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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.

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

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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. For full post, click here…

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:

Life Settlements: Doing the Right Thing Is a ‘Sometimes’ Mantra

August 31st, 2020 No comments
Within the life insurance industry, there is vicious infighting with everyone trying to protect their own turf.

There may be few markets more divisive in the life insurance world than the life settlement market. It’s a bit macabre by nature, but that shouldn’t be held against it; all life insurance is. A given individual may not want to go that route, but that shouldn’t matter for others. It might have a small target market; however, when it works, it can be like a grand slam.

Within the life insurance industry, there is vicious infighting with everyone trying to protect their own turf. Some agents believe it’s a great opportunity, with others saying it should be illegal. Some advisors cringe at the concept and others readily refer clients to

trusted players in the market.

This is something I have never been conflicted about. When done for appropriate reasons and aboveboard, I would move forward all day long. I’ve seen life settlements salvage almost unimaginable amounts of money, millions of dollars in single transactions. On smaller deals, getting 50 grand is better than a poke in the eye. But why the controversy? For full post, click here…

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Indexed Universal Life: Back Testing and Cap Rates and Averages, Oh My!

July 30th, 2020 1 comment

In a recent engagement, an agent trying to convince a client to enter a premium financed indexed universal life (IUL) transaction was touting returns on his own IUL policy over the past decade or so.  I found a number of aspects of this peculiar.  One was that he was touting the average interest rate on his own policy, which has happened to be in force during the longest bull market in U.S. history.  This was supposedly a reason the product was so great and could/might actually outperform the crediting rate of the sales ledger, which I already deem to be too aggressive based on significant objective data.

Another oddity is that he evidently doesn’t understand the difference between an average interest rate and the internal rate of return (IRR), which is the difference between an arithmetic mean and a geometric mean.  The geometric mean will generally be lower, and it’s the number any sensible person would use when evaluating an investment.  As an example, what if you get a 0% rate of return for three years and then a 40% return in the fourth year?  The average rate of return is 10% but the IRR is 8.78%.  It’s respectable but not accurate.  No one would reasonably look at the track record of this product as 10%.

Next, the agent was sharing past rates of return that are higher than currently possible due to falling cap rates.  In an IUL product, the cap rate is the highest crediting rate possible regardless of the actual index return.  On the flip side, there’s a minimum, often 0%.  Therefore the product is postured as having upside potential with downside protection.  This is not untrue but rather misleading without a full discussion of internal policy fees and charges and what’s going on with caps. For full post, click here…

Categories: Life Insurance Tags:

Video: Funding a Buy-Sell Agreement with Life Insurance

July 28th, 2020 No comments

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Woes of a Fee-Based Life Insurance Consultant

July 21st, 2020 1 comment

Why are policy owners so reluctant to pay for these services?

I’ll admit it.  I get frustrated at times.  I’m a fee-based consultant brought in by attorneys, CPAs, trustees, financial advisors and family offices to review, create, fix and do whatever else is needed regarding life insurance products and concepts.  I’m approached to analyze policies and programs already in force for years or even decades, and sometimes it’s new proposals that I’m retained to opine on.

History Can be a Guide

I’ve been around long enough to say “I told you so” a lot.  When I first started doing “policy audits” 20 years ago, which was already 15 years into declining interest rate markets, most policy owners and their advisors hadn’t seen many, if any, examples of underperforming whole life (WL), universal life (UL) and variable life policies.  Few people understood how modern life insurance worked and how the interest rate markets affected it, so few even looked to monitor, let alone manage, life insurance policies and portfolios. For full post, click here…

Categories: Life Insurance Tags:

Speaking to Clients About Premium Financed IUL Policies

June 16th, 2020 No comments

It’s important to understand the details and risks. This sample letter may help clients and advisors alike.

 

Dear Ms. Prospect:

It was good to speak with you yesterday morning about the proposed supplemental retirement plan, and I thought I would follow up with a couple of comments. As we discussed, I’m very familiar with indexed products and premium financing. I believe there are appropriate times and places to use the product and strategy, and there are times when it’s not.

Prospective consumers need to fully understand what they’re getting into on both the product and the strategy side. They need to intimately understand the variety of risks. A general rule of thumb is that they should be able to pay the full premium out of pocket but choose to finance it because they’re comfortable with the risks and have the ability to buy themselves out of trouble if trouble shows up (and it does too often). Finally, they need the policy meticulously managed until the day they die.

The proposed product is a newer policy design, and some feel it’s too aggressive. I have access to a tremendous amount of analysis regarding the policy that I’d be happy to share. One reason it’s popular in the premium financing world is because it was created to illustrate very strongly and to win the illustration wars. This doesn’t mean it’ll actually perform successfully. For full post, click here…