The Life Insurance Agent

In a general sense, life insurance regulation is administered under state law. This includes regulating the activity of life insurance agents.

One exception is the governance of variable life policies, which contain marketable securities. In this instance, federal agencies such as the Securities and Exchange Commission and the National Association of Securites Dealers have equal and sometimes primary jurisdiction depending upon the severity of the situation.

Life insurance presents a special problem with terminology. For example, the terms agent and broker are frequently interchanged when defining the role of someone who solicits the sale of life policies.

In the legal sense, an agent is someone who represents the insurance company, while the broker represents the applicant. But, for all practical purposes both actively solicit life insurance policies on behalf of one or more insurance companies.

Years ago, life policies were relatively simple in structure. A term policy is less expensive than whole life and it expires without value at some future point in time.

On the other hand, whole life costs more but continues in force as long as the premium is paid in a timely manner. In addition, the whole life policy accrues cash value that is paid upon surrender or when initiating a policy loan.

Today, there are numerous policy types and many of them are very hard for the applicant to understand. Indeed, many agents and brokers themselves don't completely understand some policy types. And, therein lies the rub!

There is a degree of larceny and misrepresentation in all industries, but it should be noted that this does not generally appear to be a major problem with the life insurance profession.

Nevertheless, there are frequent examples when life products are sold improperly and with lack of diligence on the part of the agent and/or broker.

State regulations ensure that agents are properly licensed and comply with ongoing continuing education requirements. And, such issues as inappropriate policy replacement are constantly on the forefront.

Federal regulators pay special attention to money laundering, which is more prominent in the insurance industry than one would expect. In addition, privacy issues are an increasing problem.

Another issue concerns the perceived guarantees of universal life. When this product was introduced over 20 years ago, it was backed by long-term mortgages and treasury notes. This provided a sense of security to the policyowner.

When junk bonds became the rage, one insurance company actually went bankrupt because it used them in an attempt to provide higher so-called guarantees. When the tide turned... the bottom disappeared and so did the guarantees.

A new breed of universal life provides what is referred to as a secondary guarantee. The death benefit is to be paid even if the account cash value drops to zero.

This is interesting because without having the cash reserve (in part funded by the account cash value) back up the death benefit guarantee... how will the life company pay future death claims without raising premiums?

The language of the contract (policy) together with the financial strength of the company will dictate the long-term availability of the death proceeds.

Most life agents and brokers don't appreciate the risk they assume on behalf of their clients. They either don't fully explain the situation to their client because they don't understand it themselves... or they are simply too anxious to make the sale.

The bigger problem lately has been in the solicitation of variable products - those that rely on market performance to survive. These types of policies are expensive and frequently don't provide appropriate value when compared with alternatives.

As with any stock investment plan, when the market booms everything looks wonderful. But, when the market goes down (sometimes quickly and deeply)... well, this is another story.

It is not unusual to see a legal case cited wherein the variable product was inappropriately sold to a senior aged individual. Market dips can devastate this type of person's policy with little time left and limited opportunity to recover.

Other cases include selling the variable product as a retirement supplement because the cash value grows on a tax-free basis. What the clients aren't told (that is, until their case goes to arbitration) is that internal policy management fees have jeopardized any gains in their account.

The vast majority of agents and brokers are honest, hard-working individuals, who put their client's best interest first.

Unfortunately, those few bad apples in the bunch can slander the good name of those who operate in a professional manner. There are bad people in every line of work, so be careful of those who appear to push you towards signing your name on an application.

Ask for names of other clients and call them to find out if they are happy working with the agent. Look to see if the agent has professional designations such as CLU (Chartered Life Underwriter) or ChFC (Chartered Financial Consultant). These two designations base their curriculum on a thorough understanding of life insurance.

Agents are licensed by the state and appointed by general agents of life insurance companies with permission to operate out of the agency location. Brokers are licensed by the state and appointed by those companies they wish to represent. Their office is typically not within a general agency.

If you encounter serious difficulty with someone soliciting life insurance and you feel inclined to report the situation to an authority, contact the local office of the insurance company itself, as well as the insurance commissioner in your state.