- Govt. regulations of life insurance in qualified plan
- August 8, 2013
Life insurance inside of a qualified retirement program, like any other financial tool, has certain government regulation issues and concerns to deal with before making a decision.
One thing to take into consideration is the Employee Retirement Income Security Act (ERISA) of 1974 – when life insurance or annuities are included in a qualified plan.
The U.S. Department of Labor oversees ERISA, which has contended that funding death benefits in qualified plans with permanent life insurance is a breach of fiduciary duty.
To date, the majority of cases involving the Department of Labor have dealt with highly abusive practices in plans covering large numbers of employees. Sooner or later, the department will focus its attention on smaller plans, too
The life insurance industry has a big public relations job ahead.
It cannot fall back on the ancient standard of caveat emptor – let the buyer beware. The industry must proactively set market-conduct standards and enforce them rigorously.
Mandatory commission disclosure at the point of sale would be helpful in exposing commission-driven products. As experience in the United Kingdom demonstrates, mandatory commission disclosure does not have to put agents out of business.
In the mid-1990s, British financial services regulators began requiring life companies to reveal expenses, commissions, lapse rates, and surrender value to consumers at the point of sale.
This transparency led to a more professional sale force and improved persistency. Also, it demonstrated that consumers don’t mind if agents receive commissions, but they will object to big commission numbers.
It is not always inappropriate to employ life insurance inside qualified plans, but many of these sales are inappropriate. In the right situation, with good legal and tax advice and a competent insurance advisor, it can all work out just fine.
Unfortunately, that describes a small percentage of such sales, but word is getting out. Nowadays, well-known life insurers are acknowledging that they no longer allow the use of their life insurance products inside qualified plans.
The issues discussed above still apply. Meaning, the use of life insurance inside a qualified plan usually tends to do more harm than good.
About Tony Steuer
Noted insurance author Tony Steuer has spent over 25 years in the life insurance industry. Steuer’s leadership roles include serving on the California Department of Insurance Curriculum board and the National Financial Educator's Council Curriculum Advisory Panel as well as having served as President of the San Francisco Chapter of the American Society of CLU & ChFC, President of the leading Life Insurance Producers of Northern California, and as a board member of the San Francisco Life Underwriters Association. Mr. Steuer is the author of Questions and Answers on Life Insurance: The Life Insurance Toolbook, The Questions and Answers on Life Insurance Workbook and The Questions and Answers on Disability Insurance Workbook - the first two were awarded the “Excellence in Financial Literacy (EIFLE) Award from the Institute of Financial Literacy. Steuer holds a Chartered Life Underwriter (CLU) designation and also holds the Life and Disability Insurance Analyst License, a designation that is held by less than thirty people in California.
Questions & Answers on Life Insurance by Tony Steuer, CLU, LA, CPFFE is licensed under a Creative Commons Attribution 3.0 Unported License.