Bill Boersma: On Life Insurance

The insurance company may be allowed to alter the deal during the contracted term.

It’s not often interesting talking about boring term insurance, but my most recent article seemingly touched on something bothersome.  When discussing why it’s essential to pay close attention to the contractual details of term insurance, I mentioned that many insurance companies have changed their policies regarding conversion.

Whereas most carriers allowed conversion to any product they offered the public at the time of conversion, many are now significantly shortening the conversion duration and/or limiting conversion to only policies no one would willingly purchase if they had a choice.  It’s worth looking at these numbers.

We’ll assume a 30-year-old healthy male took out a $1 million 20-year term policy at the best preferred rate.  When he did, he understood it (rightly or wrongly) to be convertible for the 20 years to any product the carrier offered, and that was the case by practice.  By contract, the carrier could change this, and it did.  Now, our insured is approaching age 50 and has a health issue that prevents him from getting new insurance on a favorable basis, or even at all.

Conversion Option

At preferred best, the insurance company offers a policy with an annual premium of $8,350.  However, he’s now limited to a product the carrier developed specifically for conversion purposes.  The annual premium for this product is $15,900.

On average, the products available for conversion have a premium more than double the premium of the competitive products the same carrier offers for new underwriting.  The conversion premium for someone with the best possible preferred rating is equivalent six to 10 table ratings.  Table ratings are for underwriting someone with health issues who isn’t preferred best, preferred, standard plus or standard.

This is bad enough for new term cases, as I’m sure most policy owners have no idea how this works.  It’s an entirely different story for those who procured their term policies years ago with one understanding who are waking up to a different world order today as their insurance company is changing horses mid stream.

Maybe I’m old fashioned, but I find this despicable.  Please make sure your clients understand. If conversion options are even a remote consideration (I’ll suggest this will be a bigger deal down the road than it seems it will be when a young, healthy individual is making these decisions), there are insurance companies that haven’t made these changes and offer their entire product line for conversion, by contract, and won’t change the deal.

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

Learn more about Life Settlements here.

OC Consulting Group / Bill Boersma

The policy death benefit often doesn’t stay in force automatically; you have to ask for it.

Two policy owners have been referred to me by two advisors in the past two weeks with the same question. “Can you help us determine what happens to the life insurance we have in place on mom/dad when they turn 100?”

The mom and dad (from different families) were both 99 years old. I had good news for one family and bad news for the other.

Bad News

Here is some of the contract language for the family with the policy that wouldn’t last beyond age 100: For full post, click here…

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?” For full post, click here…

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. For full post, click here…

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…

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…