Life Insurance Consumer Advocacy Center

A proposed new California law would allow life insurance agents to mislead their consumer customers by saying they have no conflicts of interest with the consumer even if the agent stands to gain many thousands of dollars if the consumer accepts the agent’s recommendation.  The same law allows agents to tell their consumer customers that they are obligated to act only in the consumer’s best interest, but in reality the agent is allowed to consider the agent’s financial interest equally to the consumer’s interest, and it is up to the agent to decide how to weigh the competing interests.

Consumers can make big mistakes when they don’t know about their agent’s conflicting interests.  For example, Kim Howlett of San Diego bought an indexed universal life insurance policy. Impressed by the agent’s sales pitch about tax-free income to fund his retirement, Howlett planned to invest $105,750 per year into the policy for the first four years totaling $423,000. He quickly found out the fees of the policy were consuming the value, culminating in the loss of his entire $105,750 investment. Howlett later learned that the agent received a first-year commission of $67,592.  That commission created a strong incentive for the agent to recommend the policy, but Howlett was unaware of the agent’s interest and could not properly evaluate the agent’s recommendation.

A new bill called SB 263 would have made California a national leader in protecting life insurance consumers.  The bill would have required agents to disclose conflicts of interest such as the commission described above.  The bill would also have required agents to consider only the interests of the consumer when making a recommendation.  New York recently adopted these protections for consumers of life insurance and annuities, but industry amendments have gutted Senate Bill 263 so that it now authorizes agents to mislead California consumers.

Although the bill requires agents to disclose conflicts of interest, it defines conflicts of interest to exclude “cash and noncash compensation.”  Yes, you read that correctly – conflicts of interest are defined to exclude cash and noncash compensation.  The bill thus excludes 99% of the conflicts of interest it purports to regulate.  The only conflict it covers is an agent’s ownership of stock in the insurance company whose product is being recommended.  Thus, an agent would have to disclose stock ownership in the recommended insurance company, but not the thousands of dollars in commissions the agent would earn if the consumer accepted the recommendation.  The bill misleads consumers into believing conflicts of interest are being disclosed when they are not being disclosed.

The bill also allows agents to tell consumers they are obligated to put the consumer’s interest first when that is not the case.

Insurance industry amendments also stripped the bill of any protections for life insurance consumers.  Although California regulators receive more than six times as many complaints about life insurance as annuities, the bill has now been amended to include only annuities.

Consumer groups were effectively excluded from negotiations over the central elements of the bill.  The result was a bill designed to suit the insurance industry, not insurance consumers.

Californians deserve better.  The bill has passed the state Senate and will soon be voted on by the state Assembly.  The Assembly should reject the bill unless it is amended to require that agents act in the best interest of the consumer and to require that agents disclose their conflicts of interest – without the Orwellian trick used in the pending bill that defines important conflicts of interest not to be conflicts of interest and thus to exempt them from required disclosure to consumers.

 

By Brian Brosnahan, president and executive director of the California-based Life Insurance Consumer Advocacy Center.