Roy Cranman still has not heard a clear answer to his fundamental question despite the nearly nonstop discussion about the Department of Labor’s fiduciary rule: What about life insurance?
“Everything I’ve read is focused on annuities,” said Cranman, an estate planner based in Atlanta.
Cranman uses life insurance as part of the sophisticated estate planning practice that he developed during his 38-year career.
After the DOL released its 1,023-page fiduciary rule in April, Cranman and many other agents and advisors searched for the impact on life insurance. But all he heard about was annuities.
“This is a matter of real urgency for those of us supporting life insurance sales through financial advisors,” Cranman said.
In particular, he wondered whether specialized life insurance sales would be in the crosshairs. And how the rule might affect the creative ways his clients convert their retirement assets into various vehicles.
“A very large percentage of our sales result from using qualified money,” Cranman said. “So this has a huge impact on us.”
The DOL has said its fiduciary rule will bring transparency to what it calls “complex” products such as variable annuities. But its sweeping requirements have advisors nervous about selling virtually anything.
Take life insurance, for example. Cranman works with high-net-worth clients who might use required minimum distributions (RMDs) to buy life insurance. Or who might buy life insurance out of their retirement funds for estate planning purposes.
“I don’t even know what I’ve got to do to comply,” said Cranman, an advisor with Wealth Risk Management. “That’s my problem.”
In a narrative accompanying the rule release, the DOL addressed questions regarding life insurance:
“It was not the intent of the proposal to treat as fiduciary investment advice, advice as to the purchase of health, disability, and term life insurance policies to provide benefits to plan participants or IRA owners if the policies do not have an investment component.”
The DOL did not mention permanent life insurance, a popular seller for many agents. A department spokesman did not return a phone call seeking clarification of life insurance sales under the rule.
But analysts maintain that when a life insurance sale falls within the rule’s broad parameters, then the rule will likely apply.
Exemption Might Be Required
The DOL rule targets advisors working in the retirement plan space. With the decline of pensions, many Americans are making their own nest eggs in defined contribution plans, with trillions of dollars at stake.
The DOL claims loose regulatory oversight costs investors $17 billion a year, a figure that opponents claim is baseless. However, unless plaintiffs find success in the courts — three lawsuits have been filed — the fiduciary rule will be the law of the financial land starting April 10, 2017.
Five lawsuits were initially filed, but the three suits filed in a Texas court were consolidated by a judge.
Everyone from the manufacturer to the middlemen (FMOs, IMOs) down to the agents and advisors are affected in some way. In what way depends largely on the product and licensing.
Situations where agents recommend that someone take a distribution from an IRA and purchase a life insurance policy with the proceeds will be covered under the rule, said Fred Reish, a partner at Drinker Biddle & Reath in Los Angeles.
“A recommendation to take a withdrawal from an IRA is a fiduciary recommendation, and the commission from the life insurance policy would be compensation to the agent,” he explained.
The DOL will issue guidance to clarify real-world situations such as this one, promised Phyllis Borzi, assistant secretary of labor for DOL’s Employee Benefits Security Administration, during a recent forum debate.
‘It Doesn’t Matter’
Count the American Council of Life Insurers among those who believe that any rollover or distribution from an ERISA plan or IRA is treated the same for annuities, life insurance and other products.
“It doesn’t matter what the product involved in the recommendation is — it could be an insurance policy,” said ACLI spokesman Jack Dolan in a statement. “It would be covered as ‘fiduciary advice’ under the new rule. As such, an exemption must apply in order for the advisor/agent to be paid.”
Advisors have two exemptions available to them: the Best Interest Contract Exemption and Prohibited Transaction Exemption 84-24. The former is more stringent and will be required in order to accept commissions on sales of variable and fixed indexed annuities.
PTE 84-24 applies to the purchase of non-annuity insurance contracts and fixed rate annuities, Dolan said.
Those seeking to use the exemption would be required to meet the new “impartial conduct standard,” a best-interest standard included in PTE 84-24.
When one of Cranman’s clients uses RMDs to purchase a life insurance policy, even the experts are divided on whether it triggers fiduciary status. RMDs are mandated by federal rules, usually at age 70 ½, prompting the conflicting opinions.
Some say this scenario represents a fiduciary transaction. Others say it doesn’t. Jamie Hopkins, co-director of the New York Life Center for Retirement Income at The American College, sees both sides.
“If you said, ‘Well, the RMDs were already coming out,’ that was not advice to distribute it but really just giving advice on what to do with money once it is outside of the IRA, I could see an argument that it’s not covered,” he said.
Much of the risk and liability can be avoided by subtle changes in approach, Hopkins said. Advisors will want to avoid pushing one product over another but instead present a range of options.
Framing the discussion as such means it “is not a call to action and unlikely to be advice,” Hopkins said via email. “It’s more of [a] what you could do, not what you should do situation.”
Finally, some life insurance closely mimics market-tied annuities, which can be confusing in the context of the DOL rule. For example, indexed and variable universal life are similar to FIAs and VAs.
The key is to remember that the fiduciary rule governs the sale of investments into qualified retirement accounts. So that means all life insurance that is sold into 401(k)s and purchased with plan distributions will be covered by the new rule.
In the big picture, that amounts to a small amount of life insurance sales, but agents and advisors need to be prepared.
“While not a broadly used strategy, selling life insurance to a 401(k) plan is certainly covered by the rule,” said Caleb Callahan, chief operations officer and executive vice president of ValMark Financial Group. “That one is a direct bull’s-eye in terms of what the rule covers.”
Cranman specializes in protecting clients from dying too soon or living too long. His team utilizes long-term care insurance, annuities, life insurance and other products to maximize wealth left to loved ones and minimize financial losses due to taxes and poor planning.
Servicing clients with high net worth means more complex strategies, Cranman explained, that could involve several of these products. Hence, his interest in knowing the rules inside and out.
“Until I understand what other compliance obligations are necessary for using non-RMD distributions, I’ll be very cautious with those recommendations after the regulations are (in effect),” he said.
As with many new rules, the practical application will be determined by the market, and likely the courts.
“I think this, like so many regulations,” Cranman added, “will stifle creative solutions offered by the majority of honest insurance professionals in order to prevent the misdeeds of a few.”