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The Life Insurance Benefits of Quitting Smoking

July 24th, 2019 No comments

Kicking the habit can save clients a bundle.

I recently wrote about improving return in a life insurance policy through better underwriting.  No sooner had I done so than two cases came across my desk regarding the same issue that illustrated just how dramatically meaningful this can be.

Client Quits Smoking

A few years ago, I helped a neighbor with life insurance on himself and his wife. His wife’s policy was a straight forward $1 million 10-year term. She was healthy but a smoker so she got preferred smoker status.  The premium was $3,000.

Since then, I discovered she quit smoking. She was re-underwritten at preferred best non-smoker and a new 10-year policy is priced at $1,100. Fift

een and 20-year level policies are $1,300 and $1,900, respectively.  (A new 10-year policy at smoker rates would be $4,300 at her age today to get a sense of how big a difference there is.)

In another instance, a 90-year-old man has $50 million of universal life insurance coverage that’s failing miserably for a variety of reasons, including a lack of premium resources. I was brought in for consulting to attempt salvaging the coverage. During the process, I discovered he stopped smoking 15 years earlier, but the agent either didn’t know or never did anything about it.

Just imagine how much could have been saved had this been taken into account all those years ago. I have no doubt there would have been a seven-figure savings in mortality costs and the tens of millions of coverage wouldn’t be on death’s doorstep at this point. The available premium would’ve assuredly been suitable to hold this coverage in force indefinitely. Millions will be squandered due to inattention and lost opportunity.

Transition to E-Cigarettes

Talking about nicotine, the introduction of e-cigarettes and vaping might be helping some people wean themselves off of cigarettes but with most insurance companies these people are still smokers as are the younger people who are initially getting hooked on nicotine through vaping and e-cigs. However, there are non-smoker options available if you know where to look. This could also be a great incentive to get a tobacco smoker to transition to e-cigs if insurance premiums can be cut dramatically.

As noted before, sometimes the important things to focus on with the largest returns aren’t what you’d expect. The little things can make a big difference.

 

Bill Boersma is a CLU, AEP and LIC.  More information can be found at www.oc-lic.com, www.BillBoersmaOnLifeInsurance.info and www.XpertLifeInsAdvice.com or email atbill@oc-lic.com.

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Internal Rate of Return on Underwriting

July 16th, 2019 No comments

Pay attention to where it counts

It’s interesting to see where people put effort and concern and where they don’t.  Parents might go to extreme lengths to keep a child safe and healthy by purchasing the best reviewed products and most healthy food and participating in developmental activities.  However, without even thinking about it, they’ll then put that kid in a car to run to the store, and that’s the most endangering thing a parent could do to a kid according to the Center for Disease Control and the World Health Organization.  But do any of us use that as a reason to not visit grandma?

No.  We use modern car seats and seatbelts and review crash test data and hopefully don’t text and drive.  We do what’s needed to improve the chances of a positive outcome.  In reality, we’re simply not lending credence to those things we’re very comfortable with and that don’t make us stop and think.  Sometimes worse, we make decisions based on unsubstantiated rationale.  After all, we’re victims of emotion at times.  The same emotion that makes us go to some ridiculous length to prevent something from happening that, in all likelihood, is never going to happen is the same emotion that may drive someone to buy a tiny, gas efficient car to save the planet when the full size SUV is going to protect your kid far better.

Focusing Where it Matters

It’s the same thing with life insurance and underwriting.  Where’s all the focus?  The order of process is often inverted from what it actually should be.  Quality of carrier is important.  Competitiveness of premium is nice.  Relationship with agent is helpful.  But in too few situations is underwriting the leading and driving factor.  I’ll suggest it should be higher on the list more often.  How do I know it’s not?  I witness in the market.  It’s also because of the percentage of time the policy in force is from the same insurance company listed on the agent’s business card.  Statistically, this can’t happen if sufficient attention is paid to optimizing underwriting. Personal experience in this market over the past few decades leads me to understand this very clearly.

Underwriting is where the rubber meets the road.  The initial rationale to do business with carrier A, B or C or to do business with the insurance company that ranks better on the spreadsheet might pale in comparison to where an underwriting offer might point us.

Putting Numbers To It

Here’s a simple example.  Let’s say we have a 50 year guy who wants $10 million of permanent insurance.  I’ll run some guaranteed universal life numbers on a quote engine I have access to.  At preferred rates with one well know company (carrier A), the premium is $100,000.  At standard rates, it’s $130,000.  That’s a 30% increase in premium.  Maybe standard is the very best rate he’ll get anywhere in the market.  I’ll bet not.  I’ll also bet that standard rate is what will very often be put in force.  The question is, how much work is it worth to find something better?

Let’s put this into perspective.  Assuming death at age 85, the internal rate of return (IRR) on premium to death benefit is 5.24% assuming preferred rates and 4.02% at standard rates.  That’s a 122 basis point improvement on the deal.  What if your financial advisor could get you an assured 122 basis point improvement on your investments?  What would that be worth?  That’s a 30 % improvement in performance.  The net present value of that premium spread at 5% is a half million dollars.  Might that be worth some effort?  It’s not even your effort because you’re telling the agent to do it.  For the commission on this case, he’d better be willing to shuffle some more paperwork and turn over a few more stones.  It might be good to understand that the better the underwriting offer, the lower the commission.  I’ve actually seen agents disappointed to get a better offer than expected because of what it did to their commissions.

Changing Horses Mid-Stream

Assuming we can’t negotiate from standard to preferred with carrier A, will another insurance company look at it differently?  All the time.  Let’s go back to the hypothetical spreadsheet.  Suppose another insurance carrier (carrier B) showed preferred rates at $105,000, which wasn’t paid attention to because $100,000 looked better.  If we could get carrier B to go for preferred, then $105,000 is meaningfully better than $130,000, all other things being equal.

In fact, if I looked at the insurance company 10 spots down on the list of competitive companies, an option that no one is going to consider when deciding how to move forward, the spread in IRR between the 10th place product and the first place product on the list is 50 basis points less than the spread between preferred and standard.  The least attractive option, based on price alone, when initially reviewing choices, may be the best option if their underwriting department comes through.

Let’s take it further.  We’ll assume the client was rated at a table D.  Now the premium is $200,000.  If standard at $130,000 can be wrangled from another carrier, then we’re looking at better than a 200 basis point improvement and a return that’s over 100% better.  Is this feasible?  If you’re working with someone who know’s what he’s doing, absolutely.  A rabbit’s not going to appear out of the hat every time but even a table C is better, and I’ve seen such a case go to preferred best that would drive the premium below $100,000.  I kid you not.

It’s the Same Story with Second-to-Die

The same dynamics apply for survivorship cases.  When two preferreds turn into a preferred and standard, premium increases 15%.  With one at table D, it’s a 30% increase.  Some research and negotiating to find a 50 to 100 basis point improvement in return would prove to be worth some effort.

It’s not always what’s staring you in the face that you have to be concerned about.  That stuff is easy.  It’s the stuff you might not think about, if you’re not deeply involving in the industry, that might offer the biggest return.  If that no-so-great-offer is from the insurance company on the agent’s card, direct him go outside to find a company that will do better.  Don’t let anyone tell you “I have a 30 year relationship with this underwriter, and if they won’t give you better, no one will.”

Someone who really gets this might be helping a client, for whom underwriting might prove to be tricky, prepare medical files for a year before the application process even commences.  There’s both an art and a science to this.

So, don’t be too worried that your kid’s food might not be organic because I can assure you there will be many and much more dangerous encounters on a daily basis.  Prioritize concern and effort where it matters.

 

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

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The Bastardization of Premium Financing

June 10th, 2019 No comments

What you see isn’t necessarily what you get.

Wealthy people and business owners have always leveraged money and assumed risk but starting about a decade ago, after the 2008 crash, premium financing has been driven by very low London Interbank Offered Rate (LIBOR) based borrowing rates and aggressive return assumptions on insurance products that are easy to manipulate.

Indexed Universal Life (IUL) made a strong showing marketed by a particularly attractive story, if not altogether accurate.  Upside potential of the stock market without the downside risk sounded great with the memory of 2008 still fresh in minds.  These products can be illustrated at unrealistically high rates while appearing to be modest because few understood how they work.  Abuse is rampant even after the regulatory action of AG 49. For full post, click here…

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The Tragedy of Group Term

April 30th, 2019 No comments
Steer clear unless it’s the only option.

For full post, click here…

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Understanding the Flaws in a Premium Financing Policy

April 16th, 2019 No comments
Convince a client without opening your mouth.

At the courthouse, the judge looked to the other guy and asked his story. After hearing the guy’s side, the judge ruled in my favor. I never opened my mouth. You can imagine how ridiculous the situation was when I didn’t even have to present my side of the story.

I’ve written at length about how little the typical consumer understands about premium financing. A part of my job has been to vet deals and fix problems. But even I was surprised earlier today when I had a scheduled phone call with a client who retained me to review his deal.

The phone call consisted of the insured individual, the premium finance guys, myself and my associate. In a way, the client was the judge, and respectively, the agent and I were the defendant and plaintiff, though I didn’t mean for it to be adversarial. That being said, I didn’t think it was a good idea for the client to move forward based on what I understood as his goals relative to what I was seeing. All I proposed to do was to bring objective information to the table. For full post, click here…

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Premium Financing is Great… Except When It Isn’t

April 10th, 2019 No comments

Digging into the numbers is exceedingly important.

More and more premium finance deals and proposals are making their way to my desk. Most have some common characteristics. First, they probably aren’t going to work, and second, consumers don’t understand them. When I say “don’t understand,” I don’t mean they simply don’t understand the details but that they have a misunderstanding of how the transactions will play out.

I’m a proponent of premium financing, when it’s done right and for the right reasons. Real-estate owners and developers have used OPM (other people’s money) very effectively because they’re often able to prove mathematically that the leverage makes sense. I’m doing the same thing when I don’t pay off my low interest home mortgage and keep my money in the market. However, when it comes to financing life insurance, I have an issue with much of what I see out there. First of all, I firmly believe that finance deals built around the arbitrage For full post, click here…

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Is Association Term Insurance Really a Good Deal?

February 20th, 2019 No comments

Young professionals don’t stay young forever.

If your client is in his 20s and is a young lawyer, accountant, doctor or member of any association, he’s no doubt been offered the opportunity to purchase inexpensive term insurance through his association. He gets all the benefits of easy enrollment and no lengthy forms nor medical questionnaires to complete. He may not even have to pay a bill as everything might be done electronically through his payroll department. Then, to top it all off, he receives a dividend/refund check making the price even lower. He’s convinced association term life insurance is the best and only way he should ever buy term insurance for his family—after all, the members of his profession are clearly a better risk than the public at large. The only problem is those automatic five-year increases become very expensive once he hits age 40.

For full post, click here…

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Life Insurance Reviews Don’t Always End in Disappointment

February 7th, 2019 No comments

Just as with routine physicals, a “well visit” can identify opportunity.

Sometimes I think my job is basically giving people bad news. As a consultant, yes, I see more than my fair share of sick policies just as the number of patients that come through a doctor’s office in the course of a day who are sick is likely greater than the population at large. Sick people congregate at the doctor’s office and sick policies congregate on my desk.

The main issue with educating the advisor market on sending sick policies to me is that they don’t always send policies to me that aren’t obviously sick. Often times, sick policies don’t look sick and when one waits long enough to see the sick, they’re terminal. Hey, just like with people.   For full post, click here…

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Life Insurance Survey by Bill Boersma & Henry Montag

January 8th, 2019 No comments

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When Is Whole Life Not Really Whole Life?

January 7th, 2019 No comments

Whole life insurance has been held up as somewhat holy and unaffected by the travails of universal life insurance. This has got to stop.

Over the years, there’ve been innumerable pieces written on the failings of universal life insurance. However, if consumers paid attention when these products were explained to them, they’d be no more surprised by this when discovering their retirement plans weren’t going to pan out when they experienced only half the expected market return. None of this should be a surprise; if projections aren’t realized, results will differ.

That being said, there’s little discussion about the failings of whole life insurance. Now, when I say WL, I mean actual WL and not just permanent cash value life insurance. Somehow, WL has been held up as somewhat holy and unaffected by the travails of UL. This has got to stop because many policyowners and their policies are suffering for it. For full post, click here…

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