Is low-load life insurance rigth for your client?
When CPAs help clients select life insurance, they should be aware that it's not always necessary to pay an agent's 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 policy's 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, you'd 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 buyer's investment can increase the policy's earning power. "A load can be a significant drain on the policy's 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 you're working with a salaried representative, he or she can tell you what's 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 insurance--such as whole, universal or variable life--is...