Insurance Sales - A View From The Inside

Last Updated Nov 15, 2010 10:25 AM EST

One year after writing about insurance investing and the $100,000 challenge, there are many lessons for consumers from the industry responses to the article.

A bit over a year ago, I accepted a challenge that I would invest $100K of my own money to an agent claiming:

"How about a NET return of 8% that allows you to take out the gains Tax Free for retirement income, with NO downside market risk."

The outcome of the $100K challenge was that the challenger, Brett Anderson, presented an illustration where 100 percent of the $100K could be lost. Even the actuary and director of the Minnesota Life product, recommended against his product for this challenge.

The logic
In the eyes of everyone outside the insurance industry, the possibility of losing all of your money, and the fact that the product's chief actuary recommended against it, is not exactly a close call. But for those working in insurance sales, there appears to be a different set of logic.

Reading many of the 247 comments I received on this challenge, gives one a rare glimpse inside the mind of the insurance industry. Despite all evidence to the contrary, they genuinely felt the challenge was met, and that their product did provide this eight percent return with NO downside risk.

An example
I've spent years studying these insurance investments. They are so technical that I could write a 26 volume manual on all of the tricks. But a simple example of the logic disconnect I mentioned, can be clearly seen in a statement made by the challenger, Brett Anderson, on another matter. On his web site, Anderson claims that "The odds of a couple age 65 eventually needing to pay for one typical Nursing Home stay for 2 1/2 years, is 100%!"
It's telling that I was unable to convince the agent that the statement was false. His logic for the 100 percent probability, noted in his comment #9 to my story, was as follows:

Here is a simple way of looking at the only 4 possible outcomes:
1) Each spouse needs LTC: 100% + 100% = 200%
2) Husband only needs it: 100% + 0% = 100%
3) Wife only needs it: 0% + 100% = 100%
4) Neither need it: 0% + 0% = 0%

If you add up the columns: 400% / 4 couple needs = 100% chance of 1 need per couple on average.
This is very revealing of the logic used by the insurance industry. According to this logic, if you flip a coin twice, there is a 100% chance of getting a heads (50% + 50%). But should anyone actually find this logic to be compelling, please give me a call as I have some ocean front property in Nebraska I'd like to unload. Today, this claim is still present on his web site, possibly to sell the product.

How these insurance evangelists acquire this logic
Many years ago, I held a more black and white opinion on the agents selling their wares to unsuspecting consumers. That opinion was that they were evil and laughing all the way to the bank. I have since come to believe that opinion was wrong, and the comments I received from agents on the original challenge show how wrong it was. Clearly, any con man would want this challenge to disappear into the night, which was not the case. And it's also very clear, that they firmly believe this product delivered.

Insurance companies and broker dealers teach these agents how to sell products by spreading misinformation, but making sure said misinformation is not documented.

One of the frequent commenters, who you might say didn't like me much, eventually identifies himself as a chief compliance officer, yet declined to disclose the firm he worked for. Maybe this is just me, but I think someone whose job it is to disclose shouldn't be putting out misinformation, only to decline to disclose his company's identity.

My advice
In my experience, annuity sales people think of themselves as financial evangelists who are bringing salvation to consumers. And in their minds, there is no conflict between making a bundle in commissions and helping the consumers who otherwise would have acted more foolishly with their money. Because they believe so strongly, they are very convincing when telling us we can get market returns without risk. Don't believe it!

The next insurance challenge - stay tuned
Nearly a year after this article, I've again outraged the insurance industry. On Wednesday, I'll write about the next challenge from someone claiming to be able to speak on behalf of the entire industry. While I'm at it, I'll expose a few industry tricks as well.

More on MoneyWatch
Insurance Investing and the $100,000 Challenge - The Outcome
Annuities and the $100,000 Challenge
Why So Critical on Annuities?

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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.