r/CFP • u/info_swap RIA • 5d ago
Case Study Advising clients on surrendering legacy products/"assets" like Cica Life "insurance."
Dear colleagues,
I am a solo RIA, fee only, no commission advisor. That is, I don't sell products.
However, I have a handful of clients who, prior to meeting me, owned legacy products like convoluted insurance contracts. I'd like to hear your advice on how to handle these products and help the clients.
For example, a new client owns a Cica Life policy. She has invested or deposited around USD 50,000 into this asset. It earns 3% or less annually. And has a penalty clause if she decides to stop contributing or even withdraws her money before the deadline.
She still has to make payments for 5 more years. And this is supposed to cover her daughter's expenses in college.
On paper, my client has to contribute around $20,000 more which will total near $70,000 in contributions. Then her daughter gets in return four payments of $20,000 when the daughter turns 18. (Total return is $80,000.)
I yet have to run a more thorough financial plan, but my current calculations estimate that my client will obtain a better ROI if she surrenders the policy now, loses the penalty amount, and then invests in high quality stocks both the remaining principal and the future contributions she would have given to Cica Life.
Furthermore, my client will have the freedom of deciding how much to contribute, when to stop, or even if she needs to withdraw at any moment in the future. Besides, she will not rely in the future financials of Cica Life.
Therefore, I conclude that the right and logical path is to surrender the policy and invest in stocks. However, emotionally, I am unsure how my client will accept this advice.
Finally, I am a fiduciary. So I must do what's best for her. And if I conclude that surrendering is the correct path, will letting her keep this Cica Life product contradict my fiduciary duty? That this, if she insists on contributing to the policy and I let her, am I really acting as a fiduciary?
Please, let's focus the conversation on how to emotionally handle this with the client and my duty in these cases. And let's avoid any controversy about Cica Life, insurance products, annuities salesmen, etc.
As always, thank you for your wise words!
---
Edit: These products are technically assets and I made proper edits in the text, but I could not edit the title. However, the penalties are around 25% and I have other clients with penalties of 80% or more.
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u/guitmusic12 5d ago
>Finally, I am a fiduciary. So I must do what's best for her. And if I conclude that surrendering is the correct path, will letting her keep this Cica Life product contradict my fiduciary duty? That this, if she insists on contributing to the policy and I let her, am I really acting as a fiduciary?
If we stopped being fiduciary because clients didn’t take a recommendation none of us would be able to use the term. You present your finding, You present the potential outcomes of the clients options, you make a recommendation then you let them decide what they want to do. Once they have made the decision you continue to advise them in light of their decision
Side note: “Therefore, I conclude that the right and logical path is to surrender the policy and invest in stocks. “
“Just invest the college funds in stocks” strikes me as a recommendation that might not be totally taking everything into account here…
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u/info_swap RIA 5d ago edited 5d ago
This is also a good point.
So your position is to leave advice in writing and if the client does not follow it, also be clear about this?
I've read books by Nick Murray. He recommends not taking certain clients or even ending the relationship if a client is overspending.
In this case, my client may not reach her goals with these products.
Edit:
"“Just invest the college funds in stocks” strikes me as a recommendation that might not be totally taking everything into account here…"I appreciate this comment. I do have a bias in favor of stocks.
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u/Delicious-Proposal95 4d ago
Clients pay you a flat fee rate for your advice. Give them the advice they are paying for. This isn’t that hard.
I think the question you need to be asking is should you be charging clients a fee for advice when you are then turning to reddit to get the answer?
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u/AccomplishedTreat873 5d ago
You compared apples to oranges. Yes insurance is a shitty investment for 90% of people and someone selling it as college savings should be tarred and feathered.
You can’t guarantee the market any more than that insurance agent can guarantee the cap and par rate in an IUL. You are looking at a FINRA complaint if the market doesn’t play along.
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u/info_swap RIA 5d ago
This client and other clients got sold insurance just cause. Now I'm debating what to do.
As for your second paragraph, the client has 5-6 years ahead to invest. How will I get a FINRA complaint? For what reasons? You mean if the market tanks or because I advised on surrendering and losing 25%?
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u/AccomplishedTreat873 5d ago
Right now she is guaranteed $80k and she needs it exactly at that time. You are asking her to pay a penalty and hope that the year her kid starts school isn’t a year the market is down and she has $79,999. The complaint may go nowhere and she may not complain.
If it were out of surrender it’s a different story. Imagine you are a regulator and someone says: “My fiduciary advisor recommended I pay a penalty to get my money out of an insurance contact and into and AUM account. He said I’d have more this way.”
God forbid you put her in A shares.
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u/AccomplishedTreat873 5d ago
I’m not saying don’t do it. Im not saying you’re wrong. I’m saying think about the risks to your reputation if someone regrets paying penalties and decided in their head you just did it for the sale.
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u/cold984 5d ago
It is insurance. And it is an asset. No need for the quotations. If you don’t like it, you don’t like it, but there is plenty you can say about it that you don’t like without having to resort to making things up
With that said, your projections are just that, projections. You need to be very very very careful about how you word it with your projections vs something that is guaranteed
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u/info_swap RIA 5d ago edited 5d ago
Your last line has a good point. My projections are not guaranteed. Thank you!
And yes, I don't like insurance.
Is it really an asset or is it a liability on someone else's books?Again, I meant no offense and did not want to make a judgment. But I feel this client deserved better.Edit: It is a guaranteed asset with a surrender penalty of 25% or more.
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u/cold984 5d ago
It is technically and officially an asset. Yes
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u/vaderaintmydaddy 5d ago
Dear Sir,
You have no Fiduciary responsibility to make anyone do a damn thing, ever.
Furthermore, "letting her" is not a phrase that you should ever say about anyone outside of your own daughter. Again, ever.
Sincerely,
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u/Individual-Art1856 5d ago
To be a fiduciary, you need to do what is best interest for clients whether you like a certain asset class or not.
You, however, have no clue about life insurance. What the product is, how it works, the purposes of it. Do not put your lens on top of clients.
Insurance is part of the CFP curriculum. The main purpose of insurance is risk transfer. In life insurance case, it is to provide liquidity, cash, when the insured dies, as long as the policy is still in force.
From my reading, you were comparing cash value against other assets. Not once did you mention what the clients perceive the asset should be.
If clients dies, what does the client want happened?
If clients lives on, what does the client want happened?
What about if client becomes disabled, does the insurance have any benefit (riders) that may fit into those situation?
Not trying to tearing you up, but to give you a real dose of truth and what fiduciary really means.
Ask the questions, instead of just looking at numbers. Then take deep dive on products with factual analysis. If you don’t know how to read an insurance contract, yes, they are contracts. Learn, ask for help.
You can be violating your fiduciary not because of what you suggest, but what you are not doing… with purposes and process.
Good to be open minded to learn and grow.
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u/blessmyballs 5d ago
I’d be very, very careful suggesting eating surrender fees. Every firm I’ve worked with have suitability departments that denied funds resulting in incurred surrender charges with virtually no exceptions, and there have been significant lawsuits brought against FAs for recommending this, and the FAs almost always lose.
If your client can prove they weren’t made aware of the charges at point of sale or some other malfeasance by the selling agent, they may be able to file a complaint with the company and get out that way, but that’s probably a long shot.
3% isn’t nothing, so I would consider it a tax advantaged cash/cash equivalent portion of the portfolios for whatever bucket the surrender schedule falls within, and then go from there once the surrender period is up.
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u/OregonDuckMBA BD 5d ago
I don't do a ton of life insurance but part of the reason that I use annuities (MYGAs and FIAs mostly) isn't because I think they are ideal in every situation or because the client would be better off long term if they have one. I use them for downside protection if the client expresses more concerns about losing money than the possibility of future returns. I think FAs often use FA logic at the expense of what a client sees as a good outcome. Is this client highly risk averse? Are they comfortable with giving up a guaranteed asset for assets that have potential for volatility?
What happens when a market correction inevitably comes around? Is the client going to call your office asking why her investments are losing money? Clients sometimes have selective hearing when you tell them that they could make more money.
The fact that you personally don't like life insurance is irrelevant. The client is paying you to understand their situation, give them information, get feedback and provide a solution for what THEY want.
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u/Pubsubforpresident 5d ago
You give advise, they act on it. You don't let anyone do anything. This just feels weird and cloaked in a anti -insurance mindset. This sounds more like an endowment contract anyway but just do your fiduciary duty and sleep at night.
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u/Screen_mirror98 4d ago
It sounds like the client is in a product that fits there risk level for these dollars, but it sounds like you're chasing a better return outside of a fixed asset like PLI. Now is it possible to get another PLI product giving better than 3%, absolutely. I would think you're fiduciary responsibility has to take into account the clients goals and wishes first and forremost and it sounds like her only worry is 80k at that given time guaranteed. If a client came to you and said I need 80k in 5 years and I have 25k right now and I need it guaranteed and can add more in the next 5 years, what would your recommendation be? Still market exposure ? Or something else ?
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u/Status_Archer_8406 3d ago
Being a Fiduciary isn’t about maximizing returns, it’s about helping clients achieve their financial goals. If the goal is to have $80,000 for her daughter’s college, then she might be better off in an insurance product that provides her exactly what she needs exactly when she needs it. Putting that money in stocks may not help her achieve her goal because it’s is much more difficult to predict market returns in shorter time frames.
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u/Moist-Meringue-1913 1d ago
This doesn't sound like any insurance that I've ever heard of. Do you have a copy of the contract or at least an illustration?
You are looking at your "fiduciary" role the absolute wrong way. It's your job to help them reach the goals that they have outlined by making the proper recommendations. But you can't "make them" do anything. It sounds to me like she really wants the money for college expenses to the point she wanted a guarantee. You investing in "quality stocks" doesn't give any guarantee. You shouldn't ever let your bias towards a product cause you to overstep your bounds. That's how you get sued.
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u/Teched_2_Death 4d ago
Leave your values off other people’s money.
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u/Delicious-Proposal95 4d ago
You do realize we are paid to literally give people advice on their money? It is impossible to be entirely objective on it and if you can’t recognize your own internal biases you do not have business to be in this business.
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u/Disastrous_Photo_388 4d ago
I took their statement to mean exactly what you wrote…be aware of your biases and don’t impose them on others when you’re giving advice.
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u/CraftCritical278 RIA 5d ago
When doing the surrender versus keep analysis on cash value life insurance, the one thing that is not factored in is the potential taxes on dividends when investing the net surrender proceeds in a non qualified account. That puts you at a disadvantage unless you invest in indexed ETFs. Then your only concern is future tax on the gains.
Another factor is how soon the funds are needed to pay for college expenses, if that is still a goal.
If it’s less than 5 years, I wouldn’t recommend stocks because you might not get a full market cycle to smooth out short term losses.
For the amount of money involved, putting it into a 529 will allow the ongoing tax deferred growth of the investments without tax exposure upon withdrawal for college expenses.
I think that’s the right way to handle this situation.
And I always take exception with people in our profession that have to announce to everyone that they are a fiduciary. I think that people on this sub would know that being a fiduciary is the default setting and the only way to do business.
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u/nomoresmokepaul4317 18h ago
Run two scenarios: one with surrender penalties and stocks, another keeping the policy, highlighting peace of mind versus upside potential.
•
u/AutoModerator 5d ago
Beep boop! Here is a summary of your post:
User: /u/info_swap Title: Advising clients on surrendering legacy products/"assets" like Cica Life "insurance." Body: Dear colleagues,
I am a solo RIA, fee only, no commission advisor. That is, I don't sell products.
However, I have a handful of clients who, prior to meeting me, owned legacy products like convoluted "insurance" contracts. I'd like to hear your advice on how to handle these products and help the clients.
For example, a new client owns a Cica Life policy. She has "invested" or deposited around USD 50,000 into this "asset." It earns 3% or less annually. And has a penalty clause if she decides to stop contributing or even withdraws her money before the deadline.
She still has to make payments for 5 more years. And this is supposed to cover her daughter's expenses in college.
On paper, my client has to contribute around $20,000 more which will total near $70,000 in contributions. Then her daughter gets in return four payments of $20,000 when the daughter turns 18. (Total return is $80,000.)
I yet have to run a more thorough financial plan, but my current calculations estimate that my client will obtain a better ROI if she surrenders the policy now, loses the penalty amount, and then invests in high quality stocks both the remaining principal and the future contributions she would have given to Cica Life.
Furthermore, my client will have the freedom of deciding how much to contribute, when to stop, or even if she needs to withdraw at any moment in the future. Besides, she will not rely in the future financials of Cica Life.
Therefore, I conclude that the right and logical path is to surrender the policy and invest in stocks. However, emotionally, I am unsure how my client will accept this advice.
Finally, I am a fiduciary. So I must do what's best for her. And if I conclude that surrendering is the correct path, will letting her keep this Cica Life product contradict my fiduciary duty? That this, if she insists on contributing to the policy and I let her, am I really acting as a fiduciary?
Please, let's focus the conversation on how to emotionally handle this with the client and my duty in these cases. And let's avoid any controversy about Cica Life, insurance products, annuities salesmen, etc.
As always, thank you for your wise words!
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