Avoid Life Insurance E&O Claims when Real Life Happens to Clients

Beware of what can happen when a client is forced to lower their death benefit in the first 10 years of purchasing a life insurance policy.

Selling life insurance today is not nearly as simple as it used to be.  Today there are many different types of life policies (whole, variable, universal, indexed universal, no-cash value universal, term, return of premium term, etc.).  Today there are so many features with the policies as well (variable or fixed loans, long-term care and critical- illness riders, high-cash value, springing-cash value, etc.).

Most advisors who sell life insurance think they know the basics of what they are selling to provide the best product to their clients so they don’t get sued for putting a client in the wrong product or one they don’t understand.   Unfortunately, that is not always the case.

Expenses in indexed life insurance policies

Do you know the expenses in an indexed equity life insurance policy and how they change when a client reduces the death benefit (face amount) of the policy within the first 10 years? (This e-mail will only discuss equity-indexed life insurance as that is where I’ve done my research).

When I talk about costs in a policy, I want to discuss the “costs of insurance” and the “per 1000” charges.

The costs of insurance are just that. If a client purchased a policy with a $2,000,000 death benefit, the insurance costs were based on the costs of $2,000,000 of insurance.  If a client had to reduce the death benefit to say $1,000,000 for whatever reasons (like not having the money to pay the premium), the costs of insurance would be lowered accordingly (which makes sense).

I like to define the “per 1000” charges as the “other” costs that an insurance company charges the client annually in the policy.  These costs are not insignificant.

The dirty little secret

Did you know that almost every indexed equity life policy in the marketplace has a quirk to their policies which you won’t believe and which can have catastrophic consequences when things don’t go as planned for your clients?

What quirk?  When a client needs to or is forced to reduce the premiums paid into a cash-building life insurance policy and, in turn, lowers the death benefit to reduce costs in an attempt to build the most cash in the policy, the insurance companies DO NOT lower their per 1000 charges.

It sounds harmless, but it’s not.  If a client budgets $10,000 to be paid into a cash-building indexed equity life insurance policy and does so until he/she gets disabled or is fired from his/her job, what is the client going to do with the life insurance policy?  The client will stop paying premiums because of a reduction or loss of income.  The life insurance premium will be one of the first expenses not paid while the mortgage, car, and utility payments are made (hopefully).

Let’s assume the client budgeted to pay $10,000 into the policy for 10 years and then gets disabled or loses his/her job in year three. Let’s assume the client will no longer be able to make premium payments into the policy or if premiums are paid they will be more like $1,000 a year.

What do you tell the client? Sorry, your policy will explode in the next few years and the $30,000 in premiums will evaporate?   Probably not. You’ll probably tell the client to lower the death benefit down to the lowest point possible after budgeting what if any, future premiums will be paid into the policy.  The theory is that, if the death benefit is lowered, the expenses will be lowered and the policy will still build cash and certainly won’t lapse.

What’s the problem with this thinking?  The costs of insurance will be lowered when the death benefit is lowered, but the per 1000 charges WILL NOT.  If in the above example, the client started with a $400,000 death benefit and lowered it down to say $100,000, the “costs of insurance” would be lowered to the costs for $100,000 of coverage, but the “per 1000” charges will be charged as if the client still had $400,000 coverage.

The end result will be that in a few years after the client lowers the death benefit and reduces or stops paying premiums, he/she will likely receive a letter from the insurance company telling him/her that the policy is going to lapse unless more premiums are paid.

Why do companies not lower the per 1000 charges?

I’ve been told the reasons have to do with the costs incurred by the insurance company in the early years after issuing a policy which must be recouped regardless of whether a client lowers the death benefit or not.  What costs?  Little costs like insurance agent commissions (which are usually paid up front) and taxes the insurance company pays which are based on the initial death benefit at issue.

Usually, the insurance companies spread these costs over the first 10-15 years; and if a client lowers the death benefit after that time frame, then the per 1000 charges will be lowered.

Do all equity-indexed policies have this problem?

No. When I learned of this per 1000 charge problem several years ago, I looked high and low for a policy that was more client-friendly.  I am sending this newsletter to inform readers about the new Revolutionary Life policy.  I’m proud to say that the policy has a rider thanks to my insistence (with little cost) where the client can choose to have the per 1000 charges lowered in the event the death benefit is lowered in the first 10 years.

Why am I discussing this today?

First and foremost, I wanted to put everyone on notice of the problem and the fact that there are client friendly policies in the marketplace you might want to look into.

Also, as you know, I’ve been discussing what’s wrong with the Missed Fortune 101 approach lately.  One problem with the Missed Fortune 101 sale is that the concept is being sold to those who are financially unstable.  Clients are being told life insurance is the “safest” investment (and it can be if funded as illustrated) to reposition equity stripped out of their personal residences.  That is false and misleading and can get an advisor sued.

What if a client removes $100,000 of equity from their home and repositions it in an indexed equity life insurance policy that does not lower its per 1000 charges in the event the client needs to lower the death benefit?  What if the client who has been told he/she can access the policy’s cash in a time of need and tries to do so in the first ten years of a typical policy (because of losing their job or a disability or even divorce)?

If a client doesn’t fund the policy as planned and needs to access cash in the first ten years, the client is in for a real surprise. When the client borrows money from the policy, the death benefit will be reduced; but the per 1000 charges will NOT be.  This will ultimately be the demise of the life policy if the client does not get back on his/her feet soon and is able to pay more premiums into the policy.

This scenario will make a client upset and could potentially be a lawsuit waiting to happen for the life insurance agent.

This situation could be avoided by offering the client a policy where the per 1000 charges will be lowered in the event the client is forced to stop paying premiums into the policy for financial or other reasons.


It’s important to know not only what the insurance companies want you to know about their products but also things they seem to not want you to know (or at least do not go out of their way to make you aware of).     Real life gets in the way of our client’s good intentions to fund cash value policies for wealth building; and when that happens, it is our duty to inform them how to protect themselves from adverse financial consequences.  Fully informing clients on these issues is good business and a good way to help advisors avoid E&O claims.

Roccy DeFrancesco, JD, CAPP™, CMP™

Are you a CAPP™ or MMB™?  To learn more about the CAPP™, or MMB™ certification courses and how to take your consulting to the “next level” go to www.thewpi.org.