insurance premiums on behalf of the policyholder each year, so theoretically you should be able to get the same disclosure on the funds and on yearly payment for life insurance protection, the way you do on any of the term websites.

Good luck. The insurance company never discloses the sales load paid to the agent, or the expense ratio on the investment account, or even the long‐term track record of the company’s investment portfolios. The cost of the embedded term – insurance policy is a secret, and few consumers realize that it can be adjusted annually at the company’s discretion.”

“The other goal is a bit larger. Fechtel hopes to prod insurance companies into providing full disclosure similar to the way mutual funds do today. “My hope,” he says, “is that as this cost and performance information gets into the mainstream, life insurance companies will be forced to show their real numbers, and provide disclosure the way mortgage and mutual fund companies do with their financial products and transactions. I believe if we can ever get to real openness,” he adds, “the life insurance industry would enter a golden age. This should be a product that people feel good about buying, and right now I don’t think that’s usually the case.””

The Disclosure Solution to the Problems Consumers Face in the Life Insurance Marketplace

“In 1973 Belth testified before Congress, “The life insurance market is characterized not only by an absence of reliable price information, but also by the presence of deceptive price information. In my opinion, Mr. Chairman, the deceptive sales practices found in the life insurance industry constitute a national scandal.””

“Elsewhere Belth has continued, “One company executive told me that companies could not survive disclosure of yearly prices. I disagree. I think companies would prosper if price disclosure were routine. However, if he is right and I am wrong, and if companies cannot survive price disclosure, they should leave the business. Companies that can survive only by concealing the price of their product do not deserve to survive.””

“In their 2008 book on personal financial planning Professor Laurence J. Kotlikoff and financial columnist Scott Burns declare, “Life insurance agents have a well-deserved reputation for being hucksters.””

“There can be and, of course, is some misinformation in all markets, but the difference between the misinformation in most markets and with that of the life insurance marketplace is like the difference between strolling in a neighborhood park and wading through the alligator-infested Everglades. The life insurance marketplace is a swamp of misinformation with pits of quicksand created by inadequate disclosure and with creatures poised to seize upon any and all. The proof of such is readily apparent by examining the very products life insurers and their agents sell.”

“For insurers and agents, however, the essential difference between whole life and term is the quantum difference in the sales commissions. Anyone who thinks whole life and term are somehow drastically different types of life insurance with the former somehow magically solving all the alleged disadvantages agents cite regarding term ought to be reminded that ‘whole life’ acquired its name because it was originally called ‘level payment term for your whole life.’ The industry’s age-old compensation differential of paying commissions 5-9 times larger on whole life than on term cannot be sustained in a competitive marketplace; that is, it cannot be sustained in the face of informed consumers.”

“The American life insurance system has been known to be terribly dysfunctional for generations, if not centuries.”

“the NAIC’s and everyone else’s copy of the Society of Actuaries’ 1991 journal, The Record, contains a statement by a leading life insurer’s actuary that his company could not conduct focus groups with recent policy purchasers because approximately 90% would leave very dissatisfied with what they learned about their recent purchase – its woeful value – and the company’s agents were stridently opposed to such focus group research.”

“Life insurance policies may initially seem complex to the ordinary consumer, but that does not mean that their operations and mechanics cannot be readily and succinctly explained and understood.”

The Right Blend

“One of the favorite tools of this group is  “blending,” an exercise that mixes term insurance and whole life in a way that both decreases the agent’s commission and enhances the policy’s value. These consultants have carved out a niche for themselves. Many of them are fee-only insurance consultants or agents who made the decision to put the interest of the insured first. They offer blended policies with lower commissions and with a substantial cash value at the end of the first policy year, as opposed to nothing.”

“Glenn Daily, a fee-only insurance consultant in New York, says he’s had a number of clients come to him with very large whole-life policies in which the part of the policy with the largest commission makes up most of the policy. Daily defines blending as “taking money from the agent’s pocket and putting it back into the policy.” Daily says he “can’t believe there haven’t been lawsuits about this,” because the option of giving the customer a better deal is right there, whether the agent chooses to use it or not.”

Unrightable Wrongs?

“I’ll certainly be among those who won’t be the least bit surprised if it turns out that the insurance industry is mired in sleaze. Top to bottom. Stem to stern.”

“It’s not all that easy to find a smart, credentialed insurance professional who works for the company considered the gold standard in insurance circles and is willing to question sales tactics. This marketplace encourages insurance agents to rip off their customers, says Fechtel. “An agent can look you in the face and tell you it’s the best product for you when he knows it isn’t.”

“These three [Glenn Daily, Peter Katt, Joseph Belth] have grown cynical about the possibility of change. They’ve fought misinformation for so long that the struggle is starting to wear them down. But Fechtel is still swinging.”

“Agents who have pledged to abide by the golden rule, he says, do not even show prospective customers the policy that is best for them. That’s because what’s good for the consumer is bad for the agent. The industry opposes full disclosure because it’s convinced it would put agents out of business. “The argument against good disclosure is that you’re not going to exist as an agent, because you won’t make enough money,” says Fechtel.

That’s a danger that makes the status quo pretty hard to budge. When I write about insurance, Bloomberg Wealth Manager gets angry letters and e-mail from insurance agents who suggest that perhaps if I tried selling an insurance policy, I would realize what hard work it is and stop picking on agents for raking in 100 percent of the first year’s premium as a commission. The problem is simple enough to explain: Agents get more money when consumers get a rotten deal. Bad disclosure is good for agents. Insurance policies are absurdly complex because the simple truth is bad for business. And business is not that great to begin with. “The average agent barely sells one policy a week,” Fechtel says. “There are probably 40 hours of manpower invested in selling a product.”

Fechtel has approached some of the companies in the financial-services business known for their integrity and competitive prices. They’re household names. He’s offered to build a great no-load policy for them. No deal. They don’t want to touch life insurance. It smells. It would taint the firm’s reputation.”

“The insurance industry is engaged in “the same kind of cartel-like behavior carried out by organized crime,” Spitzer told the Wall Street Journal.”

““The fact that people don’t understand the cost of what they buy strikes me as a profound inadequacy of the marketplace,” he says. But the insurance marketplace has little to do with economics. It’s about how to gain an advantage—and not necessarily for the consumer.”

Letter to Society of Actuaries – January 2011

“Echoing a famous historian’s words, that ‘the road to Auschwitz was paved with indifference,’ it is time for the SOA [Society of Actuaries] to speak up against the practices that have enabled the life insurance industry to deceive and impoverish American families.”

“Industry data clearly show that some life insurers are really just commission generating enterprises as it can be statistically known at time of sale that their policies are much more likely to financially harm, than benefit, consumers.”

Intro to Breadwinners

“With both some levity and sincerity, I believe that several Insurance Commissioners ought to have to “stand in the corner” and then write on the blackboard a thousand times, “I will never again betray my public trust and responsibilities.””

“Unfortunately, today, hundreds of thousands of individuals, trustees, and advisers, buy and/or recommend uncompetitive new policies every year, and millions of others hold on to uncompetitive policies because of misinformation and misconceptions.”

Letter to the National Association of Insurance Commissioners (NAIC) – 2012

“competitors, such as Mutual Trust Life, have such high lapse rates of their purportedly permanent cash value policies that these insurers know when issuing these policies that approximately 70% will lapse within the policy’s first 15-20 years, leavings so many policyholders so terribly disappointed in the value they received (or really didn’t receive). If a manufacturer’s baby carriages functioned with the same statistical destructive certainty, thousands of toddlers every year would be crippled.”

“Certainly, there are lots of public policy scandals, but quite possibly no others that have literally spanned generations more destructively and disgracefully than those of the life insurance industry. This industry though, is a newsbeat essentially or effectively uncovered by any investigative journalists.”

Life Insurers’ Financials Analyzed

“participating cash-value life insurance policies are “priced” after, not before, the consumer has purchased it.

Everyone knows that to make good recommendations or decisions require appropriate and relevant financial information. And yet, if knowledge about such performance is inadequate, then demonstrating that anything akin to the due diligence requirements of selling, buying, or renewing a policy have been fulfilled may be difficult if not impossible. To evaluate your specific knowledge and understanding of life insurers, consider the following questions.

  1. What was the total rate of return on your insurer’s investment portfolio over the last year? Over the past five years and ten years?
  2. What is the composition of your insurer’s investment portfolio? How does its risk profile measure-up with your risk preferences?
  3. How much are your insurer’s investment management costs? And its investment-related tax costs
  4. What are your life insurer’s mortality costs? What are its costs per million dollars of coverage provided? Also, what are your insurer’s reinsurance costs? How do companies that understand risk view your insurer’s existing and new business?
  5. What are your insurer’s general operating costs? How efficiently does your insurer operate?
  6. What are your insurer’s sales/distribution costs for both new business and existing business?
  7. What does the information on your insurer’s sales growth and persistency indicate and portend?
  8. What has been the rate of return on the insurer’s capital? And what are the components of such?
  9. How well, or to what extent, does your policy participate in your insurer’s financial performance? How does its ROR on life policy reserves compare with its ROR on capital?

Answers to such questions are not currently standard parts of the life insurance policy selling, buying, and reviewing/renewing process.”

The Life Insurance Industry Needs Better Disclosure

“Mutual Funds Can’t Do It, So Why Can Insurance Policies?…No financial advisor would illustrate how a mutual fund would grow using a current rate of return.  That is essentially what cash value life insurance illustrations do.  Illustrations use current dividend rate assumptions to show a hypothetical future scenario.  No one can predict the future and an illustration is worth nothing more than the piece of paper it is on.”

“Here are five questions that come as a natural starting place for anyone considering cash value life insurance policies:

  1. What is the life insurer’s rate of return earned from its investments, and credited on its policies?
  2. How efficient are the life insurer’s home office and agent operations?
  3. Of the life insurer’s block of cash value policies a) what share was underwritten during the past five years, and b) remains on the books even ten years after being issued?
  4. How competitive are the life insurer’s average mortality costs, and what are the implications of uncompetitive costs for you?
  5. How fairly does the life insurer distribute its earnings?”

[At the bottom of this article, one commenter remarked, “These are great questions. As a licensed agent I could not answer any one of them, and suspect that finding answers directly from the insurer would be difficult.”]

“I am a believer that life insurance does not need to be sold. Most of the selling stems from agents looking to make excessive commissions from permanent life insurance. The insurance companies know that so they can dangle a carrot in front of hungry salesman or saleswoman to get more premium dollars into the company.”

“Whole life is a complete rip-off…especially considering how the policies are sold….with excessive commissions. I recommend term insurance, probably 99% of time. And even when there is a desire for cash value accumulation, it would not be straight whole life. It would be a max blended cash value policy, which means it would be mostly term insurance with a cash value investment account. The cash value investment account earns a guaranteed interest credit of 4%. The growth in the cash value investment account is not subject to taxes – so long as the policy does not lapse or is surrendered to basis. That doesn’t stink, especially if you are in a high income tax bracket. Especially now considering the recent changes to taxes for high net worth individuals.”

“As I mentioned in a prior comment straight whole life insurance products are a rip-off. I agree with you on that!”

“many within the industry have “fought” to retain life insurance’s tax privileges by, among other things, denying its policy’s investment character.”

Study on the State of the Life Insurance Industry

Sales, marketing, and business textbooks routinely emphasize ways of differentiating one product from another in order to try to obtain more sales and/or a better margin from selling a product seen as different from a basic product or commodity. All life insurance, though, is fundamentally composed of term insurance. Whole life is called whole life because it was originally called “level payment term for your whole life.” The ways in which life insurance products have been and still are described in the marketplace not only create confusion for consumers, but also actually impair consumers’ inclination and ability to directly and meaningfully compare products. Different policies, in fact, are nothing but slightly different peas from the same pod.”

Elizabeth Warren, We, too, May Need You!

“If Insurance Commissioners could be charged with dereliction of duty, they would all be in jail, having repaid their salaries, and forfeited their pensions.”

Northwestern’s Deceptive Advertisement and Marketing

“the NY department and its NAIC affiliates have never properly regulated life insurers, their agents, and policy disclosure practices. That is the reason the life insurance marketplace has always been and continues to be awash with misinformation, deception, fraud, and worse.”

“Consumers trust regulators to protect them, to protect them precisely from such misleading sales representations, but insurance regulators wait until consumers tell them there’s a problem. And, yet it has been known for decades that consumers typically find cash value life insurance products practically unfathomable. In light of this, the regulators’ inaction/performance reminds me of the circus rodeo act where two trained stunt male donkeys chase each other’s tail. The trained jackasses, of course, are putting on an amusing show; what excuse the 50 state NAIC Commissioners offer for their continuous 40+ year ‘performance,’ I do not know.”

New York Life’s Fraudulent Advertising

“Furthermore, that such a blatantly misleading ad was produced by a large and heretofore positively-regarded life insurer, ought to cause all to wonder just how pervasive and rampant fraud is in the life insurance marketplace. It is rampant beyond your wildest imagination, but that argument can’t be completely proven in a paragraph. For the moment, let it therefore suffice to note: While such allegations of rampant pervasive financial fraud can also often times be viewed askance or greeted by some with incredulity, especially when one believes that an industry regulated by 50 states and covered by presumably knowledgeable financial journalists could not possibly be so dysfunctional, a marketplace without appropriate disclosure is a marketplace primed for fraud. And, to this day, life insurance consumers have not been appropriately informed.”

“White collar financial crime, although arguably the most destructive crime we face, goes virtually unpunished in America.”

“The general life insurance marketplace has always been and currently remains awash with absolutely pervasive and mind-boggling problems and frauds, and yet there have been no Pulitzer Prize winning series of articles on the industry. Good coverage by financial journalist could have long ago solved the fundamental problems in the life insurance marketplace. These problems largely arise from inadequate and misleading information, and journalists, after all, are supposed to be in the information, not the corporate public relations, business.”

“As you know, I have been a critic of IMSA [an industry self-regulatory body] since its inception in 1996, because despite its melodious sounding Golden Rule principles, its enforcement of such has always been a sham. In fact, during my July 2008 testimony at the NY State Department of Insurance Hearings on Compensation Disclosure I declared, “IMSA is a fraud.” Do you now agree, or is it that you recognize that IMSA’s principles, although unenforced, constitute a legal noose around Northwestern’s corporate neck virtually beckoning class-action attorneys, given the field-force’s pervasive misrepresentations? Indeed, when the chapter of our industry’s recent history is written, do you think that anyone will assert that IMSA, the brainchild of either a most duplicitous or absolutely incompetent group of corporate counsels, should ever have seen the light of day?”

Thanks for the Misrepresentation, Ms. Cicchetti

“Misrepresentations are an essential part the current sales practices of agents because there is nothing about whole life that justifies the excessive sales compensation that the industry and its agents have always extracted from consumers. Whole life is nothing but term insurance and a tax-advantaged side-fund. Consequently, to hide its huge sales loads agents routinely need to make misrepresentations.”

“due diligence reviews of LTCI [long term care insurance] policies cannot presently be performed. Given such, it hardly seems unwarranted to say that state insurance commissioners have been, euphemistically speaking, totally out to lunch on LTCI regulation. It would be interesting to know what SEC [Securities and Exchange Commission] Chair Mary Schapiro, FINRA [Financial Industry Regulatory Authority] Chairman Rick Ketchum, and other financial product and planning authorities think about long term care insurance as it is presently sold in the United States.

In summary, I think that LTCI, often privately referred to by its devoted agents as long term scare insurance, might really, with its widespread 20, 30, and 40% premium increases, heretofore have been called long term scam insurance. Consumers in general will only begin to receive significantly better value from LTCI once they with their friends in the media (the “Fourth Branch” of government, purportedly) demand solutions to the serious problems with the currently marketed LTCI policies. That such an inadequately disclosed product as to be the life insurance industry’s Blackest Box and a policy that can hold consumers hostage and shot like fish in a barrel has been so strongly endorsed by so many of America’s financial journalists is more than a little baffling; but that’s a story for another day.

Until then, LTCI Buyer: Beware! Ask Questions and Demand Value.”

The Corvair of Financial Products: Long Term Care Insurance

“In fact, without knowing the LTC insurer’s investment management practices and principles, consumers don’t know how they participate in the insurer’s investment performance, they have been, and basically are, buying LTCI BLIND. If anyone disagrees and/or thinks it’s good to buy investments or financial security blindly, then the new off-shore, hedge fund being operated from behind bars by Bernie Madoff could be a big success.”

“As Vanguard’s founder, Mr. Bogle, might be tempted to remark, there’s something incredibly wrong with what is fundamentally an investment product – an annuity, admittedly with some extra legitimate costs upon payout – when the croupiers extract over 30% of the value of consumers’ hard earned dollars.”

A Very Popular Annuity Sales Presentation

“This is not a good situation. It is not merely that consumers do not obtain what they thought they had bought (which is pretty bad), it is also that society as a whole has excessive resources ,i.e., agents’ and consumers’ time, engaged in, respectively, selling and evaluating such products that would otherwise not be engaged in if the product were properly disclosed. This conclusion is irrefutable. And the total societal costs of such financial crimes are enormous and extensive.”

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