Does Your Client Want to Save Money on His Life Insurance?

November 15th, 2018 No comments

Remember that cost and price are very different things.

Certainly, almost every industry deals with the same thing but the idea of saving a buck on insurance is an entrenched ideal. Independent agents who can bring multiple offerings from various insurance carriers are exceedingly valuable but only if they understand what they’re doing and aren’t playing the spreadsheet game.

Penny wise and pound foolish is an age old axiom but just because it’s been around for a long time doesn’t mean lessons are learned.

Let’s look at a 50-year-old preferred male and a “name brand” $1 million indexed universal life policy, the product du jour for better or worse. I had it run three ways at the default crediting rate of 6.09 percent and the premiums are $7,842, $8,115 and $11,360. Remember, if this insured died tomorrow or next year or 20 years from now, the beneficiaries will get the same $1 million. In fact, each of the three scenarios is projected (not guaranteed) to last to age 100. Most people would ask, why pay more than the $7,842? Isn’t anything else just a waste?

Let’s dig in a little. The low premium gets the policy to age 100 with minimal cash value and won’t last beyond then. The middle premium projects to fund a policy that will have $1 million of cash value at age 100 and last beyond and the high price one is “overfunded.”

Costs of Insurance

To start, we’ll focus on the two cheaper options. The premium difference is only $273 or about 3.5 percent of the premium. That’s not much but if I only get the $1 million death benefit and not the death benefit and the cash value, why do I care about the cash value growing? Well, that’s a deep discussion for another day but I’ll tell you that should care… a lot! Have you heard of costs of insurance (COIs)? There’s a lot of chatter about this in the market today because some carriers are increasing them to make their nickel, even when the mortality experience isn’t getting worse. This is exceedingly important, and you should be reading about it. However, COIs play a big role in contracts even when you aren’t getting stiffed.

The COI is based on the spread between your death benefit and your cash value. This is referred to as the amount at risk. The lower your client’s cash value, the greater the spread and the more dollars his COI is being applied to. Remember, your client’s “per dollar” COI stays the same at a given age regardless of the spread but the gross COI is greater because it’s being calculated on more dollars. This isn’t really much different from why a $2 million life insurance policy costs more than a $1 million policy but you wouldn’t try to buy a $2 policy by paying the $1 million policy premium, would you? That’s not going to end well. Even though the mortality charge rate is the same, the gross expense is different. When your client is young, this isn’t a huge issue because the COIs are very low. However, when your client is 80, 90 or 100 years old, the COIs matter a lot.

As your client gets older, does he want to be paying COI on a big spread or a little spread? If your client paid $7,842, his spread at age 90 is $622,000 and if you paid $8,115 your spread is $520,000. Not huge, but why pay for an extra $100,000 of insurance at the rate the company charges a 90 year old for life insurance if you don’t have to? At age 95 it is $629,000 and $340,000 respectively. At age 99 it is $808,000 and $79,000 respectively. At age 100 it is $987,000 and $0. You can imagine the cost of insuring the chances of death for a 99 year old, can’t you?

Mortality Charges

When running these projections, if I click the box in the illustration software to include the expense pages and isolate only the mortality charges, the cumulative expense from age 50-100 goes down from $968,000 when paying $7,842 to $319,000 when paying $8,115. That’s a 67 percent decrease. When trying to support a $1 million policy with about $400,000 of cumulative premium, does your client really want an additional $650,000 of expenses being yanked out of the contract? When I look at the mortality costs from only age 90 to 100, the expense goes from $678,000 to $62,000. That’s a 91 percent drop. Does your client really want to save 3.5 percent in premium only to pay a 1,000 percent increase in mortality charges if he outlives actuarial life expectancy?

Now, here’s where the rubber meets the road. If your client manages to not buy the farm before age 100 (and more and more people are making it), the 3.5 percent greater premium keeps the contract in force indefinitely with no more out of pocket. Saving $273 a year means at age 101, your client will have to start paying $291,000 every single year until he dies or the policy will beat him to the grave. You read that right. When they bring in the cake with 100 candles, they’ll also bring in a premium notice for $291,000… every year your client sticks around… for a $1 million policy. Are you willing to assume that risk?

So it’s not really about the $273 year, it’s about dramatically reducing the expenses in your client’s contract, which will result in a much higher cash value with the bonus of a nice refund if your client ever chooses to bail on the contract and not have to pump in more than 1,000 times that much per year to keep the thing breathing if he gets lucky. By the way, the internal rate of return on that $273 to reduce your client’s mortality expenses by hundred of thousands of dollars and not risk paying even more hundreds of thousands of dollars in premiums is pretty astounding.

All this being said, if you really understood what was going on, statistically neither of these premiums are likely to fund a policy that will last anywhere near where the ledgers propose they will. What you’re looking at is all hypothetical, and it won’t pan out as projected, guaranteed. This is where the “ridiculously high” $11,360 premium comes in.

Just maybe the higher premium may be in your client’s best interest even in a death benefit focused transaction? Stay tuned. We’ll touch on this next time.

Bill Boersma is a CLU, AEP and LIC. More information can be found at,, or email

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A Life Insurance Mystery: Underwriting

November 13th, 2018 No comments

At this point, I should really stop being surprised that consumers tend to focus more on issues that aren’t particularly consequential and often ignore the most important matters. This has been reinforced recently on a few engagements.

One of these issues is underwriting, maybe the least favorite part of the life insurance process. While it’s important to do business with a strong carrier—and no one wants to pay more for something than necessary—the details of the underwriting process are a mystery to most. For full post, click here…

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Premium Financing Life Insurance in Today’s Markets

October 25th, 2018 No comments

Our clients don’t understand insurance crediting.

In the past few weeks, I’ve received more calls than usual regarding consulting and analysis for existing or proposed premium financing transactions. They’re coming from attorneys and accountants as usual, but from more family offices than ever.

Some of these calls will involve deep analysis, and in some situations, I’ve been able to have the proposals emailed to me for a quick once-over. While I’m committed to entering every situation with an open mind and free of prejudice, sometimes, at a glance, the result is self-evident. For full post, click here…

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Time Bombs of Yesteryear and Today

October 16th, 2018 No comments

This past month, there was an article on the front page of a major publication about universal life (UL) insurance policies. The article included a statement that many people “… are sitting on a ticking time bomb, and most probably aren’t aware of it.”

This reminded me of another article that said, “Today, in this period of very low interest rates, many are sitting on time bombs… Yet many are unaware…” Guess when this period of very low interest rates was? 2002! How many times since then would someone have killed for a 2002 interest rate? For full post, click here…

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Life Insurance Analysis: an Art or a Science

October 8th, 2018 No comments

DECK: Is it worth taking an undue risk to save a few bucks? 

Earlier this year, I was introduced to a policy owner by his estate-planning attorney regarding the evaluation of a survivor life policy on himself and his wife.  It was a $1 million 1995 universal life contract that was underfunded due to decades of decreasing crediting rates.

Fundamentally, he wanted to know how the policy was doing, what it would take to firm it up and if the recommendations he’d received three years earlier from a nationally recognized life insurance consultant were correct. For full post, click here…

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Letters Of Explanation – Policy Funding Options

September 24th, 2018 No comments

Dear Mr. Client:

It was a pleasure to speak with you last week and I appreciate the opportunity to review your life insurance policy. Per our discussion, this note is intended to be a follow up summary of our conversation. If there is any additional information you were looking for which I have forgotten to include, or if you have questions about what I have written, please do not hesitate to get back with me.

Your $1,000,000 was originally an Alexander Hamilton policy which was acquired by Jefferson Pilot and subsequently merged with Lincoln Financial. Though I do not have the original sales ledgers, the original premium of $13,750 was likely calculated to maintain the policy indefinitely given the interest crediting and expenses assumption in play at the time the policy was issued in 1995.

Since that time interest rates have come down significantly; probably 300 basis points or more. For full post, click here…

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A Life Insurance Carrier Offer Your Client Can’t Refuse?

September 18th, 2018 No comments

Last week, I was contacted by an agent with whom I’ve had a long-term relationship regarding a question from a client. The client is a gentleman who’s the surviving insured on a $1 million second-to-die policy and he’s very old. His policy has little cash value and it may or may not last as long as he will without throwing a lot more money at it. In fact, next year the policy has no cash value and it’ll lapse in four years.

What initiated the call was something the client received from the carrier. It was an “Enhanced Cash Surrender Value” opportunity. The bottom line is that the insurance carrier is offering the policy owner a chance to surrender the contract for more money than the cash surrender value and, in this case, more than the gross policy cash value. For full post, click here…

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Letters of Explanation: Donating a Policy to Charity

August 16th, 2018 No comments

Good Afternoon:

It is my pleasure to be introduced to you.  Your accountant referred you to me because of the frustrating, yet required process when donating a life insurance policy to a non-profit.  I understand it is not pleasant to hear you won’t be getting the deduction you were expecting for your policy donation to the school but the process I will bring you through will get you everything you are entitled to.

Unfortunately, your cash value is not the number the IRS looks at when taking donations into account.  To think about it in a simplistic way, they aren’t eager to let you take a deduction for something you have never paid tax on.  In other words, the special rules which allow your life insurance cash value to grow tax free is what is preventing you from fully deducting that same cash value. For full post, click here…

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Life Insurance Premium Financing

August 15th, 2018 No comments

It’s too often improperly presented, implemented and managed.

I’ll start out by saying that I’m not opposed to premium financing. I’m simply a strong advocate for making sure it’s understood and done right. That being said, many of these proposals are not understood and can be misleading.

Fundamentals of Financing

First, it’s a good idea to look back to the general fundamentals of financing. Financing comes into play when someone needs or wants to purchase an asset of something but doesn’t have the money or the liquidity to pay the entire purchase price. Financing fills this void, not to get something that’s otherwise unaffordable.

We do this day in and day out. We finance our homes, cars, businesses, equipment and more. Generally, we can afford these things but the money isn’t readily available. Additionally, we often finance things we do have the money for if the financing provides a positive arbitrage to be taken advantage of. For full post, click here…

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Letters of Explanation – Trustee Liability

July 31st, 2018 No comments

This letter is to the management of a law firm.  Multiple attorneys act as trustees for clients.  There has been no program of management regarding these policies and I was called in to suggest a plan.  I was also able to look at redacted policy information and could see at a glance that many policies are underperforming and headed towards failure.  A decision was made that the attorneys deal with it on a case by case basis as they see fit.  I see this as a grave mistake.

Dear Firm Management:

It’s been a while since we’ve talked and the last time we did you mentioned the attorneys who are acting as trustees will be deciding independently on how to proceed.

I understand this but as we discussed earlier, if things go wrong (which they have and will) and result in a lawsuit, case law has shown that an independent third party is critical to a successful defense.  I am currently involved in four litigation support and expert witness cases, some going after trustees and some defending trustees. For full post, click here…

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