HOW THE FINANCIAL PLANNING INDUSTRY WORKS^©

The financial services industry has several branches or segments, including: Life insurance/annuities, securities, banking, credit unions, savings and loans, and mutual funds. In this article NAFEP focuses on the non-banking portion of the financial services industry, which we choose to term the “financial planning” industry. The following is an overview of various aspects of this “Financial Planning” industry.

The Life Insurance/Annuity Side of the Financial Planning Industry:
Both life insurance and annuities are the sale of a contract to an investor or consumer. A life insurance or annuity contract is usually called a “policy”. This policy contains a promise or guarantee to pay certain amounts of money back to the investor at a certain time or over a period of time. There is little risk of losing money for the investor in purchasing one of these.

Life insurance policies have a “death benefit”, which pays a guaranteed amount of money to the policy’s beneficiaries (usually family member or heirs of the person whose life is insured by the policy). Sometimes there are investment elements in a policy which benefit the insured person during his or her life. But the death benefit is only paid out after the death of the insured.

Annuities pay a stream of income to the annuitant (the annuitant usually is the owner of the policy, the investor). The time frame is either for a fixed term of years, or it is for the annuitant’s life, however long or short that turns out to be.

Insurance companies create, sell, and back both types of policies, life insurance and annuities. Sales of these policies are made by a network of independent sales agents. They are independent in the sense that they typically work on commissions only, and are not salaried employees of the life insurance company. This independent relationship means that the agents can set their own hours, they work for themselves. A truly independent agent can sell the policies of many different companies, and often do represent multiple companies. A captive agent is one who is contractually tied to one specific insurance company and can only sell policies of that company. Captive agents work on straight commissions only, as an agent of the company. They are not salaried employees.

Examples of life insurance companies are: Prudential Life, Metropolitan Life, New York Life, and about 2,500 other companies.

The larger companies generally have captive agents, while smaller ones generally have independent agents.

Life insurance companies are regulated by each individual state in which they decide to sell policies. The state regulatory departments are called “insurance commissions”. There is little federal regulation on the sale of life and annuity policies.

Any agent wishing to sell life insurance or annuities must take his or her state’s prescribed life insurance/annuity training. Training is followed by an examination or test which must be passed (no college education is necessary to be a life/annuity sales person). Successful completion of both the training and the exam allows the student to apply for life insurance and annuity agent licenses from the state’s insurance commission. This license is absolutely required by each state’s law before an insurance company can allow the agent to sell for the company.

Agents must take continuing education courses to stay abreast of, and to actually advance their knowledge of their profession. This is generally 30 hours of education within a two year period.

PREVIOUS | >NEXT | >1 | >2 | >3 | >4