The Tragedy of Group Term

April 30th, 2019 No comments
Steer clear unless it’s the only option.

Within a week of writing another recent piece on this topic, I was on the phone with a family friend who will soon be a widow.  My mother asked me to call her to answer a few life insurance questions she had, and I was glad to do so.

Here’s the story.  Last year, at age 65, her husband retired from his job as a minister.  As part of his benefits package, he could participate in the group insurance program, and he did so years ago to the tune of a modest $250,000 term policy.

Coincident with retiring, he was diagnosed with inoperable and terminal brain cancer.  He’ll be gone by year’s end, and the insurance isn’t in force.

Group vs. Individual Term

Let’s look at his group insurance.  I visited the benefits’ website and verified all of the numbers she’d shared with me.  I could also see what the premiums for the insurance would be at various ages over the years.  It was demoralizing.

This gentleman, 20 years ago, could have purchased a 20-year guaranteed level term policy on the open market for significantly less than his group plan.  Additionally, the group plan premium would increase by 50% to 100% every five years while a market based plan would have stayed level for the full 20 years.  The group term insurance premium would grow to over 10 times the individual term pricing.  This is a colossal waste of money for someone who was otherwise insurable at a very favorable rate, preferred best in fact.

Why does this happen?  Lack of knowledge, expediency and conventional wisdom.  He didn’t know any better, it was easy and this is what people do, right?

The ridiculous annual premiums were bad enough but they’re not what precipitated the tragedy.  Most association and group insurance programs have restrictions, one being that you can only participate if you’re a part of the club, meaning you maintain your employment with the company or your affiliation with the association.  You go, you’re cut off.

Conversion Options

There’s an alternative.  If your client leaves, he can convert his policy to a permanent, cash value contract.  However, the products offered for conversion are the worst of the worst available.  In some situations, these are uncompetitive products made available only for conversion from association and group term programs, and they’re outrageously expensive.

Of course, it has to be this way because most group and association term isn’t underwritten rigorously, if at all.  If everyone can get it, then it has to be priced expensively.  The only people converting are those who can’t get anything on the open market because they’re no longer insurable on a favorable basis.

The same insurance company backing the group or association plan has modern and competitively priced products available for others to convert to, but these policies are off limits for group and association plan participants to convert to.

Just how bad is it?  If my family friend had gone to the market to buy an underwritten policy, when he retired, he could’ve kept his policy as a term contract through the end of the 20-year period.  There would’ve been no need to convert it to a more expensive policy unless his life expectancy exceeded the duration of the policy or at least the conversion period for the policy.

Let’s assume he did need and want to convert it.  The premium to fund a competitive, individual permanent policy for life would have been $4,500/year, and he likely would’ve funded much lower, perhaps half of that or less, because he knew he wouldn’t be celebrating advanced age birthdays due to the tumor.  What do you think his group term conversion premium was?  Over $30,000/year!  That’s right, multiples of what could have been available.  Probably a 1,000% increase over what could have otherwise been if he’d known.  Besides, with the level term policy, he wouldn’t have even needed to convert in the first place because he had years left of low, level premiums that he wasn’t going to outlive.  He just needed to keep paying his $500 annual premium!

Because he had to convert to maintain the coverage and because it was $30,000/year, he chose not to.  With no disrespect to his doctors, they offered an optimistic estimate of his time left, and it wasn’t clear cut that it would be a good use of money.  In reality, it turns out almost no one with his diagnosis lives very long, and the one or two premiums would have resulted in significant leverage and offered options to his wife and family.

When Group Term is Appropriate

Let me be clear, if association or group term is the only life insurance available to your client, then by all means, he should take advantage of it.  Also, any amount of insurance offered as a benefit your client doesn’t need to pay for should be taken advantage of but your client shouldn’t count on that coverage.  If your client is offered $100,000 and needs $250,000, not only shouldn’t he buy $150,000 through the voluntary group offering but he shouldn’t even buy $150,000 in the market.  He should buy the $250,000 in the market he actually needs.  If your client loses or leaves his job because he’s sick, the very moment he can’t qualify for an individual policy is probably when he can least afford to pay for the obnoxiously expensive group term conversion.  He needs the $250,000 at the cheap and level term rates for an extended period of time.

I realize I’m beating this to death but it’s not like I’m suggesting to pay more for a better benefit.  Unless your client is uninsurable, needle phobic or so lazy that he won’t do something this easy to save money and protect his family, he’s simply flushing money down the crapper for group term insurance.

Individual Coverage to the Rescue

It turns out that my parents sent this couple to me 12 years ago, and we put in force $250,000 20-year term policies on each of them at the best preferred rates.  Unfortunately, from a personal perspective, I’ll be delivering a death benefit check in the coming months but fortunately, from a professional perspective, I’ll be able to help someone after their corporate benefits program failed them miserably.

This particular widow will be fine.  After all, her husband retired confident they had enough to do so, and she does at least have one of the $250,000 checks coming.  Not everyone will be so fortunate.  However, she really wanted to be able to help the grandkids with college education and create a scholarship in her husband’s name, and now she won’t be able to.

Bill Boersma is a CLU, AEP and LIC.  More information can be found at www.oc-lic.com, www.BillBoersmaOnLifeInsurance.info and www.XpertLifeInsAdvice.com or email atbill@oc-lic.com.

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Understanding the Flaws in a Premium Financing Policy

April 16th, 2019 No comments
Convince a client without opening your mouth.

At the courthouse, the judge looked to the other guy and asked his story. After hearing the guy’s side, the judge ruled in my favor. I never opened my mouth. You can imagine how ridiculous the situation was when I didn’t even have to present my side of the story.

I’ve written at length about how little the typical consumer understands about premium financing. A part of my job has been to vet deals and fix problems. But even I was surprised earlier today when I had a scheduled phone call with a client who retained me to review his deal.

The phone call consisted of the insured individual, the premium finance guys, myself and my associate. In a way, the client was the judge, and respectively, the agent and I were the defendant and plaintiff, though I didn’t mean for it to be adversarial. That being said, I didn’t think it was a good idea for the client to move forward based on what I understood as his goals relative to what I was seeing. All I proposed to do was to bring objective information to the table. For full post, click here…

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Premium Financing is Great… Except When It Isn’t

April 10th, 2019 No comments

Digging into the numbers is exceedingly important.

More and more premium finance deals and proposals are making their way to my desk. Most have some common characteristics. First, they probably aren’t going to work, and second, consumers don’t understand them. When I say “don’t understand,” I don’t mean they simply don’t understand the details but that they have a misunderstanding of how the transactions will play out.

I’m a proponent of premium financing, when it’s done right and for the right reasons. Real-estate owners and developers have used OPM (other people’s money) very effectively because they’re often able to prove mathematically that the leverage makes sense. I’m doing the same thing when I don’t pay off my low interest home mortgage and keep my money in the market. However, when it comes to financing life insurance, I have an issue with much of what I see out there. First of all, I firmly believe that finance deals built around the arbitrage For full post, click here…

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Vetting a Premium Finance Deal

February 25th, 2019 No comments

A family office called me in to review and analyze a proposed premium finance deal. After gathering the details of what the family was trying to accomplish and requesting presentation materials, insurance ledgers and financing term sheets, I dove into it.

The advisors let me know that one of the primary things they wanted to understand was what their “bail out” option would be in 10 years. In other words, they wanted to understand their options in a worst case scenario, which is an important thing to get one’s arms around.

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This plan was built around a 10 pay whole life contract and the collateral for the policy was to be an existing whole life contract on the same individual, the matriarch of the family. A part of my analysis was a historic comparison of whole life dividend, and how they move in relation to the interest rate markets, to LIBOR rates. An important and revealing aspect of this for the advisors was how the policy dividends really work and how they are applied. For full post, click here…

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Is Association Term Insurance Really a Good Deal?

February 20th, 2019 No comments

Young professionals don’t stay young forever.

If your client is in his 20s and is a young lawyer, accountant, doctor or member of any association, he’s no doubt been offered the opportunity to purchase inexpensive term insurance through his association. He gets all the benefits of easy enrollment and no lengthy forms nor medical questionnaires to complete. He may not even have to pay a bill as everything might be done electronically through his payroll department. Then, to top it all off, he receives a dividend/refund check making the price even lower. He’s convinced association term life insurance is the best and only way he should ever buy term insurance for his family—after all, the members of his profession are clearly a better risk than the public at large. The only problem is those automatic five-year increases become very expensive once he hits age 40.

For full post, click here…

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Testing and Modeling Life Insurance by Bill Boersma & Marty Shenkman

February 12th, 2019 No comments

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Life Insurance Reviews Don’t Always End in Disappointment

February 7th, 2019 No comments

Just as with routine physicals, a “well visit” can identify opportunity.

Sometimes I think my job is basically giving people bad news. As a consultant, yes, I see more than my fair share of sick policies just as the number of patients that come through a doctor’s office in the course of a day who are sick is likely greater than the population at large. Sick people congregate at the doctor’s office and sick policies congregate on my desk.

The main issue with educating the advisor market on sending sick policies to me is that they don’t always send policies to me that aren’t obviously sick. Often times, sick policies don’t look sick and when one waits long enough to see the sick, they’re terminal. Hey, just like with people.   For full post, click here…

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What kind of life insurance should I buy? – by Bill Boersma & Marty Shenkman

January 22nd, 2019 No comments

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Life Insurance Survey by Bill Boersma & Henry Montag

January 8th, 2019 No comments

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When Is Whole Life Not Really Whole Life?

January 7th, 2019 No comments

Whole life insurance has been held up as somewhat holy and unaffected by the travails of universal life insurance. This has got to stop.

Over the years, there’ve been innumerable pieces written on the failings of universal life insurance. However, if consumers paid attention when these products were explained to them, they’d be no more surprised by this when discovering their retirement plans weren’t going to pan out when they experienced only half the expected market return. None of this should be a surprise; if projections aren’t realized, results will differ.

That being said, there’s little discussion about the failings of whole life insurance. Now, when I say WL, I mean actual WL and not just permanent cash value life insurance. Somehow, WL has been held up as somewhat holy and unaffected by the travails of UL. This has got to stop because many policyowners and their policies are suffering for it. For full post, click here…

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