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Are You Really in Good Hands?

You have to hand it to the insurance industry. Tying an agent's sales production to his or her family's continuing health insurance is a great way to generate sales. The benefit for the agent's clients, however, is less obvious.

A recent report in Investment News exposes the industrywide practice of linking the sale of proprietary life-insurance products to group health-insurance eligibility and other employment benefits. For example, the National Association of Securities Dealers bans quotas on the sale of investment products, including variable annuities and variable life insurance. However, the restriction on sales quotas does not exist on other insurance products that don't have an investment component, such as term life.

A former Lincoln National (NYSE: LNC  ) advisor stated that he was required to generate $50,000 annually in direct commissions to remain eligible for group health benefits. AXA Financial (NYSE: AXA  ) has a production hurdle of 40,000 production credits. Advisors are welcome to sell non-AXA products, but non-proprietary products generate half the credit that AXA wares do. Failure to meet the quota means the loss of group health insurance, group life, disability coverage, and 401(k) matching contributions. Some insurers drop coverage not only on the agent but also the agent's spouse and children.

Other insurers that use benefits as leverage to "encourage" proprietary sales include Prudential Financial (NYSE: PRU  ) , MetLife (NYSE: MET  ) , and the John Hancock division of Manulife (NYSE: MFC  ) . 

Any Fool can see the conflict of interest this policy generates. There's something very wrong about a system that rewards improper placement of life insurance and annuity contracts while penalizing agents who choose the best products for their clients. In the financial-services industry, activities that are technically legal are often more galling than the clearly illegal ones. These conflicts of interest, while legal, certainly push ethical limits to the breaking point.

Have other questions about insurance? You'll find plenty of Foolish wisdom in our Insurance Center.

Fool contributor Buz Livingston, CFP, believes investors will benefit from professional advice and welcomes your comments. He remembers John Prine's timeless lament, "All my friends turned out to be insurance salesmen ..." and now he understands. He doesn't own shares of the stocks mentioned in this article. The Fool has a disclosure policy.


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