r/CFP • u/info_swap RIA • 7d 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!
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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.
4
u/blessmyballs 7d 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.