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Explaining Whole Life vs. Guaranteed Universal Life Insurance

August 10th, 2021 No comments

Hi Tim:

It was good to chat this morning. I understand what you’re looking for when you asked about articles comparing and differentiating WL from guaranteed UL products in the market. However, as I mentioned, what sounds so simple isn’t so easy to find.

I thought I’d take a stab at talking this through, and maybe this will be enough for your clients at this point.

My understanding is your client currently owns mutual WL. WL is a perfectly fine life insurance product but it comes in a number of forms, and I often discover that policy owners don’t understand what they really have. For example, one of the biggest misperceptions is that the policy they believe is traditional WL actually consists of a significant amount of term insurance. In fact, I’m currently working on a situation for a business owner in Grand Rapids who has a $1 million mutual WL policy from a well known and highly rated provider issued in 1990 with $1,000 of WL and $999,000 of term insurance. He had no idea. Given the precipitous drop in the interest-rate market and the accompanying drop in the carrier’s dividend rate that is crediting the policies, the policy is failing badly and will likely never pay the death benefit unless significant changes are made.

This is different from true traditional WL. However, many of those WL policies have some term blend, and this is greatly affected by the low interest-rate and low insurance dividend crediting environment. What’s exceedingly important for policy owners to understand is only the original WL portion of the policy had a level guaranteed premium. Many of my clients have discovered, much to their chagrin, that they have to pay significantly more premium, or more years of premium, than expected, and the cash value and death benefit isn’t growing to anywhere near original projections.

There are multiple types of permanent, cash value life insurance in the market. This includes the WL policies as discussed above, traditional UL, variable WL and variable UL, indexed UL as well as guaranteed UL and guaranteed variable UL contracts. There are additional products in the market with some unique nuances, and each of these contracts is available in a single life or survivor life format.

Most of my work with the business owner community is for trust owned life insurance to provide liquidity for estate tax planning and business succession planning. That being said, we’re generally focusing on death benefit type products more than life insurance contracts designed to accumulate significant cash value. It’s important to understand that you can’t really have your cake and eat it too in the life insurance world. It’s an ongoing game of horse trading, where you give up one thing for something else. For example, you may give up cash value for death benefit and premium guarantees. Some policies have more upside potential than others. Some perform better at different points in life. You generally can’t find something with low premiums, guaranteed premium and death benefit as well as significant cash value and upside potential.

In my market for my clients who look to life insurance for death benefits, we generally look at guaranteed products. Though guarantees are often associated with higher costs, that’s not always the case with life insurance.  Given that so much is riding on the death benefit coming to fruition for planning purposes, and the fact that these business owners are already taking significant risk in the balance of their estates, guarantees are very attractive. Also, given that they’re focusing on death benefit, they don’t put a lot of weight on significant cash value though they’d obviously take it all things being equal.  Many also value flexible premium products as their cash flow‘s can vary from year to year.  WL life products have limited flexibility while UL products have flexible premiums to an extent.

Given these goals, for the last two decades we’ve focused on guaranteed UL along with guaranteed indexed UL and guaranteed variable UL when available. These products have a guaranteed premium and a guaranteed death benefit and generally have been the lowest priced life insurance. Traditional WL without a term blend typically has a much higher premium, and it accumulates more cash value over the long term.  It likely has a growing death benefit so the projected internal rate of return on premium to death benefit at life expectancy may be similar but there’s big differences in how you get there. It’s neither right or wrong, just different.

However, given the financial dynamics of the market, insurance companies have had a difficult time making money on their money, and given some changes in the regulatory market, pricing for guaranteed UL products has generally increased over the years and many companies are no longer in that market at all.

My concern over this is reduced because of the continued availability of guaranteed variable UL products. Though it may seem like a contradiction, these products, though invested in the securities markets, have guaranteed premium and death benefit as well. They remain competitive because they’re not as dependent on the interest-rate markets, and they follow different regulatory rules. Also, an often overlooked but important aspect of these contracts is that the cash values are separate accounts, meaning that they’re separate from the insurance carriers and the creditors of those companies. Even if a life insurance company went out of business, the cash value in the separate accounts wouldn’t be on the table like cash value in traditional life insurance products.

In my experience, the premiums of these policies are very competitive, policy owners have a choice in how the cash values are invested among a wide variety of sub-accounts, both the premium and the death benefit is guaranteed and there’s upside potential if the sub-accounts do well over time. What I mean by this is, if the cash values grow enough, they’ll push the death benefits up over time so ultimately, there may be more death benefit than originally guaranteed.

In the market today, the product du jour is indexed UL. There’s a great story behind these products that many agents pitch. They’re touted as life insurance products having the upside potential of the market without the downside risk. While in a sense this is true, these are some of the most complicated products in the market, very few people, including advisers and agents, understand them and they simply don’t work like many people believe them to. I have done a tremendous amount of research, analysis and writing on these contracts, and I’m not a fan. I’m not going to get into details here but I’d be happy to discuss as deeply as anybody has an interest.

I’ve always said there’s not as much bad life insurance as there’s life insurance done badly. Also, many agents are heavily institutionally indoctrinated by the insurance company(s) they primarily work with. This has been one of the most eye-opening discoveries over the years. Insurance companies create all of their training and marketing around the products that they specialize in and want to sell so their agents do the same, largely because they have little other perspective.

Another segment of the sales market will simply follow the in product of the day that’s largely been developed and promoted and placed based on temporary economic dynamics of the financial markets. They sell what’s easiest to sell at the time and change when the circumstances do. I see this happen like clockwork. From the traditional WL policies of the old days to the development of UL in the high interest environment of the late 70s and early 80s to the variable life policies taking advantage of the hot stock market in the 90s to the guaranteed policies in the 2000s that were marketed to consumers tired of disappointment to the indexed policies with aggressive assumptions that look so attractive when the insurance companies realize they couldn’t support the pricing of their previous contracts. It can be demoralizing.

Given that the fastest growing aspect of my practice is litigation support and expert witness work, I get to see a lot of what’s going wrong in the insurance world. Something that’s a bit counterintuitive to many people is that it doesn’t matter how highly rated the insurance carrier is. They all have similar products based on similar investment portfolios that are sold to similar people by executives and agents with similar biases and incentives.

It’s exceedingly important to work with somebody who doesn’t have a connection to a given insurance company or an incentive to sell certain products.  An expert has to study the pros and cons of any given product and align it with the goals and objectives of a given client and the situation at hand.  That’s what I too seldom see in the real world.

In recent months, I’ve discussed with you the guaranteed securities based contracts because based on my expertise and experience, these are the products that best serve many of my clients. They won’t be right for every situation, and we have a large portfolio of companies and products to choose from if they aren’t.

As I stated initially, this isn’t what you were originally looking for but it’s the best I can do today. I’ll be happy to further research articles but I’m not sure that you or your clients are going to want to spend time digging deep into them. At the end of the day, facts are facts and numbers are numbers. I’ll be happy to run anything you want to see and put it up against anything else in the market. Objective black and white data is what your clients need.

Bill

Bill Boersma is a CLU, AEP and LIC. More information can be found at www.OC-LIC.com, www.BillBoersmaOnLifeInsurance.info, www.XpertLifeInsAdvice.com, www.LifeLoanRefi.comwww.TheNAPIC.orgwww.LifeInsExpert.com or email at bill@oc-lic.com.

The guarantees described in this letter are limited to the claims paying ability of the respective Insurance Company. Securities offered through Valmark Securities Inc. Member FINRA,SIPC

OC Consulting Group and its affiliates are separate entities from Valmark Securities Inc.

 

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…

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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Letter of Explanation – Premium Financing

December 20th, 2018 No comments

Following is an email I recently received:

Over this past year I have been contacted several times (by parties that I respect) asking me to get involved with Premium Financing…    The pitch is compelling – that Indexed life insurance is great (a game changer); that some carriers offer immediate surrender free CV of 100% of the premium deposit(s); that super large banks are happy to do the lending…   on and on…

I just read your take on this and I respect your opinion…     Could I ask you, if I was to get involved, what insurance companies or financial firms do you think are respectable and experienced (and doing the best job) in this specialized arena? For full post, click here…

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Letters Of Explanation – Policy Funding Options

September 24th, 2018 No comments

Dear Mr. Client:

It was a pleasure to speak with you last week and I appreciate the opportunity to review your life insurance policy. Per our discussion, this note is intended to be a follow up summary of our conversation. If there is any additional information you were looking for which I have forgotten to include, or if you have questions about what I have written, please do not hesitate to get back with me.

Your $1,000,000 was originally an Alexander Hamilton policy which was acquired by Jefferson Pilot and subsequently merged with Lincoln Financial. Though I do not have the original sales ledgers, the original premium of $13,750 was likely calculated to maintain the policy indefinitely given the interest crediting and expenses assumption in play at the time the policy was issued in 1995.

Since that time interest rates have come down significantly; probably 300 basis points or more. For full post, click here…

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Letters of Explanation: Donating a Policy to Charity

August 16th, 2018 No comments

Good Afternoon:

It is my pleasure to be introduced to you.  Your accountant referred you to me because of the frustrating, yet required process when donating a life insurance policy to a non-profit.  I understand it is not pleasant to hear you won’t be getting the deduction you were expecting for your policy donation to the school but the process I will bring you through will get you everything you are entitled to.

Unfortunately, your cash value is not the number the IRS looks at when taking donations into account.  To think about it in a simplistic way, they aren’t eager to let you take a deduction for something you have never paid tax on.  In other words, the special rules which allow your life insurance cash value to grow tax free is what is preventing you from fully deducting that same cash value. For full post, click here…

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Letters of Explanation – Trustee Liability

July 31st, 2018 No comments

This letter is to the management of a law firm.  Multiple attorneys act as trustees for clients.  There has been no program of management regarding these policies and I was called in to suggest a plan.  I was also able to look at redacted policy information and could see at a glance that many policies are underperforming and headed towards failure.  A decision was made that the attorneys deal with it on a case by case basis as they see fit.  I see this as a grave mistake.

Dear Firm Management:

It’s been a while since we’ve talked and the last time we did you mentioned the attorneys who are acting as trustees will be deciding independently on how to proceed.

I understand this but as we discussed earlier, if things go wrong (which they have and will) and result in a lawsuit, case law has shown that an independent third party is critical to a successful defense.  I am currently involved in four litigation support and expert witness cases, some going after trustees and some defending trustees. For full post, click here…

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Letters of Explanation: Whole Life Term Blend

July 25th, 2018 No comments

This letter is to a client explaining why the term blended whole life policy on his mother is failing:

Dear Mr. Client:

Unfortunately I still do not have what I requested from XYZ Life but I was able to do some work anyway.  Also, what I requested may end up being sent directly to the policy owner, which is you as trustee, at the address of record.

You had asked about potential income tax consequences regarding this policy and I believe there would be none as it looks like the gross cash value is less than what I calculate the basis to be in the contract.  I am waiting on a formal basis and gain calc from the company. For full post, click here…

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