Crashing Through the Insurance Industry’s Wall of Silence

By Bob Veres
March 11, 2014

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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.

A unique and unusual insurance agent

“We have built an industry that aspires to develop trusting relationships,” points out Brian Fechtel of Breadwinner’s Insurance in Larchmont, NY.  “And yet the first principle of the industry is that we can’t provide the disclosure that consumers should have in order to know what they’re buying.  How many policyholders realize that over the first 20 years of a typical policy, the sales costs amount to twice the total claims and administration costs?”

Fechtel is a rare insurance agent who also happens to have an economics degree from Georgetown University and holds the CFA designation.  His approach to evaluating policies is far more analytical than the guy who persistently cold calls your clients about the benefits of equity-indexed annuities.  In his spare time, when he’s not helping his clients find term and cash-value life coverage, Fechtel is deconstructing the undisclosed internal expenses of the insurance products that are sold in the marketplace.

His goal: to break the insurance industry’s century-old code of omerta regarding fees, commissions, policy and insurance costs.   Fechtel wants to bring transparency to the buying decisions of cash-value life customers.

How?  His analytical process starts with policy illustrations.  Whenever you shop for whole, variable or universal life insurance with an agent, you’ll be shown a ledger full of numbers, not unlike a spreadsheet, illustrating the annual premiums that the policyholder would pay each year, plus the death benefit and projected cash surrender value of the policy each year into the future.  This illustration will be based on a fully-disclosed assumed annual rate of return, which is often called the crediting rate.  Within certain parameters, this entirely-hypothetical investment return can be dialed up or down – a trick which can make some policies look a lot better than others when the agent is sitting down with a prospect at the kitchen table.

Over the years, Fechtel has compared these figures with actual in-force ledgers – that is, with annual disclosures of how the policies have actually performed since they were purchased.  As you look over his shoulder, you begin to see why insurance companies are less-than-forthcoming about their product costs and performance.

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