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Timing of Premium Payments

May 11th, 2017 No comments

AIn my May 12th, 2015 post, Why Paying Attention is Important, I referenced a hypothetical issue which has just come across my desk in real life. It has to do with a Guaranteed Universal Life (GUL) policy and the timing of premiums.

Much has been made of the sensitivity of GUL contracts to the timing of premiums, and for good reason.success-stories-logo Many policies do not have the grace periods of more traditional policies. A premium which comes in late, may slightly affect the internal formulas which determine the guarantees and, consequently, the policy may not last as long as expected.

One of the issues I wrote about in 2015 is when GUL premiums are paid too early. This is a real issue because given the sensitivity to late premiums, it is often beat in to GUL contract owners to pay the premiums on time, which generally means early.

However, no good deed goes unpunished. I order in-force ledgers every single year for every policy I am involved with, even single pay GUL contracts. Believe me, I have found more than a couple home office mistakes, let alone policy owner oversights and agent errors. The case I am referencing is a $3,000,000 second-to-die SGUL contract put in force on a guaranteed 20 pay of $18,978.36 a year.

Every year the ledger has shown what we expected and it goes in the file until next year. The policy date is February 1, 2007. This year the in-force ledger shows the death benefit lapsing at age 99 of the younger insured. That may still be decent and about four decades from now but it is not what was put in force, not what the clients are paying for and, given the joint life expectancy of two healthy individuals, the chances of one of them outliving the policy is real.

My first thought was that the premium was paid late last year so I referenced the annual statement and saw that it was paid and applied in January as would be expected. So, I have a ledger from the carrier from one year ago which shows it guaranteed for life and one this year that shows something different and the premium was paid on time. What gives?

The premium was paid too early.

Why is that an issue now and not in any of the other years the premium was paid in January? The internal mechanics and charges of the policy. Many contracts have a fixed premium charge for the first 10 years and another for years 11 and on. Let’s say the annual premium expense for years 1 through 10 is 10% and for years 11 and on it is 5%. If you pay the premium early in years 1 through 10 the charge is 10 percent regardless. However, the guarantee formula for this contract assumes that the year 11 premium is being charged at 5% and if it is paid in January, which is technically still in the first 10 years, a 10% charge is being taken out of the premium which is twice the anticipated charge. It’s like cutting a check for this year for $950 less than what is due (5% of $18,978). That difference is enough to violate the guarantee formula and cause the policy to lapse early. Seriously.

This was my assumption but I kept it quiet when approaching the carrier asking for an explanation. They confirmed it for me exactly. Furthermore, without even pushing, they reapplied the premiums as of 2/1/17 and re-ran the ledger showing a guarantee to 120. Good for them. Not every carrier may be this cooperative. I’ve been in fights where I had recorded proof a carrier screwed up and they wouldn’t come clean. Others have retroactively changed the formulas or instituted grace periods which gave a month leeway on either end. Some will change it if you catch it and call them on it and others will let it slide if no one says anything. The problem is, if a given carrier hasn’t made accommodations for this, it may be quite impossible to pay “on time” unless the check is delivered and applied on a single given day, which is effectively impossible to ensure, or the premium will either be early or late and there may be problems.

As an aside, this may be a reason to not put a policy in force for $18,978.36 rather than round up to $19,000 or even $19,500. Calculating something to the penny gives a contract no buffer and makes it more susceptible to the issues we are discussing. Is that premium difference worth risking the entire death benefit of a policy? Do you think it might not be significantly more difficult to go back 10 or 20 years and prove this to a carrier and get them to make amends? We’re not even talking about “wasting money” here. I’ve done this before where, before the 20th and final premium was due, we had the carrier calculate the exact premium to maintain the guarantee for life and then paid that exact amount which “got us back” our over payments with interest.

The bottom line is this is one more call for vigilance at a level which is unrealized to the consumer market, unpracticed by a vast majority of agents, unknown to even most professional trustees and clearly unreasonable except for the fact it is mandatory given the realities of the world.

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Success Story: Life Settlement Saves the Day

April 18th, 2017 No comments

The life settlement market is clearly much different than it was 10 years ago but it is still alive and well. The target for finding a qualifying policy is much smaller today but the parameters were likely somewhat unrealistic back then anyway.

Settlements still tend to be success-stories-logosomewhat controversial but with a straight face I will say that I cannot understand why. A legitimate, well understood life settlement is arguably the most consumer beneficial concept I have ever been a part of in my history in the life insurance market. The many, many millions of dollars I have been able to secure for clients who otherwise would have lost millions is astounding. For full post, click here…

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Success Story: Salvaging Loss in a Life Insurance Policy

October 6th, 2016 No comments

An attorney brought a case to me which was typical in many respects.  There was a portfolio of policies on multiple family members.  Some policies had recently failed and, among the balance of them, some were holding their own and others were rapidly falling apart.

I want to focus on the two policies on Dad.  One policy was projected to lapse in a year and the other in about 5 years.  Thsuccess-stories-logoey are currently burning through roughly $5,000 a month in cash value.  If only I had been brought in a couple of years earlier I could have saved them six figures in lost dollars.  None-the-less, late is better than never.  One policy has surrender value of $157,000 and a basis of $14,000 so the gain is  $143,000.  Another has a surrender value of $46,000 but a basis of $167,000 so there is a “loss” of $121,000. For full post, click here…

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Success Story: Managing Life Insurance – What does that mean?

September 21st, 2016 No comments

Sometimes people ask me what I mean when I say life insurance needs to be managed over the duration of the contract.  Most think that means making sure the premiums are paid but, while obviously important, that’s not really it.

Making sure contributions to a policy are sufficient given a decades long reduction in the interest market is something I talk about incessantly but there is so much more to it.  Here is a very simple example:success-stories-logo

An advisor I work with brought me the policy on his own life. It turned out to be a traditional whole life contract with a well-known carrier.  There was no issue with the company but the policy was deteriorating due to the loan it was carrying.  I don’t recall if the loan was a result of actually pulling money out of the contract or if the loan was created by the policy “auto loaning” itself money to pay premiums which weren’t paid out of pocket.  It doesn’t really matter.  We can even assume the policy owner funded the contract as originally proposed and a sales ledgers might have even shown he could withdraw money with no ill effect. For full post, click here…

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Success Story: “Shooting from the Hip” – Hit or Miss

April 5th, 2016 No comments

An attorney member of the Wealth Council posted a question on the list serve asking for referrals to a fee-based life insurance advisor.  Another member directed him to me and I ended up in an engagement with his client.

It turns out a woman in her eighties had recently lost her husband and someone had advised her and her family that the $1,500,000 of insurance in force on her life was “garbage” and they should get rid of it.

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Fortunately, the attorney recommended an independent analysis before any action was  taken.  It ended up that there were two policies, one for $500,000 and one for $1,000,000.  One was originally a survivor life policy.  The $500,000 policy was a well-funded Guaranteed UL policy with a highly rated and well respected carrier.  The $1,000,000 was with another decent carrier and was a current assumption UL contract which was modestly underfunded. For full post, click here…

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Success Story: The Importance of the “Second Opinion”

March 15th, 2016 No comments

After a presentation at Heckerling a few years ago, an attorney in the audience came up to me to introduce himself and let me know he may be calling me for help on a case.  A full year went by when he finally emailed me details of something he was working on.

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It turns out his client was the owner of a very successful global company and had a large existing life insurance portfolio.  The client and advisor was working with an agent who had a very long term and particularly close relationship to the family.

The reason the attorney brought me in was due to his skepticism regarding some work the agent was doing.  Something didn’t seem right but he couldn’t put his finger on it.  For full post, click here…

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