Non-Profit Insurance Agency

post by zwcoop · 2019-05-13T09:47:59.746Z · score: 25 (16 votes) · EA · GW · 12 comments

I am new to the community but have an idea that I would like to get feedback on. I am a licensed insurance agent and financial adviser (Series 7&66). I started an independent insurance agency a little less than a year ago mainly because I feel that the industry was in need of a more ethical approach. My goal is to also start a connected RIA (Registered Investment Advisor) but I have not gotten that together yet. Both insurance and money management can be highly lucrative endeavors and , as such, tend to attract individuals that are motivated by making a lot of money. I definitely do not mean to imply that everyone in these fields are unethical but it has been my experience that many are.

My initial focus has been on helping seniors navigate the Medicare system and to help them enroll in the the most competitive Medicare supplement or Medicare Advantage plan available for their particular need. Seniors are often bombarded with a ton of information from carriers and brokers - much of which is misleading and typically endorsing whatever plan is in the carrier/agents financial best interest as opposed to that of the client. While there is a fair amount of nuance in this field, I believe that it is possible to develop a well run online platform focused on transparency that could consolidate a significant portion of the industry.

As an independent agency, I can contract with pretty much every carrier that offers these plans and can thus show clients all of the choices available in their area. For my services, I get paid a commission from the carrier my clients end up choosing. I also receive a commission every year that the client renews their plan (or for a set amount of years depending on the product). This residual structure can lead to what many agents dream of -significant passive income for maintaining your book of business over time. While I am currently focused on health insurance, this basic idea is also true for other forms of insurance as well as money management.

Now that I've bored you with the basics of how selling insurance works, let me now get to the point of why I am posting this on the EA forum. I am strongly considering turning my agency into a non-profit and funneling the gains into charities. This appeals to me because it would essentially mean siphoning off the commissions from the insurance and financial and putting them to use helping people. The problem is I know nothing about setting up a non-profit.

While I am currently in my first year of business and, truthfully, struggling to cover my own overhead I believe that I will be able to generate a significant amount of money over time. Frankly, many successful agencies and/or money managers generate incomes far in access of what I feel I need to live a happy life. I have never been an especially money hungry person and landed in this field due to a combination of chance and necessity. But, given that this is now what I do I figure I might as well figure out a way to derive meaning for myself and other.

Another aspect of this that I find compelling is most people are skeptical about brokers and money managers because of their high commissions and fees and are often left wondering whose interests they are actually focused on. Because of this, I think that a non profit agency would be a great 'selling point'.

Taking the high commissions and fees inherent in the structure of the industry and using them to enhance the health and well being of others I think is a cool idea. That being said, I would love any feedback, recommendations or interests that could help me turn this dream into a reality.

12 comments

Comments sorted by top scores.

comment by aarongertler · 2019-05-13T23:57:06.084Z · score: 10 (4 votes) · EA · GW

This is a very positive thing you're doing, and it sounds like you're going to help a lot of people!

I've heard a few stories before about people who advertise the fact that they donate in the course of their work, and I've even tried it myself (as a freelance tutor). Results have been mixed:

  • It's offputting to some people, either because it's unusual and they don't know how to respond or because they want to pay money for services, not "charity" (even if the price is the same either way).
  • On the other hand, this car salesman managed to make his giving into a positive way to interact with customers. Notably, he only talks about giving mid-deal, and only once people have expressed curiosity, rather than advertising his donations ahead of time.

Do you have a rough estimate of how much more you'd be able to donate through this unusual business structure, as opposed to if you just went into business and then donated money from your earnings? I haven't seen this particular arrangement before, and I'm curious about the benefits.

comment by zwcoop · 2019-05-14T00:42:19.212Z · score: 1 (1 votes) · EA · GW

Thanks for the link! Car salesmen are very similar to insurance salesmen in perceived ethics by the public for sure!

I honestly am not sure if the benefits are worthwhile or not. I find it an appealing idea but, as of now, do not understand the logistics well enough to know. I can't tell from the article whether this salesman worked for a particular company or a used car lot or what? Hat's off for his efforts regardless!

What I envision (realistic or not) is the following comparison. If you had a choice of buying any brand of car you want through A) the company that makes the vehicles (Ford, Chevy, Honda, etc) and or B) through an independent company that could offer all the exact same cars for the exact same costs and that donated all revenue above operational costs to charity ... which would you choose?

One thing that is a little different in my current situation is that I am not longer a salesman in the sense that not only do I need to make sales every month to survive, I also have to grow a company which means paying overhead, reinvesting in marketing and hopefully hiring additional staff over time. The problem with donating a fixed amount of sales in that it is hard enough to grow a business with 100% of the revenue let alone with less. One of my thoughts with a non-profit is that I could retain the profits and use them to grow the company in the early years, building sort of a trust account that would be obligated to charity once the growth phase evened out. I'm not sure if it works like that or not though

comment by Sanjay · 2019-05-16T18:40:24.045Z · score: 8 (3 votes) · EA · GW

Thank you for thinking about how you can use your insurance background to make the world a better place, and thanks for sharing your thoughts.

I have c 15ish years’ experience in the insurance arena, having worked as an insurance actuary, financial (ratings) analyst specialising in insurance, and a strategy consultant for the insurance space. I’ve also been on the board of several (>5) charities in the UK and consulted for ~10 more charities globally.

I’ll give some opinions about

  • What can you do to maximise impact through your work
  • Long-term business prospects for an insurance brokerage firm
  • How should you position your firm to maximise success
  • About structuring as a non-profit

First comment – you didn’t state your location, but I’m assuming you’re in the US.

What can you do to maximise impact through your work

  • You mentioned helping seniors navigate medicare. This is no doubt a good outcome, however I expect that focusing on wealth management and encouraging clients to donate more is likely to be higher impact, taking into account replaceability. As a quick calc, assume you have $10million of assets under administration (not an aggressive target for an established adviser); if you can get 1% of that to be donated per annum that otherwise wouldn’t have been, that could easily outperform your donations (unless you’re particularly profitable/frugal)
  • Note that financial advisers are currently short on tools to help them make more effective donations. My organisation SoGive is working on this in the UK, and Agora was doing this in the US (although I think they no longer are)

Long-term business prospects for insurance brokerage firms

  • Financial advisers in the UK and several other European countries is have often (until a few years ago) had a fairly low-stress, moderately high-income life. Which suggests that you might be onto something.
  • Some argue that this is because insurance providers paid them loads of commission, and this was only possible because commission is not transparent
  • Several European regulators, led by the UK, introduced new rules which banned commission (UK Retail Distribution Review 2012), introduced penal new training requirements, and broadly made a financial adviser’s business more regulation-heavy and painful. I don’t know how likely this is to happen in the US, but American regulators will certainly be aware of it.
  • The insurance intermediary sector is also at risk from disintermediation (especially if the commission payments are made more transparent) Having said that, your comment about a well-run online platform suggests that maybe you may be interested in actually *being* one of the disruptors, in which case you would stand to benefit from this risk. If you are going down this route, I don’t anticipate that it will be the easy life that some brokers have had.

How should you position your firm to maximise success

  • For a vanilla financial advice service, I am sceptical about the value of advertising the non-profit nature of your business. It risks creating confusion about the positioning of your service
  • However, if you provided financial advice covering ethical investments, structuring your business as some kind of non-profit may have some brand value. Even then I’m doubtful.
  • Note that “some sort of non-profit” includes options which are much cheaper/easier than a full-blown 501(c)(3), see below for more
  • Offering ethical investment advice could also (maybe) make sense from an impact perspective; if you advertise yourself as offering ethical investment advice, you could, as part of the advice, explain why donating is likely to outperform (i.e. because of counterfactuals).
  • If you are focusing on providing investment advice, I would encourage you to position yourself as a “holistic” adviser or “financial planner”, or failing that, at least a “tax specialist”; I would encourage you away from “investment specialist”. (Let me know if you would like me to expand on this point; also not sure if these terms transfer well across the Atlantic)

About structuring as a non-profit

  • As mentioned by other commenters, it’s unlikely for you to want to structure your organisation as a 501(c)(3) – lots of cost/effort and little upside. If your donations are going to tax-exempt (501(c)(3)) organisations, there’s no real tax benefit from you doing this
  • I haven’t checked if other commenters have covered this, but other options include a straightforward ltd company with adjustments to the constitution to stipulate that the profits must be donated, or maybe even just a non-legally-binding pledge. (I know this is possible in the UK, I imagine it’s possible in the US too). You could also be a B Corp. In the UK there is also the option to be a Community Interest Company (or CIC) – I don’t know of any similar option in the US (B Corp might be the closest thing you have to this)

Lastly, if you’re open to more wacky ideas, I’m more positive about micro-insurance than earning to give in the US. Your personal circumstances may not allow for this, but a few years working as a broker in the US, saving (not donating much) and then a few years selling insurance to the very poor (or trying to!) is likely to enable you to have more impact than this plan, assuming you have flexible skills and are able to learn lots of new skills quickly. (note: I can’t promise that everyone will agree with me on this) This attempt may fail, however it would likely teach you about what is needed to make insurance sales work better for the bottom billion, which may then make you better placed to work in micro-insurance sales for a micro-finance institution or become an entrepreneur.

Finally I’ll mention that I only check the forum occasionally, so apologies if I forget to look back soon and therefore provide slow responses to any more questions on this.

comment by Ben_West · 2019-05-13T22:57:01.193Z · score: 5 (3 votes) · EA · GW

Thanks for considering this! I believe you are considering what I would call "earning to give" as an insurance agent. 80 K has more info on earning to give, if you have not already seen that: https://80000hours.org/articles/earning-to-give/

Building on Gordon's answer: LLCs are pass-through entities, which means that you can deduct donations up to half your revenue/income. You could consider something more elaborate (e.g. a corporation owned by a nonprofit foundation, like Newman's Own), but that's probably unnecessarily complex.

comment by zwcoop · 2019-05-13T23:53:16.068Z · score: 1 (1 votes) · EA · GW

Thanks for the reply! I have read the article and it is super inspirational. What would be the additional benefits of a setup like Newman's Own?

Do you mind if I as your opinion of my thought above that there may be a marketing advantage to being labeled a non-profit considering the widespread distrust of the insurance and financial industries from the view of average consumers?

comment by aarongertler · 2019-05-14T02:27:41.726Z · score: 5 (3 votes) · EA · GW

I think that trust is contextual. People may distrust some insurance/financial companies, but they trust others. People trust some nonprofits, but distrust others. An insurance company that is set up as a nonprofit for some reason might be thought of as uniquely trustworthy, but might also be thought of as strange. Atypical nonprofits have a bad history of being used as vehicles for tax evasion and money laundering.

comment by zwcoop · 2019-05-14T15:06:35.739Z · score: 1 (1 votes) · EA · GW

I agree with this completely.

The one distinction I would make is that I do not own an insurance 'company'. I run an independent insurance 'agency'. I feel you general point is about trust is valid regardless. The reason I bring it up is not to be argumentative but to highlight the fact that a customer of mine can choose whichever insurance company the want to have their policy with. I'm just the broker. The problem that clients have is knowing which company offers the best deal for their situation. My job is merely to be as objective as I can about their choices.

It's just a different type of trust. If you shop through Amazon, for instance, you are basically trying to figure out which company to trust and which has the best deal. You don't have trust in Amazon to provide the best product - they don't make products (at least for sake of this simplifies example) - you just need to trust that they are showing you all the available options in an objective fashion. This is aided by reviews etc.

So, how I see my role is simply providing a marketplace for people to shop plans. Not to provide the plans per se.

comment by G Gordon Worley III (gworley3) · 2019-05-13T17:41:11.404Z · score: 5 (4 votes) · EA · GW

When you say "non-profit" what comes to my mind is operating as a legally and financially advantaged organization with special non-profit status. But a non-profit (especially if you are interested in 501(c)(3) tax status) are more complex than LLCs, with more strenuous reporting requirements, so guessing that you're operating as an LLC since, I'd seriously consider if there's any actual benefit from operating as a non-profit. Presumably you wouldn't be taking donations so you wouldn't need special tax status to allow your donors to deduct their donations, so unless there is also a reduction in taxes on profits that goes along with whatever status you obtain that could not be gained already from donating the profits of an LLC, then it's probably not worthwhile. If you're a C-corp then go ahead; it's probably similarly complex, if different.

I bring all this up because it's possible and easy to operate an LLC for public benefit, and you can take whatever measures you like to demonstrate that you are doing this to interested folks, so you should probably consider that the default course and only do something different if you reckon there are clear benefits from operating another way.

comment by zwcoop · 2019-05-13T23:47:28.093Z · score: 2 (2 votes) · EA · GW

Thank you for your reply! I am, as you guessed, operating as an LLC. I wasn't sure if there would be any advantage in trying to obtain 501(c) status or not. I don't know very much about it. My thought was two-fold. 1) That I would reduce my tax and therefore would be able to donate more ... however from what you're saying I can deduct up to 50% of my revenue if it was donated to to charity? 2) That there is would be advantage to growing a business by marketing as a non-profit. The distinction being able to advertise my agency as primarily interested in growing to give to charity as opposed to the primary purpose of making a profit and we also give to charity may excel grow and overall revenue by appealing to individuals and companies that are inherently distrustful of the motives of insurance producers and financial advisers.

comment by zwcoop · 2019-05-14T00:49:13.813Z · score: 1 (1 votes) · EA · GW

Another question I had is that if by operating as a non-profit I could retain my profits in the early years and reinvest them in growing the company. Essentially building a trust that long term would be obligated to charity? The downside of donating my profits at this point is frankly I don't have very much profit and it would be much more difficult to grow if I was giving away revenue in the early stage.

comment by G Gordon Worley III (gworley3) · 2019-05-14T01:54:51.237Z · score: 1 (1 votes) · EA · GW

I don't know the answer to these specific questions, as I've not done it. A 501(c)(3) organization is tax advantaged on its "profits", but only in certain ways and not others, and in my engagement in helping run such orgs it's never come up (or if it has someone else handled it before I learned about it). It's probably best to recruit the advice of a CPA or other expert in this area. My main goal was just to warn you that operating as anything other than an LLC (whether passthrough or not) is more complicated, so it's seriously worth evaluating the options and seeing if you can't get most of what you want by operating your LLC for public benefit so long as all the partners (so probably just you!) are on board with it.

comment by Wayne_Chang · 2019-05-20T02:18:26.452Z · score: 1 (1 votes) · EA · GW

A company structure to consider would be a mutual organization where all profits go to members, which in your case would be the policy holders. Profits can be retained to grow the company or policy fees can be reduced by the amounts of its profits. Mutuals have a long history and many of the most successful financial organizations in the US are mutuals (e.g. Vanguard, State Farm, Liberty Mutual, NY Life). You could develop an insurance brokerage mutual that offers products from different insurance companies. I'm not sure if there are mutuals in this space but this could be a potential structure to explore given its long history of success. Personally, I'm a huge fan of Vanguard and Jack Bogle. They've done tremendous good and helped millions retire with more money and fewer fees. I wish you the same success!