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The Sensitivity of Indexed Universal Life – Part 2

February 3rd, 2021 No comments

The following table is something I reference when talking with anyone about the time value of money.  When I was in my 20s, I had the conversation with my siblings as well as with my wife’s siblings and their spouses.  More recently I had the conversation with my own kids.

This isn’t going to be a revelation to anyone familiar with finance but a lot of people are surprised by it.  At a glance, it shows numbers that are almost unbelievable and, to an extent, defy logic for those unfamiliar with it.  For example, how can accumulating at 12% over 10 years be only 57% greater than at 4% when at the 60-year duration it’s 3,381% greater?  Or that from Year 10 to Year 60, 4% grows 20 fold when at 12% it grows more than 400 fold?  I mean, 12% is three times 4%, but over 10 years it only grows the pot by a fifth of that but at 60 years it grows the pot by over ten times the three times.  This is pretty cool stuff. For full post, click here…

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Today’s Life Settlement Market

January 18th, 2021 No comments

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The Sensitivity of Indexed Universal Life – Part 1

January 13th, 2021 No comments

Build it right or you’ll be walking on eggshells.

In the course of reviewing so many premium financing proposals and transactions, I have the opportunity to dive deep into many indexed universal life (IUL) contracts.  While premium financing has many complexities that go unrealized by consumers, even fewer understand the complexities of the life insurance product the already complex transaction is built on.

I’ll focus on a recent case in which my services were procured through the estate-planning attorney for a potential premium financed policy owner.  I’m not going to muddy the waters by naming the insurance company or the product because it really doesn’t matter.  I’ve seen the same thing over and over through the years and have written about it before.

In the course of review, one of multiple focuses is generally on the assumed crediting rate of the proposed policy and the crediting rate sensitivity to policy success.  To set the stage, in today’s market, a typical crediting rate is in the 6% range based on specific policy features and AG49A rules.  In the specific contract I was reviewing, the assumed rate was 5.92%. For full post, click here…

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Life Insurance Appraisal Brings Confidence to Planning

December 8th, 2020 No comments
Paying for a policy appraisal can have a great return on investment.

Recently, the attorney for a family office asked for my help with a situation. The family wanted to transfer/sell two $10 million survivor life policies to another trust for planning purposes. The policy owner went to the two insurance carriers to ask for the 712 values or Interpolated Terminal Reserve (ITR). Though the two policies had the same death benefit on the same couple issued at the same time for the same kind of policy, the numbers came back very different from the two insurance carriers, each of which is one of the top rated and recognized carriers in the market.

A Difference of Opinion

The cash value of each policy was roughly $1.5 million, and one carrier came back with a number exactly the same as the cash value and even stated on its communication “Please note that ABC Life uses the Net Cash Value as a proxy for the ITR.” The other carrier came back with $3 million.. For full post, click here…

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Success Stories: Policy Appraisal Brings Confidence to Planning

November 24th, 2020 No comments

Recently I was brought a situation by a family office through their attorney.  The family wants to transfer/sell two $10,000,000 survivor life policies to another trust for planning purposes.  The policy owner went to the two insurance carriers to ask for the 712 values or Interpolated Terminal Reserve (ITR).  Though the two policies w

ere the same death benefit on the same couple issued at the same time for the same kind of policy, the numbers came back very, very different from the two insurance carriers, each of which is one of the top rated and recognized carriers in the market.

The cash value of each policy was roughly $1,500,000 and one carrier came back with a number exactly the same as the cash value and even stated on their communication “Please note that ABC Life uses the Net Cash Value as a proxy for the ITR.”  However, the other carrier came back with a $3,000,000 number. For full post, click here…

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Comparing Term Life Insurance Policies

November 18th, 2020 No comments

Though the following piece I wrote on term insurance with Professor Gregg Dimkoff may seem very basic, sometimes it’s the basics that bear reviewing so we don’t miss something while focusing on the “high end” stuff.  In numerous recent situations clients have suffered significant harm because the basics weren’t a focus.  Also, the market is changing and we can’t take for granted our old assumptions are still accurate.  Enjoy.

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The Worst Life Insurance Deal Ever – Annual Renewable Term

October 27th, 2020 No comments

Why your client should never buy annual renewable term.

I’ve written about how expensive association term and group term is, how poor the policy features are and the tremendous amount of money that can be saved by going with a better underwritten product. But there’s another term insurance situation that’s even more insidious in my estimation. Annual renewable term (ART) or yearly renewable term (YRT) can take the cake.

Creeping Up Premiums

This was brought back to me vividly during a recent client conversation. An attorney had a $750,000 ART term policy, and his wife had one for $550,000. The premiums were only about $500 and $300, respectively, which isn’t much money for a couple making the income they do. However, let’s look forward a bit.

They’re in the seventh year of their policies, which already tells me a lot. By the second or third year, most ART policies already exceed the premium of a 10-year level term product. In 10 years the premiums on his and hers, respectively, are $1,200 and $700. In 20 years, they’re $2,900 and $1,700. In 30 years, the numbers are $6,800 and $3,400. Of course, almost no one plans on keeping an ART in force for many years, but plans don’t always pan out. What I see too often is that ART that was so cheap in the early years, like association term, has a premium that slowly creeps up without anyone noticing. It’s like the proverbial frog in the water on the stove. 

I’ve seen cases in which the ART had been in force for over 20 years. Even this one at seven years is a travesty. For this couple, a new 20-year level policy with a high-quality, well-respected insurance carrier issuing policies with very good contractual features would cost less every year for the next 20 years than the existing ART will cost this year. Ten years from now, the 20-year level term premium will be less than half the ART premium, and in 20 years, it will be less than 20% of the ART premium. The savings are ridiculous.

For full post, click here…
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Beware… of Inforce Illustrations and Loans

October 22nd, 2020 No comments

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Insuring Life Insurance

October 13th, 2020 No comments

Clients should create their own disclaimers.

Consumers procure life insurance for protection, but do they need to be protected from it at the same time? Too often the answer is yes. Maybe it’s because I’m on the consulting side of the market that train wrecks disproportionately end up on my desk.

For full post, click here…
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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.

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