Take A Load Off

When CPAs help clients select life insurance, they should be aware that its not always necessary to pay an agents commission as part of the purchase. Just as no-load mutual funds have gained popularity in the securities arena, low-load life insurance is slowly emerging as an option in this market.

With many life insurance policies, the person selling the product takes a commission that is deducted from the policys cash value; in a low-load policy, there is no commission, which offers buyers a number of clear advantages.

A HEAD START
In a low-load policy, there is less overhead being taken out of your dollar, says Robert Hunter, director of insurance at the Consumer Federation of America. He notes that when a consumer gives an insurance company $100, $10 may go to marketing costs, $10 to expenses and $10 to commissions. In a no- or low-load policy, youd have a 10% advantage right off the bat. While commissions and expenses may eat up a significant portion of premiums in the first and even second years of a policy, low-load policy costs should take a smaller bite.

Preserving the buyers investment can increase the policys earning power. A load can be a significant drain on the policys cash value in the first years, says John Buckley, director of product management and sales support at USAA , one of the companies that offers these policies. And with compound interest, more cash value up front affects the long-term value of the investment. Indeed, according to Hunter, in the first year of a policy, as much as 55% of a life insurance policy investment may go to commissions alone, not including other expenses. After 20 or 30 years, having more of that early investment building tax-free can make a tremendous difference.

In addition, Hunter notes that when youre working with a salaried representative, he or she can tell you whats best without that commission getting in the way and affecting his or her guidance. That representative is more likely to recommend what you really need, agrees Buckley. When choosing the low-load option, consider not only the lower cost of the policy but also the value of the advice you get, he says.

Low-load life insurance also can make it possible for consumers to avoid policy surrender charges. These charges, usually commissions and selling expenses, are built into policies fee structures. Permanent life insurancesuch as whole, universal or variable lifeis a long-term commitment that assumes premium payments will be made over many years. If policyholders choose to cash in policies before theyve made all payments, surrender charges can eat up much of what they have paid in. In fact, during the first years of a policy, those charges can equal the entire investment. The lack of surrender charges offers policyholders and their advisers greater flexibility, says Keith Maurer, president of Fee For Service, a low-load insurer owned by GE Capital. Without surrender charges, youre better able to create insurance programs without worrying about what will happen if the policies must be cashed in later.

Flexibility is an advantage when a policy has not lived up to expectations, as well. Since insurance company projections and illustrations may not always accurately predict long-term investment performance, low-load policies offer buyers the chance to switch companies if a policy doesnt perform well without a loss of premiums paid due to surrender charges or other costs.

CAVEATS
Cutting costs may not always be the most important factor in a decision, however. Even if a client sidesteps the commission, he or she still will face other expenses that are folded into the policy price. Hunter cautions buyers and their advisers to evaluate all of the fees and expenses in any policy to ensure it really is a good deal. Its also important to examine the insurers credentials and reliability. According to Hunter, an insurer should have the highest ratings given by companies such as A. M. Best, a leading industry rating service. Finally, avoiding a commission is less of a concern with term insurance, because the load on those policies is already so small that low-load policies offer little benefit (weve focused here on companies that offer term plus other kinds of policies). In fact, some companies outside the low-load market may charge less for term insurance if their sales volumes make lower prices possible.

THE CPAs ROLE
Despite these drawbacks, this option is a good one for many clients. Why hasnt low-load insurance become more popular? Many consumers rely on their insurance agents to help them untangle the intricacies of insurance, so they are reluctant to strike out on their own, even if it means saving money. Remember that the commission is essentially a payment for the insurance professionals knowledge and service, and may well be worth paying if the CPA or the client lacks familiarity with insurance options. CPAs who do understand this investment option, however, are in an excellent position not only to advise clients about their life insurance needs but also to educate them about this cost-cutting option. The chart on page 28 lists some of the major players in the low-load market. The companies may sell the insurance directly, through salaried representatives or through fee-only advisers. Some other companies sell directly to the public, often over the Internet or through toll-free numbers, but they may levy a commission even though no local agent is involved, so be sure to examine fees before picking a company. Choosing the best life insurance product remains a complicated puzzle, but low-load policies are an interesting new element in the equation.

ANITA DENNIS is a Journal contributing editor.