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Busting Whole Life Policy Myths

March 22nd, 2022 No comments

The conventional wisdom of what “whole life” is an how it works is often far from the truth.

When initially speaking with clients, I often hear reference to a “whole life policy.”  I’ve long since learned that this is a generic reference to permanent insurance, as opposed to term insurance.  Few policy owners understand that whole life (WL) insurance is simply one form of permanent insurance, and the menu of options out there is wide and varied.

Often, this generic terminology is harmless, but at times it’s not.  This is because there’s a traditional association of what WL is and how it works, and this conventional wisdom is too often far from the truth.  In fact, “WL” isn’t always even whole life!life-insurance-old-file.jpg

A Multitude of Products

As far as permanent insurance goes, I’ll include the following in the modern lineup: WL, universal life (UL), guaranteed UL, indexed UL and variable UL and WL.  Additionally, within these categories, there are subcategories.  For instance, traditional WL may be term blended, and this can make a WL policy act like anything but.  WL from mutual and stock carriers work differently, to an extent.  With dividend-paying WL, there may be a handful of different dividend options that can dramatically affect the policy today and down the road.  When it comes to the dividend, you can even find a version in which the dividend for paid-up additions is put into an indexed option instead of the general account.  In recent years, there’s also been a proliferation in long-term care riders.  You can build these policies just about any way you want to, including from fully guaranteed to taking on meaningful risk.

That’s all with just WL. The multitude of products built on a UL chassis can be dizzying.  Within the traditional, guaranteed, indexed and variable models, a tremendous amount of flexibility and rider options abound.  Just when you think you have your arms around it, you discover that there are indexed and variable UL options with lifetime guarantees, for example.  A securities-based variable UL with a guaranteed premium and death benefit for life?  Yep.

Try explaining to a traditionalist that there are UL and securities-based products out there with more guarantees than “WL” policies from top-name mutual carriers.  It’s not pretty.  Why do I put “WL” in quotes?  I see many policies with ABC Mutual on the title page of their flagship WL policy that have about as much to do with WL as my son does with a clean bedroom.  Many times I’ve reviewed a WL policy that turned out to be 1% WL and 99% term insurance.  If you expect that policy to work fine in a multi-decade declining interest rate and dividend market, well, you might want to sit down before hearing the truth.  I’ve seen “WL” disasters that make UL disasters look like playtime.

Infinite Variations

It’s important to understand that there’s no such thing as sitting down at a computer and putting in the details of a given proposed insured individual, hitting a button and getting a cost for insurance.  It doesn’t work that way.  There are multiple different input screens and multiple fields per screen.  There ends up being a figuratively infinite number of ways to build a product, and I can assure you of one thing,  it’s close to a guarantee that your client doesn’t understand what went into it.  Most of those decisions were made without their input and with no understanding of the alternatives and potential consequences.

I can build a given life insurance policy with a $10,000 annual premium or a $100,000 annual premium that supposedly does the same thing.  My most uneducated client can tell me they’re probably not the same thing, but my sharpest client couldn’t tell me how.

Buyer Beware

Who knows why a given proposal was initially presented?  Is it the product du jour?  Is it something the insurance carrier is pushing for reasons that may not line up with the best interests of the policy owner?  Is it for commission purposes?  Is it simply because it’s the product the agent’s primary carrier specializes in?  Was it the product the most recent wholesaler who popped into the agent’s office was talking about?  Maybe one more policy with that insurance carrier was what it took to get over the hump to the next council level for that cruise to the islands?  Was variable kept off the table because the agent doesn’t have the proper licensing?  Is indexed UL not in the mix because the broker-dealer won’t allow it?

Most policy owners accept things they don’t suitably understand out of fear of looking foolish, and they take at face value that everything suggested is what’s right for them. Things need to change. I have to deal with the results of this traditional process daily. The typical policy placement is akin to shoving pages across the desk for signatures like you see in a mortgage closing.  You know what I mean.  Most people have no idea what they’re signing.  It’s inevitable, but what are the consequences?

When it hits the fan, you know what the insurance carrier does every time?  They pull out all those signatures that show the policy owner understood everything.  If they didn’t understand, why did they sign off on it?  There’s no recourse.  No one cares what was said because the words mean nothing if they’re not immortalized.  The insurance ledgers that are dozens of pages long are theoretically in the name of consumer protection.  In reality, they’re the opposite and too often used against consumers when things go wrong or a product was misrepresented.

We all have to admit that it’s necessary that clients ultimately have to have faith.  George Michael knew what he was talking about.  You just gotta have faith.  But is that a good idea?  What about the “Trust but Verify” line of reasoning?  I think there’s something to that.

Almost every day I see the results of life insurance transactions that involve as much money as private equity deals, real estate transactions, business acquisitions and so forth.  Almost every one of these deals would’ve involved tax and legal counsel, consultants, appraisers, inspectors… the list goes on.  Tens or hundreds of thousands, or even millions, of dollars, of advice in one way or another may be brought to bear to vet the deals.  But in life insurance transactions of the same magnitude? You know the answer.  Maybe it’s time to rethink this.  I’ve seen people lose millions.  I’ve also seen people pay modest fees that result in saving millions.

Educate the Client

Back to the various products and how to build them.  When I can show that a guaranteed policy might not be the best option for the client, or the best way to get the biggest death benefit may to buy the least, what can anyone take at face value?  It’s time to admit what we all know; your clients have a snowball’s chance in Haides of figuring this out on their own.  It just can’t happen.  I’ve testified to that in court.  They have to have an advocate.  It’s just the way it is whether you or they want to believe it or not.  They have to be educated enough to become partners in the decision-making process.  This will take some time and commitment and a little bit of money, but what that’s worthwhile doesn’t?

Bill Boersma is a CLU, AEP and LIC. More information can be found at www.OC-LIC.com, www.BillBoersmaOnLifeInsurance.info. Call 616-456-1000 or email at bill@oc-lic.com.

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A Peek Behind the Insurance Marketing Curtain

March 14th, 2022 No comments
The IUL marketing insurance companies sell the agents, who in turn, sell the public, doesn’t sit well with me.

The piece went out to the insurance carrier’s agents and announced the updated cap rates and maximum illustrated rates for their indexed universal life (IUL) products.  As has been the case for many years, they’re all going down.  This means that whatever the S&P 500 (or whatever index is being tracked) grows at, the maximum crediting rate in good years will now be at the lower cap rate.  There’s no judgment here; it is what it is, but it will suppress the future performance of the IUL contracts and make it even more challenging to support earlier projections and for policy owners to attain their goals. For full post, click here…

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Video: Premium Financed IUL

March 10th, 2022 No comments

Categories: BlogAnimate, Life Insurance Tags:

The Most Arrogant Man in the World

January 27th, 2022 No comments

When you’re right, you’re right.

Bill Boersma

A recent book, The Death of Expertise: The Campaign Against Established Knowledge and Why it Matters, is from one writer among a number discussing the American public’s growing hostility to expertise.  I see it in my industry.

It’s been about 20 years that I’ve been doing life insurance policy analyses to show policy owners and their advisors what’s happening to their contracts, and how a shifting economic market is affecting performance.  This isn’t rocket science, it’s just not understood and it’s in conflict with conventional wisdom.  The premise is that if your life insurance performance is based on interest rates and these rates are dropping, your policy won’t do what you think it will.  How complicated is that? For full post, click here…

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How Advisors Can Catch Premium Financing Red Flags

November 17th, 2021 No comments

The biggest sign to look for is if someone has, or is looking at, a premium financed life insurance transaction in the first place.

An attorney recently asked me to offer some red flags to look for regarding premium financing.  Here’s my reply.

I’ll start with a somewhat facetious comment.  The biggest red flag I look for is if someone has, or is looking at, a premium financed life insurance transaction.  In a sense, that’s a joke but it’s also true.  The problem is, you can’t really do anything with it.

The older a transaction, the more in jeopardy it may be because the further back you go, the higher the crediting assumption that was likely used and the further it’s fallen.  A transaction can’t be supported at 5% what might have been projected at 7% or 8%. For full post, click here…

What’s Happening in the Premium Financed IUL Market

October 12th, 2021 No comments

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Beware … Term Convertibility

September 15th, 2021 No comments

Categories: Beware Series, Life Insurance Tags:

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. For full post, click here…

How a Life Insurance Policy Loan Can Surprise You

July 22nd, 2021 No comments

A ridiculous analogy to bring reality into focus.

Let’s assume your client’s financial goal is to accumulate $5 million for retirement. The stock market has been on fire and it’s suggested to do your client’s planning based on a 10% rate of return. Your client is 25 years old and has a 40-year time horizon. The numbers show they need to put away $10,270 a year to hit their target.

However, 10% turned out to be too aggressive and your client actually earned 7% but never really paid attention after the original plan was put in action. At that lower rate of return the client won’t hit their $5 million target and will only accumulate roughly $2.2 million. This will be devastating to their standard of living in retirement. In reality they need to be socking $23,407 a year away to hit their goal at the lower return rate. A feature of their planning that they never really understood, or maybe were never even told about, is that their financial planner has arranged for a third-party to automatically loan them the spread, over $13,000 a year, to make up the difference so they hit their target. After the plan is in place they never sign anything, don’t have to approve it, there’s no renewal process or required disclaimer; it just happens. The loan accrues indefinitely at an 8% interest rate. For full post, click here…

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Q&A: Policy loans are often misunderstood

July 20th, 2021 No comments

A version of this question has been posed to me so many times, I’ve lost count.  Following is my answer.

Question:

How on earth do I have a policy loan when I’ve never taken any money out of my life insurance policy, let alone a loan?

Answer:

I understand your confusion as it seems almost impossible.  When they’re introduced to me, many policy owners seriously believe there is an error on the part of the insurance company.

That being said, this is not uncommon.  I more often see loans on traditional whole life policies than I do other type of life insurance contracts.  This is because there are multiple possible dividend options available and most policy owners aren’t aware of the decisions made on their behalf. For full post, click here…

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