Time for RIAs to Rethink Insurance
October 26, 2018 by Michael Finke
At a recent conference of financial planners who strongly consider themselves fiduciaries, I explained the benefit of tax-favored longevity insurance using a qualified longevity annuity contract (QLAC). I even called them a “no brainer” when building a retirement income plan for a client who doesn’t have a pension.
A planner in the audience raised her hand. “I’m struggling with why I’d recommend a QLAC. I mean, I’d have $130,000 less in assets under management.”
For fee-only planners, recommending costly insurance products presents a challenge. In a recent Wall Street Journal article, two financial planners debated the merits of life insurance. One argued, “Most people are very likely to outlive their coverage, which makes their rate of return on the policy zero. In fact, they will be getting a negative rate of return.”
A negative rate of return is what insurance is all about. It’s one of the reasons that insurance is less sexy and often more difficult to explain than accumulation.
The expected return on insurance needs to be less than zero for the insurance company to stay in business (though some types of insurance can provide a positive return net of taxes). This means that buying insurance results in lower expected financial wealth.
Why would a fiduciary recommend a strategy that results in lower wealth? People want security, and wealth maximization isn’t the point of financial planning. The point is to provide expertise and guidance that helps people manage their finances to meet life goals.
We all face financial risks that can derail a carefully constructed investment plan. Failing to account for these risks as part of an investment strategy exposes the client to the possibility of financial disaster, which is a lot worse than missing out on a few basis points of return.
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