Life Insurance: Told vs. Sold

September 17th, 2019 No comments

Over the course of my life insurance consulting career, it’s been much more common to be called in to fix things that are already in place than to be called in to help understand and build something right from the get go.

There’s an all-too-common thread in many of these situations, and it’s that what policy owners are buying isn’t always actually what they think they’re buying. A list of examples would be very long but anything from the whole life (WL) and universal life of the 1970s and 1980s through premium financing and the intricacies of modern policies today would be on the list.

Indexed Universal Life

To illustrate what I mean, I’ll take the most simplistic of examples. We’ll start with indexed universal life (IUL). The pitch is fantastic, and it focuses on the story of an IUL policy having the upside potential of the stock market while having no down side risk. You could make double digit returns and never have a negative return. I have to admit, that sounds exciting.

What’s the told vs. sold difference here? Let’s start with what an index actually is and focus on the S&P 500.  If I ask you what the S&P 500 return has been over time, you’d likely have at least a guess for me.  Over the past decade, it’s been greater than 13%, over the past 40 years it’s been over 11% and over the past 100 years better than 10%.  My experience is these numbers ring true to many people. However, the S&P 500 returned less than 6% over the past 20 years so it matters greatly what period you’re looking at.

The S&P 500 Relative to the S&P 500 Index

On a decade-by-decade basis, only half of the past 10 decades had total returns in the double digits with two full decades experiencing a negative return. But this isn’t the most important thing to understand. More important is what the S&P 500 Index actually is. Few people understand that the S&P 500 and S&P 500 Index aren’t the same thing. The S&P 500 Index doesn’t incorporate dividends in its return numbers. Does that make much of a difference?

With the exception of the past decade of a historical bull market, there’s no backtesting from today where the S&P 500 Index is double digits. The past 20 years? 3.69%. The past 50?  6.68%. The past 100?  5.97%. Over the past 100 years, reinvested dividends account for roughly 40% of total return. In the past 30 years, it’s about a quarter of the return. There are entire decades in which over half of the return is due to the dividends. If these are the S&P 500 numbers that indexed policies are actually built from, how should that affect decision making?

AG 49

The National Association of Insurance Commissioners issued Actuarial Guideline 49 (AG49) in 2015. This guidance was an attempt to reign in crediting assumptions of IUL policies being marketed. Some like and some hate the guidelines, but they’re the rules of the land today. The current allowable crediting rates for new and in-force ledgers are based on 65 years of backtesting of 25-year periods. There are many thousands of data points and other parameters to be incorporated, but in the end, the crediting rates allowed are the result of a geometric average. This average is often referred to as the “compounded annual growth rate” or “time-weighted rate of return.” When we talk about averages, half the results are above this number and half are below. Remember, this is the maximum allowable illustrated crediting rate, yet it’s the number very often used as a default rate for sales ledgers and for managing existing contracts.

I’m not confident that regulatory maximums were ever meant to be default illustration rates. Effectively it means that an annual premium arrived at by using the AG49 limit has a 50% chance of turning out better than and a 50% chance of turning out worse than illustrated. Would a prospective policy owner really move forward on this modeling if that was fully understood? With some policy designs, the contract would stay in force, but with many I see in the field, the policy would cease to exist with the policy owner losing all premiums, cash value and death benefit.

Yes, even with a policy with downside protection that can never be credited at less than 0%, the cash value can go down, eventually to zero, with the policy lapsing. This truth is actually a surprise to many.

When the prevailing understanding of a consumer is that the S&P 500 is double digits and the proposed insurance ledger is assuming, say 6.5%, it may seem quite conservative. But if the actual dividend exclusive returns are understood to be a few hundred basis points lower, all of a sudden the transaction may not seem so conservative.

Sequencing of Returns

None of this analysis even takes into consideration the sequencing of returns. In the real world, it’s exceedingly important when a return is realized, not just what the return is. A 0%, 10%, 5% sequence is different from a 10%, 5%, 0% sequence. Interestingly, the only way an IUL ledger can be illustrated, an exactly even return year in and year out forever, is absolutely positively impossible to actually happen. There is, however, some limited access to independent modeling showing the effects of various sequence of returns, and it generally shows the policy falling apart well before expectations, and this would certainly affect choices of the decision maker.

Now that we better understand what IUL returns are built from, let’s look at the returns in policies themselves. Over and over again, I deal with policy owners who have a substantive misunderstanding of what they’re getting for their money. For some reason, when life insurance consumers hear the crediting rate, whether it’s the dividend rate of a WL policy, the market rate of a securities based policy or the rate we’re discussing of an IUL product, they think that’s the actual rate their premiums are earning, even though it’s actually not even close. There are commissions, premium taxes, overhead expenses, policy fees and mortality charges coming out. The net crediting rate ranges from modestly lower to drastically lower depending on the type of contract, how it’s built and the phase of the policy life we’re focusing on.

The Effect of Expenses

Looking to a real life example from not long ago, a very wealthy and financially sophisticated consumer was considering a significant IUL purchase. His attorney brought me in to provide some analysis. A meaningful point of the policy was cash accumulation, but per my perspective, it wasn’t at all built for such. Looking forward for this 50-year-old gentleman, the internal rate of return (IRR) on premium to cash value at age 65 was 1.10% assuming a 6.28% crediting rate. The expenses in the contract in the first 10 years totaled 58% of the cumulative premiums. Assuming the very unrealistic ledger provided to him panned out, the best IRR on premium to cash value over the life of the contract never exceeded 50% of the assumed credited return.

Why does this disconnect matter? Because he was single-mindedly focusing on the gross rate the agent told him rather than the deal she sold him. A well built contract could look much better, but even that will never perform as understood by most consumers.

Rather than focusing on the marketing story and the maximum allowable illustration rate, if a policy owner understood how indexes were actually calculated, the internal expenses of the contract, the effect of sequence of returns, the actual return on committed premiums, etc, do you think he might start asking additional questions?

What About WL?

Let’s turn our focus to traditional WL. Even more so than with IUL, the policy owners I talk with focus on the dividend rate. An actual life WL ledger recently provided to me assumed a 7.1% dividend rate. After five years, the IRR on premium to cash value was projected to be negative 6.13%. This is how WL is supposed to work, but the policy owner had no idea. After 10 years, the projected return was 1.23%. Because the dividend has come down, the new projected return after 10 years is half that. In 15 years, the projection is 2.90%, at 20 years it’s 3.64% and at 30 years it’s 4.02%. The dividend rate has been reduced again so even these numbers are outdated, and the new prospective return is lower.

The told vs. sold issue is especially important in this situation as the gross dividend rate was strongly and loudly and emphatically touted for the premium financing deal this policy was a part of. I’ll tackle that issue in my next piece.

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

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The Life Insurance Benefits of Quitting Smoking

July 24th, 2019 No comments

Kicking the habit can save clients a bundle.

I recently wrote about improving return in a life insurance policy through better underwriting.  No sooner had I done so than two cases came across my desk regarding the same issue that illustrated just how dramatically meaningful this can be.

Client Quits Smoking

A few years ago, I helped a neighbor with life insurance on himself and his wife. His wife’s policy was a straight forward $1 million 10-year term. She was healthy but a smoker so she got preferred smoker status.  The premium was $3,000. For full post, click here…

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Internal Rate of Return on Underwriting

July 16th, 2019 No comments

Pay attention to where it counts

It’s interesting to see where people put effort and concern and where they don’t.  Parents might go to extreme lengths to keep a child safe and healthy by purchasing the best reviewed products and most healthy food and participating in developmental activities.  However, without even thinking about it, they’ll then put that kid in a car to run to the store, and that’s the most endangering thing a parent could do to a kid according to the Center for Disease Control and the World Health Organization.  But do any of us use that as a reason to not visit grandma?

No.  We use modern car seats and seatbelts and review crash test data and hopefully don’t text and drive.  We do what’s needed to improve the chances of a positive outcome.  In reality, we’re simply not lending credence to those things we’re very comfortable with and that don’t make us stop and think.  Sometimes worse, we make decisions based on unsubstantiated rationale.  After all, we’re victims of emotion at times.  The same emotion that makes us go to some ridiculous length to prevent something from happening that, in all likelihood, is never going to happen is the same emotion that may drive someone to buy a tiny, gas efficient car to save the planet when the full size SUV is going to protect your kid far better. For full post, click here…

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Letters of Explanation: IUL Premium Financing Risk

June 17th, 2019 No comments

Dear Mrs. Client:

Last week I promised you some numbers to put into perspective my thoughts that premium financed Indexed Universal Life isn’t what you think it might be.

The spreadsheet you showed me some time ago assumes an annual loan of $700,000 for 13 years.  This is used to purchase a policy that assumed roughly a 7% annual crediting.  This may sound conservative for an S&P 500 Index return but it isn’t if you understand how Index funds work.  A significant issue is that the dividends aren’t included in the return and historically dividends make up at least a couple hundred basis points of the return and sometime 500 basis points.  There are entire decades where the dividends are greater than 50% of the return of the S&P 500.

For full post, click here…

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The Bastardization of Premium Financing

June 10th, 2019 No comments

What you see isn’t necessarily what you get.

Wealthy people and business owners have always leveraged money and assumed risk but starting about a decade ago, after the 2008 crash, premium financing has been driven by very low London Interbank Offered Rate (LIBOR) based borrowing rates and aggressive return assumptions on insurance products that are easy to manipulate.

Indexed Universal Life (IUL) made a strong showing marketed by a particularly attractive story, if not altogether accurate.  Upside potential of the stock market without the downside risk sounded great with the memory of 2008 still fresh in minds.  These products can be illustrated at unrealistically high rates while appearing to be modest because few understood how they work.  Abuse is rampant even after the regulatory action of AG 49. For full post, click here…

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Q&A: Opinion of IUL Policies

May 24th, 2019 1 comment


I am curious as to your opinion of IUL policies? They seem to me to substantially overpromise, and they are too complicated for me to understand! Would love to hear what you think.


Regarding IUL, I say “There’s not bad insurance as much as there is insurance done badly.” For full post, click here…

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The Tragedy of Group Term

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

For full post, click here…

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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.


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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