Insurance Plans with Investment Options

Insurance companies are overseen and regulated by the National Association of Insurance Commissioners (NAIC) and the Department of Financial Services of each state. The federal government is not involved in overseeing insurance companies. The principal reason for supervising insurance companies is to guarantee solvency of the company in order that it may fulfill its purpose, to meet the terms of the contract in event of loss.  In the United States regulation has grown to include protection of the public. 

Insurance is less than straight forward and is, in fact, quite convoluted.  Although it is still possible to find a simple term life insurance policy, agents would prefer to sell whole life bundled with some type of investment product.  This is where the waters begin to become muddied.  In many cases, buyers of these products are sold on the opportunity for gain without fully understanding the equal opportunity of loss through risk of assets.  This is also where the profits of the insurance company are greatly increased. 

Actually, whether this is a benefit to the purchaser or not depends upon the reason it is being purchased.  In truth, most people cannot make heads or tails of the lengthy explanations and riders attached to insurance policies and instead, they trust the insurance agent to provide them with an explanation.  Today, there are rules attached to the sale of insurance products to seniors due to misleading statements made in the past that resulted in someone buying a product that was better for the agent’s pocket than the purchaser’s purpose.

Financial advisors will often recommend that investment products and insurance are best purchased separately rather than bundled.  In today’s volatile market, that is probably truer than ever.  Insurance agents will recommend the bundled product as that is where the commission is usually highest and often, front end loaded; meaning that there may be the equivalent of a bonus paid over the course of the first year’s premiums.  Incentive for the agent to service the product beyond the first year is decreased with these plans.

Bundling a package of services from an insurance company to obtain a discount; i.e. auto and home insurance from one provider, is generally beneficial to both the insurance company and the consumer.  Bundling to hide huge profits and/or commission is only beneficial to the insurance company.

Ideally, it would be helpful to be able to read the policy and its attachments and understand it without the need for an intermediary, whether agent or financial advisor.  Often the language is legal-eze that is impossible for all except lawyers to fully understand.  That would be a great start!  Next would be unbundling the products except where it was mutually beneficial to both the purchaser and the insurance company.  In other words, less regulation might be needed if there were simplification of the product.