Here’s how advisors can recommend a life insurance policy in their client’s best interest

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Financial advisors have another “best interest” rule around the corner: This regulation applies to life insurance and annuity recommendations.

New York is rolling out a regulation that will require financial advisors to place their clients’ interests above their own when they’re making recommendations around proposed or in-force insurance contracts.

Insurance sales are regulated at the state level, so this rule will apply to transactions taking place in the Empire State.

It will apply to annuity recommendations as of August 2019, and it will cover life insurance transactions as of February 2020.

“It’s the gold standard,” said Birny Birnbaum, executive director of the Center for Economic Justice.

“It defines ‘best interest’ in putting the consumer first and without regard to the financial interest of the agent making the recommendation,” he said.

While the regulation applies in New York, advisors said that it establishes best practices for advisors who are recommending life insurance and annuities, regardless of where they are based.

“You are, in many respects, a lot more up on the techniques, issues and implications of a particular product,” said Marc Minker, a tax practice leader for the New York office at CBIZ.

“You know the questions to ask,” he said, speaking to a group of advisors and CPAs at the American Institute of CPAs annual conference in Las Vegas. “The clients don’t.

“They turn to you to suss out a lot of this information,” Minker added.

Gathering data

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According to the New York regulation, an advisor is acting in the best interest when the recommendation is based on an evaluation of the client’s suitability information — including their age, annual income, financial objectives, existing assets and risk tolerance.

The advisor’s recommendation must reflect the care, skill, prudence and diligence that a prudent person would use under those circumstances, according to the New York rule.

Advisors can still receive commissions for their annuity and life insurance sales, provided the payment doesn’t influence the recommendation, according to the rule.

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The regulation would also apply to captive agents who represent only one insurance company.

In this case, the agent would have to disclose to the consumer in writing the limitations in the range of the policies she can recommend.

To streamline the regulatory requirements, Susan Bruno, CPA and founder of Beacon Wealth Consulting South, worked with insurance research firm Veralytic to build a checklist to ensure advisors comply with the New York rule.

See below for the checklist:

Work to be done

Some industry observers say that New York’s regulation doesn’t go far enough to better inform policyholders.

For instance, insurers don’t clearly define the dividend interest rate paid to the cash value of a whole life insurance policy, said Glenn Daily, a certified financial planner and fee-only insurance consultant in New York.

“If you hear one company’s dividend interest rate is 5% and another company has a rate of 5.85%, can you conclude that the second company’s rate is better than the first?” he asked.

“No, because there is no consistent definition and companies use it to mean different things,” he said.

Sometimes that quoted dividend rate is net of capital charges, and other times it isn’t, Daily said.

Regulators could also make the insurance marketplace more consumer-friendly by calling on insurers to make publicly available a list of their pricing changes to policies, he said.

Not just the illustrations

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Insurance companies use a set of assumptions, including crediting rates and internal expenses, when they first illustrate the expected performance of a life insurance policy.

When making an insurance recommendation, advisors should view this so-called policy illustration as only one component of their due diligence.

Instead of relying on the illustration, make sure to ask for the detailed expense pages, which show the annual cost of insurance, policy charges and more.

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“Most illustrations we’re now told you can’t rely on, but the expense pages give you some insight into what’s going on in the industry,” Bruno said.

Further, if your client has an in-force policy, it’s best to run an in-force illustration to ensure the contract is performing as expected.

“Compare the in-force to the as-sold illustration every single year,” she said. “You have to understand when the policy isn’t doing what it’s supposed to do.”

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