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Archive for September, 2020

Is Term Insurance a Commodity?

September 30th, 2020 No comments

Question:

When it comes to term insurance, can’t I treat that as a commodity, at least when I’m dealing with quality insurance companies?  Why should I pay any more than I need to?


Answer:  

Many people have the same mentality when it comes to term insurance but I will caution you about that mindset.  There’s a chance that things will turn out fine but it’s the future unknowns that you want to be ready for and can be better handled by a product that has flexibility.

It’s more important today than ever before to understand the contractual features of your life insurance policy. In the past, many insurance companies had practices regarding policy language that they do not follow today. For example, they may have allowed a policy split or a reduction in face value by practice but not by contract.  It was taken for granted that these practices before would be honored but many companies are going back to contractual language and dismissing former and traditional flexibility.

A huge issue today is what a term policy is convertible to.  Over the years, most current policies were convertible to any permanent product the carrier was issuing at that time. Nowadays many insurance companies are only allowing conversion to certain products, sometimes terribly uncompetitive products that only exist for the purpose of converting to when someone has no other choice.

I’ve seen conversion options from a preferred best rated term policy to a permanent policy where the pricing was equivalent to a couple of tables down the substandard risk scale for their more popular products available today.  Some contracts are convertible to certain policies in the first number of years then only to other policies after that.

Another big issue is conversion features relative to age of the insured and of the duration of the level term policy. One term policy might be convertible to age 65 while a policy with another company to age 70 or age 75. One policy may be convertible for the full duration of the level term product while the next is only convertible for the first five years. 

This may not seem like big issues and they aren’t until they are… When you are 48 years old and discover you have a disease, that if it doesn’t kill you it will certainly leave you uninsurable for the foreseeable future, and still have a family that is depending on your income and you are getting close to the end of your 20 year level term policy that was only convertible for the first 10,  don’t tell me you don’t really care that it’s not convertible when you realize that you’ll shortly be leaving yourself uninsured and your family at risk. I’ve seen it happen. I am all too familiar with the regrets.

As an aside, if you have group or association term, don’t think these issues don’t affect you.  You are at the most risk as those term products are some of the worst that exists in the market. Please do yourself a favor and learn what they really are and what they aren’t.

The bottom line is that term can be viewed as a commodity no more than any other life insurance product.

Categories: Questions & Answers Tags:

Beware…of Inforce Illustration System Error

September 23rd, 2020 No comments

Categories: Beware Series Tags:

Beware…Of Group and Association Term Insurance

September 21st, 2020 No comments

Categories: Beware Series Tags:

The Most Important Thing to Understand Regarding Premium Financing: Are the Numbers Real? By Bill Boersma

September 16th, 2020 No comments

Given the number of premium financing cases that I review, in force and proposed, I’ve seen much of what’s out there and have a good grasp of the level of understanding in the consumer market. There’s one overriding commonality I see again and again, and until this is taken care of, there will continue to be problems: Are the numbers customers see real?

As I’ve written before, I’m not against premium financing. If I was, I wouldn’t have a mortgage on my house. I don’t pay off a 3% mortgage because I’m confident that I can do better over time in the market or invest that money back into my company, other real estate or whatever I believe I can invest in at better than 3%. Returns elsewhere that are better than my mortgage rate effectively discount the cost of the house.

The Appeal

Isn’t this often the communicated appeal of premium finance? If I can borrow at 1-year LIBOR plus 150 basis points today, let’s say that’s 2%, and I can make 5%, 6%, 7% or higher in a life insurance policy, why wouldn’t I if I’m shown that the spread will grow cash value to the point it can pay back the loan and I have significantly discounted, or even free, life insurance?

That would be great… if only it was true. Now wait a minute Bill, I can hear you saying, you’re not going to say that the gazillions of dollars of premium financed business aren’t real, are you? Well, kind of. Of the gazillions in premium financed business, some percentage is legitimate but I’ll suggest bazillions aren’t. (Sorry for the technical terms. I’ve defined them at the end of this piece.) How can I say that, you ask? Because I’ve seen the misrepresentation first hand.

This isn’t about the realism of the AG 49 regulations or the future performance of the stock market or legitimacy of proprietary indexes or performance of more realistic sequencing of returns or the efficacy of indexed loans or numerous other things we can argue about regarding modern life insurance and the financing of premiums. No, this is about something very simple… are the numbers consumers see real?

What Rates are Real?

This is where we can start getting into the area of Clintontonian parsing of language. Is that 6.2% whole life (WL) dividend rate or indexed universal life (IUL) crediting rate real? It depends on what the definition of “real” is. Is it an actual number that goes into the funnel along with all of the other contract variables? Yes. Does it bear much resemblance to the product coming out the other end? No. At least not in the sense that policy owners understand.

I’ve seen plenty of premium financed cases built around both traditional WL and IUL. In recent examples of each that I have analyzed, the internal rate of return on premium to cash value over 10 years was 0%. Let’s go back to the earlier question; Is the WL dividend rate or IUL crediting rate real? You tell me. If I’m supposedly being credited 6.2% and getting 0%, what’s real? Where’s that 6.2% going? Premium taxes and charges, policy fees, mortality charges, commission, etc. That’s to be expected because that’s how insurance works. A recent IUL case on my desk had $3.5 million of premium in the first decade and $3.7 million of expenses during the same period. That’s bound to put a dent in the returns.

That’s in the early years, so how about later? Over decades, the actual IRR on premium to cash value might be 3%, 4% or 5% based on current dividend rates and reasonable market returns, but we’re still not at the 6.2%. Is that a problem? It depends on how the deal was postured to the policy owner. What I can tell you is that over and over I see a deep misunderstanding on the part of the consumer that’s a result of misrepresentation. The arbitrage these deals are consistently built around is between the gross crediting rate and today’s borrowing rate. Moving into the arena of Trumpian language, there is almost no understanding that this is a fake spread.

It’s not real, people. It’s just not real. There, I said it. The gross WL dividend rate and the illustrated IUL crediting rate that so many consumers buy into, because that’s what they are sold, doesn’t mean much relative to the net rate after all expenses. I’m not saying this is typical of all cases, but one I’m working on right now, based on the actual original sales ledger, that has an IRR on premium to cash value that never exceeds one point something percent. I’m serious! The supposed arbitrage based on the original 6.25% projected crediting rate never even hits, under best case conditions, the borrowing rate. It’s a perpetual negative arbitrage that the client bought into because of how it was sold to him! It didn’t even have anything to do with the opportunity cost of any of his other assets.

What Can You Trust?

But what about the spreadsheets showing is all working out? Ask yourself how well you comprehend those spreadsheets. Do you really understand all the variables built into them? How realistic are the assumptions? Maybe it’s being built on an insurance carrier’s illustration system that’s being outlawed as we speak. Are you familiar with options pricing and how that affects cap rates and where they can go? When do you want to discover that? Maybe it was built off a baloney, nonetheless “real” dividend rate that someone who actually understands the markets, the industry and how life insurance works, would absolutely know is going down. Wouldn’t that be valuable and more so today than down the road after millions are sunk into it?

Let’s review. Does your client have needs and a risk tolerance profile that necessitates consideration of such a plan, or is this something “sophisticated” that rich people do? The advertised rate means almost nothing so your client should never make a decision based on the “arbitrage” or “spread” between the advertised dividend or crediting rate and the borrowing rate because it isn’t real; it’s a fake spread. Seek objective counsel from someone who understands the financial markets, the industry, the products, the programs, what’s driving these deals and who’s paid for advice.

Once again, I’m not saying premium finance is bad or can’t work, and I’m not saying to get out of what’s currently in force. What I’m trying to say clearly is that anyone who’s in a deal or considering a deal absolutely needs to understand what is real and what isn’t real. Is that so crazy an idea? The good news is that this is possible. All that’s needed is some objectivity and a calculator. If they move forward with something that isn’t as real as it’s understood to be, things fall apart, disillusionment prevails and they end up at my door. After I dive in and untangle things and show them what was real from the beginning, they tend to pay attention and get engaged. If only they were that engaged from the outset.

* Gazillion – A lot.
Bazillion – A lot but not quite as much.

Bill Boersma is a CLU, AEP and LIC and the founder and principal of OC Consulting Group. More information can be found at www.OC-LIC.com, BillBoersmaOnLifeInsurance.info or email at bill@oc-lic.com.

Categories: Life Insurance Tags:

Do Life Insurance Dividends and Crediting Rates Mean Anything?

September 8th, 2020 1 comment

It’s time to separate fact from fiction.

If I hear another policy owner touting the rate of return he’s getting on his policy cash value, I might scream.

Few policy owners have any idea what they’re talking about. All they’re saying is what the agent told them, and they haven’t even taken out a calculator to check the numbers.

Let’s look at a recently run traditional mutual whole life (WL) policy presented to me. The carrier is a big name and respected company with a

current dividend rate at better than 6%. The internal rate of return on the premium to the cash value at 10 years is negative 3.2%. At 15 years, it’s about 0%. At 25 years, or age 70, it’s 3.5%. It never hit 4%.

Expenses Need to Be Considered

There’s nothing wrong with this, and it’s a perfectly fine policy. However, don’t tell me you’re getting 6% on your cash value because you’re not. That’s not even how WL works. The cash value, let alone your premium, just doesn’t grow at the stated dividend rate. I mean, seriously, where do you think the expenses are paid from? Of course, not everyone thinks this and not every, or even most, agents misrepresent it, but enough do so it needs to be talked about. For full post, click here…

Categories: Life Insurance Tags: