How Not To Evaluate Life Insurance – Part One

February 27th, 2018 No comments

I’m a life insurance guy and I feel a properly researched, constructed and managed life insurance policy can be an exceedingly powerful financial tool. However, my daily life is spent trying to find solutions to problems policy owners are experiencing. Decreasing crediting rates and increasing expenses are obviously issues but we deal with these kinds of things in many areas of life on a regular basis.

What makes life insurance different? I believe it’s the lack of understanding about what modern life insurance is and how it works.  Unfortunately it’s not even close to what many people think it is and until people start paying attention, my job security is assured.

Whether it’s a brand new contract or a potential replacement, a healthy combination of skepticism and analysis should be brought to bear.  Here’s an example.

Second-to-Die Policy

A file is on my desk now is for a policy owner couple referred to me a few months ago.  They have a single pay second-to-die whole life (WL) policy as well as two single pay individual WL policies.  The single life policies are in place primarily for the annual dividends to pay the annual premium of their long term care (LTC) policies with the same carrier.

The policy owners are very bright people.  They’re experienced in finance and have run divisions of global companies.  Of anyone who could conceivably figure things out, these are the people.  But… they couldn’t.  While they dug deep, ultimately they were dependent on the agent, who to this day they see as a good guy, but wrong.

The single life policies have experienced decreasing dividends and the LTC policy premiums are increasing so they’re getting squeezed from both ends.  However, we’re currently focused on the second-to-die contract.  The original death benefit was $625,000.  The nature of this product is if the dividend decreases then either the death benefit decreases as well or the contract needs additional funding.

Worst Case Scenario

I was shown some modeling originally completed and presented at the point of sale.  It was very interesting to say the least.  One column was labeled “worst case scenario.”  The contract has only been around for five years but the current dividend is now lower than the “worst case scenario” that was postured as what might only happen if there was a global pandemic and everyone was dying.  In other words, real life in the midst of a booming US and world economy and improving mortality experience is worse than “worst case scenario”.  Interesting.  (I would like to say I’m not going to say “I told you so” but I just can’t help it.)

The death benefit was initially reduced from $625,000 to $595,000 and then further to the point we’re now in the $400,000 something range.  They’re telling me they want to look at alternatives.

Replacing the Policy

The point of the next few paragraphs is to show how easy it is to posture market alternatives very attractively in an attempt to replace a policy.  We’ll start with the basis that these clients  want something rather conservative as they take enough risk with other asset classes.

We took traditional variable life insurance (VUL) off the table as they’re not interested in a policy driven by equities.  I showed them illustrations for an array of guaranteed universal life policies (GUL) but in today’s marketplace the pricing is such that we can’t beat the currently illustrated death benefit of their whole life product.  Of course, the current policy may further degrade but given the likely long term performance of it combined with giving up cash value in the GUL model, it didn’t look attractive.

We then compared illustrations for some traditional, current assumption UL that showed a death benefit of about $650,000 followed by some Indexed UL that showed death benefits in the $750,000 to $800,000 range.  Now we’re talking!  Right?

Pick up the phone and ask Barry Flagg what he would say.  I’m picking on Barry because his response would be almost robotic.  “Comparing illustrations of hypothetical premiums, cash values and/or death benefits is misleading, fundamentally inappropriate and unreliable according to financial, insurance and banking industry authorities.”  And he’s right.  There are many other very bright and experienced experts in the industry who agree with us.  To make these decisions based on ledgers is not only inappropriate, it’s also foolish.

Finally, I showed them what appears to be an oxymoron; a guaranteed variable life policy.  Sometimes this type of policy has an edge due to regulations regarding reserving requirements.

I helped the clients dig deep into the options so they could better understand what they were built on and how the contracts actually function.  Once I did so, even something that appears to show almost twice the death benefit and accompanied by a beautiful story isn’t a slam dunk.

Understanding the Options

In the end these policy owners may or may not make a change.  But if they do, doggone it, it’s going to be after I’m sure they understand the options well enough to make an educated decision, know what’s reasonable and what’s a pipe dream and it’s going to be based on empirical data and not emotion or a gut feeling.  Even for this highly educated and conscientious couple, making a sale and pocketing the commission, whether or not in their best interest, would be like taking candy from a baby.  Your clients are no different.

Sometimes replacing an existing policy is absolutely the best thing to do either because the numbers prove it or goals have changed.  In the end, their needs, their risk tolerance, their understanding of the financial markets and projections of where those markets will be in coming years and their faith, or lack of it, in the insurance companies and agents is going to determine what direction they’ll go.

Unfortunately, too many people can easily be taken by unrealistic ledgers and a good story.  I’ll be their next stop, maybe in five years and maybe in 25 years, to help them understand what happened and help them pick up the pieces.

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Help Mitigate Life Insurance Fraud

February 6th, 2018 No comments

Three rules to remember for layering in a basic level of protections for your clients.

While there’s likely no way to ultimately ensure your clients won’t be victims of fraud, there are a few things to be done that may help prevent it, as well as assist in recovery efforts if they’re victims. For full post, click here…

Understanding Life Insurance Performance – Part 2

January 19th, 2018 1 comment

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Digging Into the Black Box of Life Insurance

December 19th, 2017 No comments

Referring to life insurance as a “black box” goes back a long way, but just because life insurance may seem like a black box to you or your clients doesn’t mean it has to be. Some people understand it. It may not be healthy to foster an “us versus them” mentality, but it’s most certainly not healthy to ignore reality. When individuals don’t understand something, they seek out an advocate to ensure they have the information they need to make decisions in their best interest. Life insurance shouldn’t be any different. For full post, click here…

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Rebalance Power Inequity in Life Insurance Industry

November 30th, 2017 No comments

In the news, we currently have a number of stories of bad behavior. Political shenanigans, sexual harassment, corporate malfeasance, gun violence, the media, etc. It doesn’t take much to understand what connects much of this. I’m thinking about power. Those with the power can take advantage of those without the power. It’s not complicated.

Think about a serial sexual harasser or a congressman or a corporation or the guy holding the gun or the talking head. They’re all in a position of power and, unfortunately, often go unchecked until another who gains power can level the playing field. For full post, click here…

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Are all discounts beneficial? – John Hancock Vitality Program

November 13th, 2017 No comments

Many readers may be aware of Hancock’s Vitality program. I’m not going to attempt to do the program justice but you can click here to read about it. The short story is that the program offers different levels of discounts on your clients’ life insurance premiums based on their healthy lifestyle as measured by a variety of metrics and activities. It also incorporates discounts from partner companies and allows your clients to earn a steep discount on an Apple Watch or a complimentary Fitbit to track healthy activities. For full post, click here…

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Understanding Life Insurance Performance – Part 1

October 31st, 2017 No comments
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Don’t Underrate Term Insurance

October 31st, 2017 1 comment

It can be a good, cheap solution for many clients.

A younger attorney asked me some time ago to get some term numbers for her clients. Her question was “Is this premium monthly or annual?” When I told her it was annual, her next comment was “Could you quote some term for me and my husband?”

Pretty much every statistic shows most people are meaningfully underinsured. Sure, this is easy to say when it’s someone else’s money you are spending, however, I don’t think most people understand just how cheap term insurance is. Yes, some people can’t get it, and some people just don’t have any money, but that isn’t the case in most situations. For full post, click here…

The Problem with Spreadsheeting and Commoditization

October 11th, 2017 No comments

Recently I was brought into a case by an estate-planning attorney who had relatively young clients who handed over an insurance policy and said “Tell us if this is good”.

The short story is that the policy was only a couple of years old, it was a guaranteed survivor universal life (UL) from a reputable carrier and it was doing fine. The pricing was now unduplicable, and if they keep paying the premiums on time, then the death benefit will assuredly be paid someday. For full post, click here…

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The Truth Behind Whole Life Premiums

September 20th, 2017 No comments

Last September, I wrote a response piece to a New York Times article titled “Skyrocketing Premiums.” I was taking issue with some aspects of the article, which was interesting and made some valid points, but wasn’t entirely accurate. As expected, I got some interesting responses.

They came in two flavors:

1 Though I was somewhat blaming carriers for some of the problems with underperforming and collapsing life insurance policies, I was also deflecting blame directed at carriers, which was unwarranted. In response, I received fervent notes about how wrong I was. This response further proved much of the ignorance in the market regarding how life insurance actually works.

2 The other response came from some agents who specialize in whole life (WL) policies, as opposed to universal life, variable life and indexed products. I often hear from this constituency that their products don’t have the problem of rising premiums because WL premiums are guaranteed. I feel sad for these agents for they’re either appallingly ignorant regarding the polices they sell or they very well know better but purposefully keep up the façade for sales and marketing purposes.

Here’s my disclaimer… WL isn’t bad. Not all WL works the same way. I don’t have anything against it. It can be a good tool when understood, properly implemented and well managed. I even own some. There! I’m not trying to dis WL. What I am going to do is tell the truth. For full post, click here…

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