Are Advisers Who Sold Whole Life Plans Profit Driven?
As expected, in the aftermath of the news of MAS’s Financial Advisory Industry Review (FAIR), the media followed-up with more reports , particularly on the commission part. The 28th March 2012 issue of The Straits Times came with an article (Beware profit-driven insurance agents) on the sensitive issue.
Disclaimer: I have sold whole life plans and am still selling them.
A junior insurance agent was quoted “Term policies don’t make the company money, so we have to sell other policies like investment-linked plans or whole life policies. I only talk about term policy if the client asks me specifically about it“. Is this phenomenon common? From my own experience, yes! Not only junior advisers do that, even senior ones do that! Sure, some are driven to do it due to the commissions. However, there could be ones who do it due to pressure and sales quotas.
The article also showed how a firm can help ‘save’ client’s money using a fee-based approach which I find misleading. The example given was that a client could pay $5,000 for an policy and the commission earn on that, which could be a further $5,000 stays with the client. So is the client paying $10,000 for a $5,000 policy? From my understanding of the fee-only model (which the firm claims to be in the past), the commission is returned to the client, the client pays only the advisory fee, which in the example, amounts to $3,000. For fee-based model, commission may not be returned. So a client gets to keep the commission derived from the $5,000 premium (which could amount to $5,000) and pay the advisory fee of $3,000 in the example. The client does not save on both the premium and get another extra $5,000 in commission.
Now, there are a couple of things to take note here. As stated in the example, the fee-based approach “can in some cases save the customer money and can in some cases save the money compared to commission-based model“. So the client must take note of the fact that with a fee-based/only approach, is the adviser only recommending certain approaches (eg, Buy Term Invest The Rest) and forgoing others? Is that the best approach and is suitable for everyone? What about the commissions for the rest of the policy years? Are they returned as well?
The calculations given for another example is quite an extreme. . The annual premium for the 10 year term is $325 while for the whole life, it is $20,400. The numbers are for a 26 year old male for a 10-year term and a whole-life policy. Surely the numbers are going to be very different. The term covers for 10 years while the whole life covers, well whole life with cash value. I quoted a popular whole life plan for a 26 year old male for $500,000 coverage for Death/TPD/CI 10 year premium term and it cost $15,600/year. I am however, unable to comment on the commission based on the percentage of the premium because I don’t track that.
The argument of Term vs Whole Life is never ending. Term gives you pure coverage for a limited time, thus the premiums are low. Whole life gives you whole life coverage with cash value, thus it cost more. Which one is more suitable depends on the client. Personally I find complimentary. However, there are people who are dead against whole life and only want term and vice visa. The product is just a tool. Different tool is use to solve different issues. There is no universal tool that can solve all issues. So at the end of the day, its different folks different strokes.
The main argument of Term vs Whole Life is actually on using Buy Term Invest The Rest (BTITR) vs Whole Life. Again, this is never ending. I find BTITR is very good theory. It is extremely hard to implement. This does not mean that it cannot be implemented. It just mean that only the minority can do it.
As newspapers need to attract readership, it has to be controversial. Readers need to have their own mind and may need to take things with a pinch of salt sometimes.