You have all probably been approached about purchasing a wonderful retirement investment that offers you tax deferral and guaranteed returns or protections against loss. Or perhaps a great way to plan for covering education costs or maybe saving on taxes using life insurance. Whether or not you looked further into the offer or perhaps even purchased one of these investments, did you really understand the terms and meaning of the offer? Did you understand the role of the insurance seller and how that affected the offer?
An adviser mentioned to me a client who purchased a complex life insurance product from a salesman who was a member at the same country club the client had joined. The client’s reasoning for the purchase: the salesman obviously was doing very well financially, driving an expensive car, living in the “best” neighborhood and so on. The adviser reminded the client the reason for the salesman doing well – sales of insurance products may result in large commissions.
Now there is nothing wrong with an insurance seller making a commission and it is the insurance company that decides how large that commission may be, not the seller. More to the point, though, the insurance seller, unlike the adviser mentioned above, owed no duty to serve the potential client’s best interests in advocating the sale. There is no requirement that the insurance seller ensure the client understands the workings of either the transaction or the product purchased; the only requirement is disclosure which may be ineffective. A client purchasing the insurance product would be locked into the contract by many years of surrender charges that protect the insurance company for the commissions they paid the insurance seller. Finally, a client may not understand that the insurance product, with its guarantees, might not really be akin to investments in stocks as the client understands them but more like a fixed income asset with expensive extras.
Clients need to understand these factors as well as how a purchase of the product in question will serve them, both in the context of their financial plan and goals as well as in various types of markets and financial situations which may arise. They likely will not get this information from the insurance seller. Of course, some insurance sellers may be able to explain how the product works and how they, the seller, may be compensated for making the sale. And the product might serve a need the client finds important. In such case, with full knowledge and understanding, a client might usefully enter into an agreement to purchase the product.