Things are Heating Up with the Next Generation… of No-Load Life Insurance!

Posted by Michael Kitces on Thursday, June 26th, 7:50 pm, 2008 in Insurance

For many years, the no-load space for life insurance products has been very limited, to a large extent because fee-based advisors were perceived as being a very weak target market by the traditional insurance companies. However, a new entrant to this marketplace is raising the stakes on the pricing and transparency of permanent life insurance, and is starting to get some attention as a result!

For no-load life insurance, the most appealing new product on the market is actually from a very old company - TIAA-CREF. Their no-load permanent life insurance product, marketed under the name "Intelligent Life", was designed with significant input from the highly reputable industry veteran Ben Baldwin, Jr. (author of the New Life Insurance Investment Advisor).

The contract offers one of the most transparent and straightforward pricing structures of any permanent life insurance product on the market, with just four basic charges for policyowners: state premium taxes (but only for the exact premium tax applicable in the policyowner's state); a monthly policy fee (waived if the policy is issued on someone over the age of 18), cost-of-insurance charges based on current age, and a mortality and expense (M&E) risk charge that starts at 0.95% and drops down to only 0.35% as the cash value rises. (Separate charges still apply for the underlying operating expenses of the sub-account investment options.)

Of course, being a no-load product, the expense structure does not directly incorporate any commissions, and consequently is fully liquid with no surrender charges at any point. Beyond the lack of commissions, though, the policy's clear pricing structure, built on Baldwin's professed philosophy of "Don't nick me [for the small charges hidden throughout most other insurance policies]" results in a permanent policy that is remarkably easy to understand and explain (unlike virtually any other product in this market!). And the bottom line costs to the client are so appealingly low, that advisors are starting to view this not only as a viable option for a 1035 exchange from an existing policy with another company (to "rescue" a policy from more expense insurance policies), but as a primary tool up front for clients who need permanent insurance. It seems that TIAA-CREF is starting to prove that the fee-based advisor marketplace can be a viable distribution channel for life insurance after all!

On the other hand, TIAA-CREF's early successes with the fee-based advisor marketplace may also be because the company realized that fee-based advisors appreciate being compensated, too, in their own way - and consequently, the company is able to sweep investment advisory fees attributable to managing the cash value directly from the contract. However, the tax consequences of this aren't quite perfect. It appears that TIAA-CREF cannot directly extract advisory costs as an expense from the contract and pay it directly to the advisor from the company, the way that advisors are normally compensated with load-based life insurance policies. Instead, TIAA-CREF processes the advisory fee as a withdrawal-from-basis for this universal-life-based policy; as a result, the advisory fee payment does not cause a taxable event to the client at payment and there is no Form 1099 issued. However, this withdrawal does stillrepresent a withdrawal from basis, and consequently the company will adjust the cost basis recorded for the policy. If the policy is held until it matures as a death benefit for a beneficiary, the cost basis adjustment is a moot point. However, if the policy is ultimately surrendered or simply lapses, the reduced cost basis (due to the advisory fee withdrawals) will potentially result in a larger tax gain for the gain. In addition, tax consequences for the advisory fee may accrue along the way, if the policy is a Modified Endowment Contract (MEC) or the advisory fees withdrawn eventually exceed the aggregate cost basis of the policy (although this seems somewhat less likely). Ironically, it appears that our regulatory structure effectively makes it impossible for a company like TIAA-CREF to extract an advisory fee from a policy to pay to a fee-based advisor without any cost basis adjustment or other tax event, notwithstanding that it is a standard structure for load-based policies, leading to a small indirect tax benefit for some clients using advisors in favor of load-based policies. Ultimately, whether that distinction is important enough to undermine the desirability of the Intelligent Life product will depend on the client situation, and particularly on whether the policy is being used for accumulation purposes or to mature into a death benefit payment for a beneficiary.

Beyond traditional permanent insurance needs, the policy is so clear and flexible and liquid that some advisors are event considering using it as a place to deposit a modest lump sum for the client (for those who have the financial wherewithal to do so), simply to allow the interest to accumulate and be used to pay for the cost of insurance charges each year. Think of it as a way to purchase annually renewable term insurance (although you can lock in a 10-year fixed term cost under the policy if you wish) by having the term insurance premiums deducted, on a tax-free basis, from the interest growth on your deposit into the policy. And when you decide you don't want the "term" policy anymore, simply surrender the policy and receive a full distribution of your accumulated cash value without any surrender charges; on the other hand, if it turns out that you do need the policy for longer than the original term time horizon, you have a permanent policy that can be maintained and receive additional deposits as necessary, without the hassles and hazards of seeking out a term conversion. On the other hand, if the advisor is extracting advisory fees for the management of this asset, then per the discussion above the advisor may need to be cautious about indirectly causing a larger tax gain for the client when the policy is surrendered in the future. In this case, the planner might even consider advising the client to not have the advisory fees extracted from the policy, to avoid this indirect-taxable-as-ordinary-income treatment of the fee.

The only caveat to this new offering? (Besides the advisory fee issue, there had to be another big caveat, right?) Watch out for adminstrative hassles. TIAA-CREF doesn't exactly have the best reputation for beinga company that's easy for outside advisors to work with administratively. The word on the street is that thus far the underwriting and application processing department for the company has been... less than optimal... in their efficiency in underwriting applications, dealing with problems, and for that matter not causing problems through processing errors. So for advisors that are thinking of going down this road, be prepared for the possibility of some administrative speed bumps along the way. On the plus side, though, the support team at TIAA-CREF is preparedt o take charge of every step along hte way (their regional vice presidents are trained and licensed in the insurance business to help work directly with your clients), truly minimizing the amount of time that the advisor must spend on the application and underwriting process. Hopefully, with time, TIAA-CREF will get better at delivering on this promise with a level of service standards that many advisors are accustomed to when dealing with other vendors and channels.

In any event, the TIAA-CREF Intelligent Life product is one to watch. At the least, it's a notable new offering in the life insurance space, particularly for fee-based advisors looking for a quality no-load product to address client life insurance challenges. However, there's also a possibility that TIAA-CREF is blazing a new trail for the life insurance industry as a whole, putting forth a permanent life insurance policy where every cost and charge is transparent, fully disclosed, and clearly conveyed to the potential buyer. It's a shocking concept, I know.

For more information, you can contact TIAA-CREF directly at advisorinsurance@tiaa-cref.org.


  • jim schwartz

    Michael – seeing that I got Bradford Life in 1980 to then introduce the first no load – low load – to the yelling and screaming of the industry, the progress of unbundled life insurance over the years – despite the efforts of Ameritas etc.

    What I find interesting is the old adage – first an idea is ignored, then ridiculed and then accepted – especially by those who ridiculed or diminished it in the first place.

    I find Baldwin’s conversion heartening after 25+ years…

    You might find this of interest. In Colorado, for example, the then State Insurance Omissioner temporarily got rid of no loads by giving the edict that one could not charge a fee in excess of the commission. So 0% commission – $0 fee. When exposed in the local newspapers by myself – he retreated behind his spokesperson and reversed himself. When he left office, he went to work for Great West Life which then introduced a no load product…

    The incestuous relationship between commissioners and the companies they regulate, and the pattern of ignore, ridicule and then take credit – may be breaking down – but if you look at Europe – no loads/low loads are a much higher percentage of the market.

    Thus, once again the life industry and its minyons create structural barriers to trade – reinforced by privilege of McCarren Ferguson.

    Semper Fido

    jim schwartz
    co founder NAPFA (from which he resigned!)
    retired fee only financial planner
    author of Enough
    author of forthcoming book on Amazon: Trust Me: I’m Not A Veterinarian!

  • http://www.FoxCollegeFunding.com Deborah Fox

    I have found the flat fee ($20 per month) Jefferson National Monument Advisor to be an excellent no-load option. The contract provides a good choice of investment options along with good customer service. Monument Advisor offers over 165+ underlying fund options managed by more than 20+ independent fund families.

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