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Defined Benefit Life Insurance

April 17th, 2018 No comments

Clients need to pay attention, as the world has changed
By Bill Boersma

In my ongoing effort to educate people on how life insurance works, I seek out new analogies and examples on a regular basis.

Along with others, I’ve written exhaustively about underperformance and management of life insurance. Charlie Ratner is fond of saying it isn’t underperforming, it’s under-explained. I completely agree. If your car runs out of gas and stops along the side of the road, is it really underperforming? Life insurance policies need gas, and if they don’t get it, they stop too. Fortunately no one at the dealership needs to explain this to society because a critical mass of people understand this and help educate others as they come along.

Most of us understand the difference between defined contribution and defined benefit plans. With defined contribution plans, you put a certain amount in, and it grows depending on performance. With defined benefit plans, there’s a desired goal, and the contributions are dynamic based on past experience and future expectations. Actuaries calculate how much needs to be contributed annually based on these underlying assumptions.

Shift to Defined Benefit

Before the late 1970s, fundamentally all life insurance was fixed; one knew what was being contributed and what was to be expected. Since then, most insurance is built on a defined benefit model. This isn’t unlike the shift experienced in retirement planning, where the risk has been transferred from the company/employer to the customer/employee. Based on how they’re built and client expectations, even many whole life policies are defined benefit contracts. . I’ll submit that the reason so few people understand this is because many, if not most, people have an old fashioned understanding of life insurance.

But didn’t I say that retirement plans have shifted to a defined contribution model while life insurance has shifted to defined benefit? How can seeming opposites both shift the risk the same way? It’s obvious to most of us how the change from defined benefit to defined contribution plans shifts the risk to the employee. With life insurance, the shift in risk to the customer is in the sense that the defined benefit (death benefit) is only payable if the customer funds it appropriately. In the old days, interest, mortality and expense risk was on the shoulders of the carriers. If they got it wrong, they still had to pay the death benefit. Today, interest, mortality and expense risk is on the shoulders of the insurance customers because if they get it wrong and don’t fund the policy appropriately, the carrier doesn’t have to pay the benefit. Very, very different from defined benefit retirement planning.

Beginning in the late 70s, with the introduction of universal life, the shift was made to defined benefit life insurance, though the consuming public didn’t fully realize this. Later, variable life policies, blended and non-guaranteed short pay whole life insurance policies and indexed policies were all versions of defined benefit contracts. Only true guaranteed premium and guaranteed death benefit contracts, such as guaranteed universal life and non-blended whole life policies are defined contribution contracts, as is term insurance.

Different Role of Premiums

The premiums of these defined benefit policies weren’t tradition premiums, guaranteed like in the past. These premiums are merely suggestions, or point in time calculations, of what might be paid to hit a goal given what’s happened to date, what’s happening today and what we think might happen tomorrow. If crediting rates rose and/or the expenses of the contracts declined, the premium might be lowered. But as actually happened, crediting rates fell for decades, and now some contract expenses are rising, so the requisite corrections need to be made. Don’t confuse paying premiums with guarantees. This is why pension plan contributions can change regularly. If the plan overperformed or underperformed projections, actuaries calculate the corresponding changes needed for proper funding.

While your client’s 401(k) may be a defined contribution plan, it’s a factor of his overall retirement planning, which is defined benefit planning. If your client’s original retirement planning assumed an 8 percent return and his experience was off that by a couple hundred basis points, without making changes, could your client still expect to retire on target? If you can usually get to your cottage on one tank of gas but this trip you’re pulling a boat that meaningfully reduces your gas mileage, if you don’t stop for more gas and still plan on making it, I have news for you.

Since most life insurance is built on a defined benefit chassis, you should advise your clients to manage life insurance like anything in their life that has a benefit affected by environmental factors. I’m not saying policy premiums need to be tweaked with every single crediting or expense change but periodic review is essential or the policies may fail, as they have been for decades. The world changed 40 years ago. I find it difficult to understand why the critical mass of consumer understanding has yet to follow.

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

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Life Insurance with an Infinite Return?

April 9th, 2018 No comments

Warn clients not to bail on policies.

An advisor recently called me regarding a client who has a $2.5 million second-to-die guaranteed universal life policy. The contract was put in force in 2012, so those who are familiar with the market understand that was near the bottom of the pricing curve. Nonetheless, the clients want to bail on this policy, purportedly due to the change in estate tax laws.

Given the fact that this policy is an unduplicable contract with a premium so relatively modest they probably can’t notice it, and noting the sunset provision and probable estate tax uncertainty moving forward, I’m not sure this is a wise choice, but it’s not for me to say. Maybe the kids have been ticking them off lately. For full post, click here…

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Life Insurance in Today’s Estate Tax World

March 22nd, 2018 No comments

What to do with existing policies
By Bill Boersma

As might be expected, I’m getting more calls lately from advisors, on behalf of their clients, asking what should be done about life insurance no longer needed for estate liquidity purposes.

I generally answer the same way every time; “Let’s evaluate the policy and then talk about options.”  Depending on the client situation, the first issues I discuss with the advisor is what happens when the current estate tax law sunsets, and does your client really want to bank on what the tax laws will be, 17, 28 or 42 years from today?  With life insurance, it seems many people will jump on a reason to walk away. For full post, click here…

How Not To Evaluate Life Insurance

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. For full post, click here…

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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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