Consumers’ Education of Financial Services Products
March 30, 2011 by Sheryl J. Moore
Since entering the financial services industry twelve years ago, I have had the opportunity to regularly witness the lack of information that consumers have access to when it comes to financial services products. Back before the turn of the century, I could easily count myself among the ignorant. Today, I frequently run into friends or relatives needing thorough information on financial services products and I regularly receive emails from consumers needing assistance on these products as well.
One of the big reasons for the lack of knowledge on these products is that most Americans do not realize that you cannot buy all financial services products from a single person! YOU TRULY NEED SEVERAL FINANCIAL SERVICES PROFESSIONALS’ ASSISTANCE IN ORDER TO FULFILL ALL FINANCIAL GOALS AND NEEDS!
Here’s the deal: each type of financial services professional is only licensed and educated on a select type of products. For example, the person that sells you a Certificate of Deposit likely does not sell life insurance. Your financial planner probably does not offer annuity products. The person that sells you auto and homeowners insurance in all probability cannot sell retirement income products. Making things even more difficult: some of these financial services professionals bash one another because they are fighting to control 100% of your monies. The bottom line is that we, as consumers, need to surround ourselves with an array of financial services professionals, each specializing in their own financial services products. We cannot be influenced to avoid diversification just because two professionals don’t want to “share.”
The lack of information available to the general public on the topic of financial services scares the heck out of me. It frustrates me. It makes me feel like I need to do something more to change it. So, listen-up! I am about to give you a high-level overview of these financial services professionals and what products they may be able to offer you. I will also comment briefly on the positioning of some of these products.
Banks offer numerous types of financial services products. Most consumers are familiar with checking and savings accounts, loans, and possibly even money market accounts. However, Certificates of Deposit (CDs) are a financial services product that is frequently offered by banks, so that their members can earn interest and accumulate monies for their retirement. CDs are just one of the many alternatives for saving for your retirement. (And note that every retirement product has its pros and cons!) Many savers value that CDs are guaranteed by the Federal Deposit Insurance Corporation (FDIC). This guarantee is limited to $250,000. See here for more information on the FDIC.
There are so many different titles that financial advisors go by today, depending on how they make money and their licensing; some titles are merely used for marketing purposes. However, each title means something different and it can be intimidating to decipher what it means. Here, I am referring to securities-licensed salespeople: those that sell stocks, bonds, mutual funds, and the like. I don’t care if the financial advisor calls themselves a “wealth manager,” a “financial planner,” or a “retirement specialist”- if they sell securities, this is whom I am referring to. Securities products give you the ability to invest directly in the market and provide the opportunity for tremendous gains at the expense of also being exposed to tremendous loss. Different types of securities licenses give financial advisors the authority to sell different products. However, the most common securities products known to American consumers are stocks, bonds, mutual funds, and variable annuities. Variable annuities are yet another alternative for saving for your retirement. For more information on variable annuities, please read about them at AnnuitySpecs.com.
Property & Casualty Insurance Agents
Nearly every adult in the U.S. has automobile insurance (it is required by law in most states, in order to drive). The person who sells auto insurance is an insurance agent that is licensed to sell property and casualty (P&C) insurance. P&C insurance protects against property losses to your business, home or car and/or against legal liability that may result from injury or damage to the property of others. There are numerous types of P&C coverage in addition to auto insurance. Most people who own a home, as opposed to renting, have homeowners insurance (most banks require this coverage in exchange for a mortgage loan). Other types of P&C insurance include renters’ insurance, flood, windstorm, and umbrella policies.
Life, Health & Accident Insurance Agents
One of the most under-utilized financial services professionals is the life insurance agent. This insurance agent is typically licensed to sell life, health, and accident insurance products, depending on the states she/he does business in. On the other hand, it is not uncommon for a life, health, and accident insurance agent to specialize in either life or health and accident policies, and not actively sell all three types of insurance products.
Life insurance guards against the risk of dying early. There are many different types of life insurance, none necessarily better than the other. However, it is worth mentioning that just about everyone with assets and/or dependents should have both term and permanent cash value life insurance. Less than 2% of all term life policies result in a claim and the majority of term policies expire prior to death. In order to avoid problems with qualifying for permanent cash value life insurance at an older age, it is suggested that permanent insurance coverage be purchased early-on (as premiums are based on your attained age, and therefore lower when you are younger). For more information on the many different types of life insurance, please read about them at LifeSpecs.com.
Another type of life insurance product that these agents sell is annuities. An annuity is merely a contract where an individual agrees to pay premiums to an insurance company and receives in exchange, a regular stream of income payments from the issuer- either now or at some time in the future. In short, an annuity is easiest explained as “the opposite of life insurance.” Where life insurance guards against the risk of dying early, annuities guard against the risk of living too long. An annuity is the only financial services product that can guarantee you an income for the rest of your life, no matter how long you live.
There are three questions that must be answered, when looking into what type of annuity is right for you:
1. What level of market risk am I willing to assume with the annuity?
a. If more concerned about a high minimum guarantee, regardless of the lower level of interest accumulation, consider a fixed annuity.
b. If willing to accept a lower minimum guarantee than a fixed annuity, but looking for potentially greater interest accumulation, consider an indexed annuity.
c. If willing to accept no minimum guarantee, in exchange for the possibility of unlimited interest accumulation, consider a variable annuity.
2. How soon will I be taking income?
a. If within the first year, consider an immediate annuity (offered in fixed, indexed, and variable types).
b. If it is further in the future, consider a deferred annuity (offered in fixed, indexed, and variable types).
3. How many premium payments will I be making?
a. If only a single payment, consider a single premium immediate annuity or a single premium deferred annuity.
b. If making more than one payment, consider a flexible premium deferred annuity.
You’ll notice that I mentioned variable annuities in the section about Financial Advisors, but did not expound on them. That is because variable annuities are a securities product, where you can potentially lose your gains and even the money you paid into the contract. As such, these products are sold by Financial Advisors. Fixed and indexed annuities on the other hand, are considered insurance products. They provide a minimum guarantee and will return no less than the premiums paid plus interest at the end of the term, worst-case scenario. For more information on fixed and indexed annuities, and how they differ, please read about them at AnnuitySpecs.com. Many savers value that fixed and indexed annuities are guaranteed by the National Organization of Life and Health Insurance Guaranty Associations (NOLGHA). This guarantee is also limited to $250,000. See here for more information on the NOLGHA.
Most Americans have some form of health insurance for themselves or their children. However, not everyone pays for this health insurance and some only pay a portion of their premiums while their employer pays the balance. If you are one of the folks that do not have employer-sponsored health insurance and have to purchase and pay for health insurance on your own, you have a health insurance agent. This insurance agent likely sells dental insurance as well as the broad spectrum of insurance products that are available under the ‘accident’ umbrella (disability, sickness, and unemployment insurance).
Note: it behooves the consumer to understand the many different distribution channels that financial services products are sold through. Although that topic is too broad of a scope for our conversation here, I’d like to communicate the difference in two channels specifically. This example will highlight a major difference that can have a dramatic impact on the products that are available to you, as an insurance consumer.
Career insurance agents (sometimes referred to as “captive” agents) are generally employees of the insurance company that they are licensed to do business with. With few exceptions, career agents can only sell the insurance products offered by the one insurance company that employs them. By contrast, independent insurance agents are not employees of the insurance company and often are licensed to do business with dozens of insurance companies. Next time you think you are purchasing the most competitive product to fit your needs, you may want to consider this topic. This is not to say that career agents’ product options are not competitive, but it does mean that the career agent may not necessarily have the option to sell you the most competitive product, much less even be aware of its’ existence.
Why am I taking it upon myself to educate you on these matters? Many will speculate that it is so I can sell you insurance. Wrong. I have long been a licensed insurance agent, but I have never contracted with an insurance company or marketing group, which would allow me to sell these products. In fact, I spend tens of thousands of dollars on insurance every year and another insurance agent actually sells it to me. (Yes, I am forgoing lots of commissions by doing this, but I am my agent’s best client- all he has to do is show-up and sign the paperwork that I’ve completed!) I may not use my insurance license to sell, but it comes in handy in my responsibilities as an insurance expert who runs a third-party market research firm. I do not endorse any company or financial product. I am, however, admittedly a huge fan of indexed life and indexed annuity products. Why?
At the turn of the century, I was employed by a large insurance company that gave me the option of enrolling in a 401(k) for my retirement savings plan. What is a 401(k)? I didn’t know. I just knew that my employer endorsed it and was willing to match my contributions up to 4%; plus everyone I worked with was doing it. No one ever explained to me that you can lose money in a 401(k) or even that there were alternatives to 401(k)s for your retirement savings efforts. As a young single mother of three babies, that information would have been invaluable to me. Sadly, I had to learn the hard way when my 401(k) turned into a 201(k) after the tech bubble burst at the turn of the century. I lost ALOT of money in my 401(k) that year; thousands. When expressing how unhappy, unsecure, and uncertain I was with my retirement plan in light of these developments, my boss offered-up, “Why didn’t you buy an indexed annuity?”
I asked what an annuity was. He explained that it was a retirement savings vehicle that would guarantee me a paycheck for life. What was an indexed annuity, I wondered? An annuity that would promise no less than 0% interest credited and offer the opportunity to earn limited gains based on the performance of a stock market index, such as the S&P 500. No risk of loss as a result of market downturn? My boss was talking my language! “Just where can I buy one of these indexed annuities,” I queried.
“Our employer is the #1 seller of indexed annuities in the nation.” he answered. I was angry and hurt. Why would my employer shove the 401(k) down my throat when obviously the indexed annuity was more-aligned with my risk tolerance? To that- I had no answer. When I asked my friends, neighbors, and colleagues if they’d heard of a retirement product where they couldn’t lose money as a result of market downturn, while preserving the opportunity to earn limited gains based on the market’s growth, no one had heard of indexed annuities. What kind of world would educate their consumers on only one option for retirement savings?
The rest, my friends, is history. I did what any other self-respecting single mother would do. I cashed out my 401(k) and started this company. My mission: to spread the word about indexed insurance products, so that nobody would ever has to go through the same experience that I had. I intend to ensure that every American consumer know that they have choices when it comes to their life insurance and retirement needs. Seven years later, we’re still in business and serving as a resource to millions. I’d say we’re not doing half-bad in that endeavor!
Thank you for taking the time to learn. Good luck in your quest to purchase financial services product purchases! If all else fails, ask questions. Ultimately, YOU are in charge of your financial future. sjm