When a Life Insurance Company Wants to Buy a Policy Back

July 18th, 2022 No comments

Why would they do this? What are the advantages/disadvantages of accepting this offer?

I recently received another communication from a life insurance company looking to purchase back from the policy owner a life insurance policy issued years earlier.  Offers like this happen periodically, but this is the first time I’ve see it from this carrier.

In these situations, the insurance company offers the policy owner more money than the current cash value to surrender the policy.  This approach often take the policy owner by surprise, and they start asking questions.  The first is “Why would they do this?”

These situations typically involve guaranteed universal life (GUL) policies.  GUL policies have a guaranteed premium and a guaranteed death benefit and often have little, if any, cash value, especially relative to more traditional policies.  I imagine that if a given policy owner had, for example, a more traditional $1 million policy with $300,000 of cash value, they would be more likely to think about surrendering it to use the cash value for alternate purposes than if it was a $1 million GUL policy with $50,000 of cash value.  A GUL with no cash value provides no incentive for surrender except for the promise of not paying future premiums.

Benefit to Carrier

It’s a matter of economics and what would be in the best interest of the financial situation of the insurance company.  Some of the policies they issued in the past year turned out to be “too good of a good deal” for clients. Let’s say there’s a $5 million life insurance policy with a $300,000 cash value. Given the insured’s age, regulations regarding how much money the insurance company has have on hand to cover claims and other factors, the company would want the client to surrender the policy for the $300,000 because that would be much less than funding for the future liability of $5 million. But the client doesn’t want to surrender so they offer more than cash value as an incentive. Economically, it’s simply better for the insurance company to try and get that liability off the books.

If the economics dictate it’s better for the carrier to buy off the risk and obligation, it seems the target policies may be the those that might also be in the best interest of the policy owners to maintain.  I’ve seen offers on pretty disparate GUL policies, but when you calculate the internal rate of return (IRR) on current cash value and ongoing premium to future death benefit, the lower the cash value, the higher the IRR.  This comparison doesn’t make the IRR on the entire transaction from policy issue to death benefit payout necessarily better, but from a midpoint to the end, a lower cash value GUL policy generally provides a greater IRR than a higher cash value traditional policy.

When evaluating the offer, the policy owner should be reconsidering the original purpose of the policy. Do they still need it? Is the reason they originally secured life insurance still valid, or if things have changed, is there an alternate current need? If they do decide they want to take advantage of the offer, it’s important for them to understand potential tax consequences of surrendering the policy. A great offer may result in gain that would taxable on surrender.

Life Settlement?

The first thing I advise to a client who gets such an offer is to think this way about it: “If the insurance company wants it because it’s a better deal to them to buy out the death benefit today, maybe someone else would be interested as well.”

I’ve done this before.  In a couple instances, it turned out the life settlement market ended up thinking the policy was attractive too.  In fact, they felt it was more attractive than the insurance company did and ended up making a higher offer.  In the end, the policy owner ended up with more, a third party obtained the deal they wanted and the insurance carrier ended up with the policy staying on the books.

Bill Boersma is a CLU, AEP and Licensed Insurance Counselor.  More information can be found at www.OC-LIC.comwww.BillBoersmaOnLifeInsurance.infowww.XpertLifeInsAdvice.com or email at bill@oc-lic.com of call 616-456-1000.  

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Leimberg Article: Bill Boersma: Risk Profiles of Life Insurance – Don’t Take Conventional Wisdom at Face Value

July 12th, 2022 No comments

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A Major Consideration Regarding Term Insurance

June 29th, 2022 No comments

What product the policy can be converted to is an important issue.

Life insurance, in general, isn’t something that should be commoditized, though term insurance is the product many consumers feel has the fewest downside ramifications when spread-sheeted and sold on a cost basis.

There have always been some differences in the products of various insurance carriers, but the biggest difference, in my opinion, involves

conversion features and language. Carriers have different rules regarding conversion to a permanent policy down the road, including to what age a policy is convertible, how many years it’s convertible and to what product the term policy is convertible.

It’s this last issue that’s changed most significantly. Though more carriers are limiting the number of years the policy can be converted to less than the number of years of the level term contract, what the policy is convertible to is a very major issue.

Practice vs. Contract

Many insurance carriers have allowed conversion to any product they had available at the point of conversion but there wasn’t a realization that this was by practice and not by contract. This became an issue when they changed practices and began falling back on contractual language.  This means that many policy owners who thought they had the flexibility to convert to any available product were surprised when they requested conversion quotes and realized the rug had been pulled out from beneath them. I’ve seen multiple situations in which the products available for conversion have premiums double what would have otherwise been available.

Leaning on contract language also affects changes like splitting a policy and death benefit reductions; issues that seem unimportant until they’re important.

Explaining Reasoning to Clients

Following is an excerpt from an email I sent to a client a few days ago when she asked me to remind her of why I was recommending a certain term insurance product:

I’m happy to reiterate the reasons for my particular term insurance recommendation.  You’re correct that it’s because of contractual conversion features. We can go with another carrier with modestly lower premium if this ends up not being important to you.

Conversion is the ability to convert to a permanent policy down the road.  Even though there may not be a desire for that at this time, it provides a lot of flexibility regarding unknowns later.

Let’s say you’re getting toward the end of the level term period, and you decide you want insurance in force for longer. If you aren’t insurable, or insurable at a favorable rate in the market at that time, you may want to convert the term policy into a permanent policy that would last. 

You would have to pay the higher premium of the permanent policy but you could convert without going through underwriting, and you would get the new policy at the insurance class of the term policy, even if you had a heart attack, cancer and diabetes. 

I’m recommending a product with the best conversion language. It lasts until a later age than most other insurance carriers, and it’s convertible for the full length of the term policy, up to age 75. Most importantly, it’s contractually allowed to be converted to any product the insurance carrier offers at that time. Many other insurance carriers are now limiting conversion to only a product they make available for conversion, and it costs about twice as much. 

Finally, two individual term policies with this carrier on you and your wife are convertible to a single joint life policy in the event you want second-to-die coverage in the future for estate tax planning.

Lesson Learned

The lesson learned is that even lowly term insurance shouldn’t be viewed as a commodity.  Seemingly unimportant aspects of contract language can result in unfavorable results and disappointment in the future if attention isn’t paid to details.

Bill Boersma is a CLU, AEP and LIC. More information can be found at www.OC-LIC.com, www.BillBoersmaOnLifeInsurance.info, www.XpertLifeInsAdvice.com, or email at bill@oc-lic.com or call at 616-456-1000.

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Whole Life Policies Using Loans

June 22nd, 2022 No comments

A lot can go wrong if you don’t examine the numbers.

I’m getting enough questions that it seems like a reasonable idea to keep on this whole life (WL) explanation track. Immediately after writing about a recent experience regarding how direct recognition loans affect a WL policy, I was brought into another situation involving policy loans. The loans weren’t ancillary; they were the point of the transaction.

Some insurance companies practice direct recognition loans and some practice non-direct recognition loans, which means some policies will have dividends affected by a loan and some won’t.

While uncommon, there’s a carrier or two that swing both ways. With the carrier at the center of this engagement, direct recognition results in a fixed loan rate, and non-direct recognition results in a variable loan interest rate. For full post, click here…

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Busting More Whole Life Policy Myths

June 6th, 2022 No comments

What direct recognition is and what it’s not.

When it comes to dividend-paying whole life (WL), there are direct recognition and non-direct-recognition policy loans. Direct recognition loans allow the insurance company to set a different dividend rate for a policy with an outstanding loan. With a non-direct-recognition loan, the dividend is credited as if no loan exists and the loan is charged a separate loan interest rate.

There is a difference of opinion about which is “better,” and, as might not be surprising, each carrier touts the benefits of the way it leans. I’m not interested in wading into that debate today.

I was recently involved in an analysis in which the plan could involve a significant policy loan. This proposal was with a carrier employing direct recognition, meaning, the dividend could be different when loans are taken. The fixed 6% loan rate was being touted as a backstop to potentially higher commercial lending rates in the future. I agree that this could be an important feature and I’ve noted it myself in some scenarios. For full post, click here…

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Busting Whole Life Policy Myths

March 22nd, 2022 No comments

The conventional wisdom of what “whole life” is an how it works is often far from the truth.

When initially speaking with clients, I often hear reference to a “whole life policy.”  I’ve long since learned that this is a generic reference to permanent insurance, as opposed to term insurance.  Few policy owners understand that whole life (WL) insurance is simply one form of permanent insurance, and the menu of options out there is wide and varied. For full post, click here…

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A Peek Behind the Insurance Marketing Curtain

March 14th, 2022 No comments
The IUL marketing insurance companies sell the agents, who in turn, sell the public, doesn’t sit well with me.

The piece went out to the insurance carrier’s agents and announced the updated cap rates and maximum illustrated rates for their indexed universal life (IUL) products.  As has been the case for many years, they’re all going down.  This means that whatever the S&P 500 (or whatever index is being tracked) grows at, the maximum crediting rate in good years will now be at the lower cap rate.  There’s no judgment here; it is what it is, but it will suppress the future performance of the IUL contracts and make it even more challenging to support earlier projections and for policy owners to attain their goals. For full post, click here…

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Video: Premium Financed IUL

March 10th, 2022 No comments

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The Most Arrogant Man in the World

January 27th, 2022 No comments

When you’re right, you’re right.

Bill Boersma

A recent book, The Death of Expertise: The Campaign Against Established Knowledge and Why it Matters, is from one writer among a number discussing the American public’s growing hostility to expertise.  I see it in my industry.

It’s been about 20 years that I’ve been doing life insurance policy analyses to show policy owners and their advisors what’s happening to their contracts, and how a shifting economic market is affecting performance.  This isn’t rocket science, it’s just not understood and it’s in conflict with conventional wisdom.  The premise is that if your life insurance performance is based on interest rates and these rates are dropping, your policy won’t do what you think it will.  How complicated is that? For full post, click here…

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How Advisors Can Catch Premium Financing Red Flags

November 17th, 2021 No comments

The biggest sign to look for is if someone has, or is looking at, a premium financed life insurance transaction in the first place.

An attorney recently asked me to offer some red flags to look for regarding premium financing.  Here’s my reply.

I’ll start with a somewhat facetious comment.  The biggest red flag I look for is if someone has, or is looking at, a premium financed life insurance transaction.  In a sense, that’s a joke but it’s also true.  The problem is, you can’t really do anything with it.

The older a transaction, the more in jeopardy it may be because the further back you go, the higher the crediting assumption that was likely used and the further it’s fallen.  A transaction can’t be supported at 5% what might have been projected at 7% or 8%. For full post, click here…