The Department of Labor’s (DOL) new fiduciary rule will officially go into effect on April 10, 2017 and promises to bring sweeping changes to the retirement planning industry. All advisors who work with IRAs or qualified plans or who give advice regarding these plans will be elevated to the status of a fiduciary, which means that they must unconditionally put the best interests of their clients ahead of their own as well as disclose their compensation and any potential conflicts of interest.

But while the impact of the fiduciary rule is clear when it comes to investments and annuities, the rules pertaining to life insurance are still murky. Life insurance agents and brokers will need to tread carefully in any area that touches on retirement plans, accounts and advice in order to ensure that they stay compliant with the rule and meet any fiduciary responsibility that they incur in the course of their business. (For further reading, see: Making the New Fiduciary Rule Clear for Clients.)

Suitability vs. Fiduciary

Life insurance agents are currently required to adhere to a suitability standard when they recommend specific products or dispense advice related to insurance to their clients. This means that the product that they show a client merely needs to be “suitable” given their objectives and circumstances. But while the new rule will automatically confer fiduciary status on any broker or agent who uses annuities, those who sell a pure life insurance policy have been left without clear direction in this area. Some who only deal with pure life insurance policies might be tempted to dismiss the fiduciary rule as not applicable to them, but if they are using money taken from an IRA or qualified plan to fund a policy, then the fiduciary rule will definitely apply.

But policies that are funded by required minimum distributions may not fall under the jurisdiction of this rule, given that they are required regardless of any advice or product that is used or given. The rule is silent on this topic, and many brokers and agents have been left in a state of uncertainty on this topic. (For more, see: The DoL Fiduciary Rule: What Advisors, Clients Should Know.)

Roy Cranman, an estate planner in Atlanta told InsuranceNewsNet magazine that, “Everything I’ve read is focused on annuities. This is a matter of real urgency for those of us supporting life insurance sales through financial advisors. A very large percentage of our sales result from using qualified money, so this has a huge impact on us. I don’t even know what I’ve got to do to comply.”

Gray Area

The DOL did offer the following information regarding life insurance when the final rule was initially released: “It was not the intent of the proposal to treat as fiduciary investment advice, advice as to the purchase of health, disability, and term life insurance policies to provide benefits to plan participants or IRA owners if the policies do not have an investment component.” However, the DOL did not address permanent life insurance, which has left this product in all its forms in a gray area.

Most analysts are telling brokers and agents to err on the side of caution with these products, as failure to do so could land agents in hot water if the DOL rules that permanent policies are covered under the rule. The American Council of Life Insurers (ACLI) has weighed in with the opinion that life insurance will receive the same treatment as annuities and other products under the rule. ACLI spokesman Jack Dolan made the following statement: “It doesn’t matter what the product involved in the recommendation is — it could be an insurance policy. It would be covered as ‘fiduciary advice’ under the new rule. As such, an exemption must apply in order for the advisor/agent to be paid.” (For more, see: The Impact of Fiduciary Rule on Annuity Sales.)

But the crux of the matter is this: agents and brokers who only carry a life insurance license could seemingly get caught between their federal and state licensure requirements to use the best product available, while the fiduciary rule may hold them liable if the best product that they use does not exactly match the client’s needs or objectives. For example, an insurance agent who puts a client who wants greater exposure to the market into a fixed indexed annuity with a guaranteed income rider could run afoul of the fiduciary rule because the agent did not have access to a product that was primarily designed for growth.

One possible solution to this dilemma might be for advisors to present a range of options to the client, then let them choose which one to use. This steers the interaction away from being construed as advice under the definition of the fiduciary rule.

Many believe that life-only advisors won’t get caught in this dilemma, but will be subject to fiduciary scrutiny when it comes to recommending products that are available to the advisor in that asset class. For example, an agent who recommends a product from a lower-rated carrier because it pays a higher commission than an identical product from a higher-rated carrier could be cited for breach of fiduciary duty.

And this view does seem to receive some support from the following language contained in the rule, where it talks about agents performing "… with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, based on the investment objectives, risk tolerance, financial circumstances and needs of the plan or IRA …" (For more, see: How Advisors Can Plan for Fiduciary Rule Changes.)

This therefore indicates that advisors will only be judged on the prudence that they display within the limits of their circumstances. Furthermore, the preamble to the section of the rule that deals with the Best Interests Contract Exemption says that agents are not required to " …somehow identify the single 'best' investment for the retirement investor out of all the investments in the national or international marketplace, assuming such advice were even possible."

The Bottom Line

Life-only agents and brokers will need to stay tuned to further guidance from the Department of Labor in order to find out where they stand under the rule. The guidance for annuities is fairly clear, but permanent life insurance has yet to be classified as a retirement product by the rule. Phyllis Borzi, assistant secretary of labor for the DOL’s Employee Benefits Security Administration, has said that more information will be forthcoming regarding this topic in the near future. Until then, advisors would be wise to stay cautious in their client interactions. (For more, see: The New Fiduciary Rule: Will Lawsuits Overturn It?)