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The Problem with Spreadsheeting and Commoditization

October 11th, 2017 No comments

Recently I was brought into a case by an estate-planning attorney who had relatively young clients who handed over an insurance policy and said “Tell us if this is good”.

The short story is that the policy was only a couple of years old, it was a guaranteed survivor universal life (UL) from a reputable carrier and it was doing fine. The pricing was now unduplicable, and if they keep paying the premiums on time, then the death benefit will assuredly be paid someday.

But there’s more to this than a simple response. Today isn’t the time to get into a philosophical discussion about the merits of guaranteed UL, current assumption products, market based products or traditional whole life (WL). We’ll assume guaranteed UL was and continues to be an appropriate prod-uct for these clients.

Life Gets in the Way

This policy was sold on a full pay basis (pay every year), and the cash val-ue was projected to be zero by age 70, though the death benefit would still be guaranteed if premiums were received timely. This is common, and there’s nothing particularly wrong with it but this is the time I generally share the following scenario:

“Mr. & Mrs. Jones, let’s assume that we’re down the road a ways and Mr. Jones is deceased. Mrs. Jones, you’re 93 and in the Alzheimer’s wing of the local nursing home. Your kids are the policy owners or trustees or at least have power of attorney (POA) over financial assets and are responsible for getting annual premiums to the trustee. Given whatever is going on in their lives at any given time, do you think it might be possible that they could ever miss a premium notice? And at 93, if the premium isn’t paid, do you know what happens to the $5 million in death benefit you’ve been paying on for 50 years? It’s all gone.”

It’s not terribly difficult for them to envision problems their kids may be facing. Maybe Junior just got laid off or is going through marriage issues, or great granddaughter Suzie just had a baby in high school. Maybe nothing is going wrong but juggling a job, getting children to practices and games and visiting their mom in the nursing home is stretching them thin. Could the financial situation change over time, and the premium be a stretch? Maybe it’s as innocuous as someone moved, forgot to change the address with the insurance company and the invoice never showed up. Or the premium no-tice is buried in a stack of paperwork on the corner of the desk. In other words, life gets in the way.

There can be problems when the market commoditizes products and spread sheeting takes the place of education and analysis.

Consider Possible Alternatives

In this case, I could show that significantly reducing the number of years of out-of-pocket premiums, to a point they would be guaranteed to be done while the policy still has cash value, could be accomplished for not much more annual cash flow. Is a guaranteed 30 pay for $25,000, with the pre-mium obligation done while in their 70s more attractive than a $20,000 an-nual premium to 100? I don’t know, but I’ll bet it would have been a good idea to show the clients and see what they thought. My guess is that no one ever showed them.

Alternately, I discovered that another quality carrier had a premium that was within $100 for a comparable full pay guaranteed product that had a guaranteed cash value that grew to seven figures. Again, I’ll bet it was never discussed because it didn’t win the spreadsheet war. Do you think the clients would have chosen it had they known that for effectively the same premium, down the road they could have a policy with no cash value ver-sus a policy with millions of dollars of cash value?

Sure, this is a death benefit transaction rather than a cash value transac-tion but what kind of long term security against inevitable mistakes could it have provided? What if in the future, for whatever reason, a decision was made to bail on the life insurance?

Contractual Differences

Stress testing and independently modeling different products also highlights meaningful contractual differences. I have two policies on my desk now that have been in place for quite a while. One can move forward indefi-nitely at a reduced death benefit and no premium, and the other is a goner no matter what unless premium is continued. In other situations, I’ve seen that missing a premium or two in one contract reduces the longevity of a policy only modestly while in an apparently similar contract, the policy would crash and burn.

Even term insurance shouldn’t be spreadsheeted. Conversion durations and ages vary dramatically. One policy might have options “by practice,” while the other is “by contract.” That’s a biggie. Is the policy convertible to any product in the carrier’s portfolio or only a crappy policy the carrier only makes available to hose people who are forced to convert? This is im-portant stuff.

Maybe the clients would have made the decision they did given all facts and options on the table, but my guess is that they never made a “decision” be-cause the options were never presented on an equitable basis.

A Meaningful Process

There’s a reason I’m in the middle of a couple of cases in which I’ve con-vinced the clients to step back from imminent decisions based on incom-plete data. I don’t want to make the process overwhelming, but there simp-ly has to be a meaningful process. If there isn’t, the possibility of policy owners ending up where a thoughtful, nuanced, empirical process would lead is largely a factor of chance. A good result isn’t as likely if choices are a result of being directed by a sales person who’s simply leaning the way the industry winds are currently blowing or by an agent who’s subject to in-stitutional indoctrination and isn’t giving alternate products and carriers a fair shake.

A meaningful process inevitably involves analyzing different product types and not just a price comparison of similar products. I’ve put together a spreadsheet that included guaranteed UL, current assumption UL, equity in-dexed UL, traditional WL, blended WL, securities based products at various assumed market returns and private placement options. The spreadsheet includes not only premiums, but also projected cash values and death ben-efits at various durations and corresponding internal rates of returns on cash value and death benefits at multiple assumed life expectancies. It’s a fascinating exercise. Frankly, I don’t know how anyone could make a deci-sion without this. I’m the first one to talk about pragmatism in a process and that there’s generally not a need to turn this into an overly involved re-search project, but there’s a lot of real estate between the all or nothing routes.

Maybe my process is molded by the fact that my daily job often involves coming in to fix things. Things go wrong when policy owners don’t have a fundamental understanding of how things work and what the consequences are of not paying attention. I strongly believe policy owners need guidance and many want to be told what to do but they need to be informed to the extent they can be productive participants in the decision-making process.

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The Truth Behind Whole Life Premiums

September 20th, 2017 No comments

Last September, I wrote a response piece to a New York Times article titled “Skyrocketing Premiums.” I was taking issue with some aspects of the article, which was interesting and made some valid points, but wasn’t entirely accurate. As expected, I got some interesting responses.

They came in two flavors:

1 Though I was somewhat blaming carriers for some of the problems with underperforming and collapsing life insurance policies, I was also deflecting blame directed at carriers, which was unwarranted. In response, I received fervent notes about how wrong I was. This response further proved much of the ignorance in the market regarding how life insurance actually works.

2 The other response came from some agents who specialize in whole life (WL) policies, as opposed to universal life, variable life and indexed products. I often hear from this constituency that their products don’t have the problem of rising premiums because WL premiums are guaranteed. I feel sad for these agents for they’re either appallingly ignorant regarding the polices they sell or they very well know better but purposefully keep up the façade for sales and marketing purposes.

Here’s my disclaimer… WL isn’t bad. Not all WL works the same way. I don’t have anything against it. It can be a good tool when understood, properly implemented and well managed. I even own some. There! I’m not trying to dis WL. What I am going to do is tell the truth. For full post, click here…

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Life Insurance at 100

August 15th, 2017 No comments

Different Policies Have Different Features

When it rains it pours. I have multiple cases on my desk now regarding age 100 and/or “endow-ment” issues. Also, recently a Wall Street Journal addressed this same issue.

Historically most policy owners didn’t concern themselves too much about what happens when an insured individual turns 100 years old. This is partly because most people didn’t expect to live to 100 and partly because people didn’t know there was anything to concern themselves with. However, it seems to be on people’s minds more often lately. For full post, click here…

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How Do Professional Group Term Contracts Stack Up

August 7th, 2017 No comments

If you’re a professional, chances are you’ve looked at group term rates through a professional association. For example, many CPAs have their term insurance through the American Institute of CPAs (AICPA) which has served many people well over the years. However, I like to say that there is a difference between having something done and having it done as well as it can be. Being informed can pay off. For full post, click here…

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The True Meaning of the S&P 500 Index

July 19th, 2017 No comments

DECK: It may not be what you think

Have you ever heard something often enough that you take it for fact but you don’t really under-stand what it means? What if I told you the S&P 500 Index wasn’t really what you thought it was? Would you believe me versus everything you ever understood it to be? Probably not. For full post, click here…

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Is Term Insurance a Commodity?

July 13th, 2017 No comments

Hopefully the message that life insurance cannot be treated as a commodity is slowly getting through to advisors and consumers. I see signs here and there that it is but it seems to be a painfully slow process.

Even when that realization sets in, the perception of term insurance is often different. I have to admit that I haven’t always viewed the details of term insurance on par with permanent insurance but there are aspects to keep in mind which may not surface for years to come. For full post, click here…

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AALU Piece: Avoiding 5 Common Mistakes in Life Insurance Planning

June 15th, 2017 No comments
TOPIC: “Trouble Ahead, Trouble Behind,” and You Know that Notion Never Crossed My Mind: Avoiding 5 Common Mistakes in Life Insurance Planning.


MARKET TREND:
As estate planning involving personal life insurance becomes commoditized, so does the chance that a minor oversight will have a major tax impact.

SYNOPSIS: According to experts, some of the most common mistakes in life insurance planning include: (1) failure to qualify gifts to irrevocable life insurance trust (“ILITs”) for the annual gift tax exclusion; (2) improper allocation of GST tax exemption to ILIT gifts; (3) retention of incidents of ownership in an ILIT – owned policy; (4) failure to understand the planning implications of a policy classification as a modified endowment contract; and (5) triggering tax on an otherwise non – taxable policy exchange under Internal Revenue Code (“Code”) §1035. Find out how to identify and avoid them. For full post, click here…

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OC Consulting Group – What’s it about?

May 23rd, 2017 No comments

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Insurance By The Numbers

May 4th, 2017 No comments

Help Your Clients Understand What They Are Really Getting For Their Money

Have you ever been talking with someone intelligent who says something which makes you do a double take? I’m talking about the kind of thing which makes you assume you have misheard them because no one could really think that.

Here’s a case in point I often hear in reference to funding a traditional whole life policy. “I keep paying the premium, even though I don’t have to, because it grows the cash value so much.” What’s so crazy about this comment? For full post, click here…

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Giving a Life Insurance Policy to Charity

April 11th, 2017 No comments

Over the past number of months I’ve had a handful of cases come across my desk involving life insurance and charity. As is so often the case, some of the transactions ended up as case stud-ies in what to watch out for.

I understand that not everyone is going to have the same attitude regarding the intersection of life insurance and the non-profit sector but I am somewhat surprised at the black and white policies of charitable organizations I encounter at times. Many charities and non-profits have a policy to simply cash out life insurance policies which are donated. I can’t think of a more short sighted stance. Of course each and every transaction should be evaluated on it’s own merits relative to required premiums, guarantees, life expectancy, use of money, etc. It also doesn’t help that so many non-profits have been burned by life insurance over the years the same as so many consumers have. For full post, click here…

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