Life insurance is the forgotten transaction in ongoing debate over the Department of Labor’s fiduciary rule.
The impact on variable and fixed indexed annuities is dominating news coverage. The stories usually note the impact on IRAs, 401(k)s, investment education, mutual funds and many other aspects of the industry.
But life insurance sales are affected as well. Some life insurance closely mimics market-tied annuities. For example, indexed and variable universal life are similar to FIAs and VAs.
The key is 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 covers a small amount of life insurance sales, but agents need to be prepared.
“While not a broadly used strategy, selling life insurance to a 401k 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 bullseye in terms of what the rule covers.”
The Department of Labor spokesman did not return a phone call seeking clarification on life insurance sales under the rule.
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."
Exemption Might be Required
Situations where agents recommend that someone take a distribution from an IRA and purchase a life insurance policy with the proceeds will also 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.
Analysts are unsure if the commission would make the above example a prohibited transaction requiring an exemption. The DOL has promised to issue guidance to cover real-world situations such as this one.
The American Council of Life Insurers is clear with its members: 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.”
Prohibited Transaction Exemption 84-24 applies to the purchase of non-annuity insurance contracts and fixed rate annuities, Dolan noted. 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.
InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]
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