At Vintage we aren’t licensed life insurance agents but we still sometimes get e-mails targeted to the commission based agents. This one pitches the fat commissions available for taking advantage of poor Martha, a 66-year-old woman with an extra $90,000 in the bank. It suggests that the agent can pitch Martha on turning her $90,000 into $152,027 tax free to her heirs. But let’s look at the math.

At age 66, Martha can expect to live another 17.2 years according the life expectancy table used by the Social Security Administration. If she takes the money from her bank account and buys the policy, she could make $62,027 on her death. If she dies at age 83, as expected, she’d earn a 3.1% annual rate of return on her $90,000 premium. If she only lives ten years, the return jumps to 5.4%. But if she lives to age 90, the return falls to 2.2%, which is just a bit more than the 2.0% available on three-month Treasury bills today.

The ad of course doesn’t include all the limitations, exclusions, and other legalese found in the dozens of pages of the actual insurance policy. If Martha were to buy the policy and then end up needing the funds, there’s likely a cash value but it would be much less than the $90,000 premium. After all, the insurance company would pay the agent $13,500 up front and they need to make their own profits on top of that.

So Martha could earn $62,027 for her heirs over the rest of her life and the insurance agent can make $13,500 for convincing Martha to write the check. To us, this seems like a bad bet, but the insurance agent doesn’t need to act in Martha’s best interest. He may call himself a financial advisor and offer other financial products and even “fee based” accounts. He may even be a Certified Financial Planner (CFP). And earning $13,500 off poor Martha for a couple hours of work is perfectly legal and obviously quite lucrative.

It’s really important to learn about the financial incentives of your advisors because people will naturally act on their financial inducements. And it’s certainly much more profitable to spend a couple hours and make 15% up front than to charge a 1% annual fee and have to service a client for years to come.

If your “advisor” is a licensed life insurance agent or “offers securities through a brokerage firm member of FINRA” then their advice is conflicted. You can check them out at Broker Check to see if they are a licensed Broker and able to receive commissions on securities sales (If they only show up as an Investment Adviser then they can only charge fees and must act as a fiduciary with you). For insurance agents licensed to earn commissions in Michigan, see Michigan Insurance Agent Check (note that they won’t show up if not licensed and may show as Inactive if they were once licensed). Poor Martha will never know that she paid that nice insurance salesman over $13,000, but with a few clicks you can protect yourself.