Archive for July 19th, 2007
Some life insurance companies, Transamerica and American General to name a few, have stepped off into an area of underwriting that is borderline (or maybe not so borderline) offensive to the people that are subject to the new guidelines. I suspect someone in the near future will test it’s legality.
They have decided that folks over 70 needed to be evaluated beyond the normal health, family history and lifestyle guidelines that say a 45 year old or even a 65 year old would need to be. The first to hit the streets with the new cognitive tests was Transamerica. Along with the normal exam, the examiner now gets to insult the applicant by asking them a lot of the same questions that are asked at an accident scene when someone has suffered a head injury. Things like what day of the week it is, what town you are in and who the President is? They go further and ask you to use a list of words in sentences and then later they test you by asking you to recall as many of the words as possible. I can see examiners being thrown out of houses over this kind of stuff. I can tell you that the examining companies are not pleased with this new role. They find it offensive and embarrassing.
This is really over the line. If insurance companies are concerned about cognitive impairment, they should get that information the old fashioned way, from medical records. Doctors make notes about everything and if you think they are going to miss a chance to mention something like cognitive impairment, think again.
Then American General just upped the ante today by announcing that in addition to cognitive testing, they have two new tests for anyone over 70. According to today’s memo, “Our new 71 and over requirements are a result of cutting-edge research…….What is considered a good indicator of health for a 75 year old is different from that of a 25 year old, or even a 45 year old.”
“Two new functional tests: The Gait Test assesses the applicant’s ability to walk at their normal pace within a specific distance and time frame. The Chair Stand Test assesses the applicant’s ability to rise from a seated position five times, without using their arms for support.” Both of these tests are ludicrous to be age specific. If they are relevant at all, they are relevant at any age. They are equally as ludicrous in that the tests will never be done with any consistent base format. For them to be valuable in underwriting, the Gait test would have to always be done on the same type of surface and for the Chair test to be relevant, there would have to be a standardized “test chair”.
I’m not a big fan of litigation, but I really hope AARP and ACLU gang up on this bit of nonsense and stomp it back into the mudhole it crawled out of.
July 19th, 2007
If you are a Northwestern Mutual agent you are bred to believe that life insurance without cash value is, by it’s very nature, evil. Northwestern Mutual has term life insurance products, but they are priced so outrageously high as to lead the casual observer to the conclusion that they would be foolish to buy term when they can get whole life and it’s cash value at only slightly higher rates.
Whole life is all about the cash value. Variable universal life is all about the cash value. Some agents sell straight universal life based on it’s ability to build cash value. Why does your life insurance policy need cash value? Bottom line, it doesn’t.
Cash value accumulation in a whole life policy is sold on the premise that you can borrow against it down the road. Cash value in a variable universal life policy is sold on the premise that you can retire on it down the road. The problem with down the road is that in most cases it is not guaranteed. You may or may not build the cash value to meet your goals. What is guaranteed is that you will pay a lot more for your life insurance than you need to.
Can these policies really build significant cash value? It’s possible. It is generally accomplished by a method called overfunding. In layman’s terms that means that you are going to pay additional money above and beyond your normal premium. It still doesn’t guarantee that you will end up with some cash cow, but if you do, remember that you paid for the cow. Cash value comes from you, not the insurance company.
Back when whole life was about the only product around, cash value was the only option. Whole life policies by definition were policies that had a level premium and level death benefit to age 100, and at age 100, the cash value equaled the face amount (death benefit) of the policy. More recent “whole life” policies, in an attempt to be competitive, have structured the policies so that the cash value equals the face amount at age 120. That helps lower the cost since the company has 20 more years to use your money. The problem I have with this idea is that they also want you to pay premiums to age 120. I get this picture floating around in my head of me writing checks to the life insurance company at age 115. My hand writing and ability to balance a checkbook is already bad at half that age.
So, in the opinion of this agent, in most cases whole life is a bad investment and an entirely too expensive way to buy life insurance. What’s the alternative?
Anyone who has been around for a while has probably heard the phrase, “buy term and invest the difference”. Simply, if a term policy will cost $500 a year and a whole life policy will cost $2000 a year, buy the term policy for the life insurance protection and invest the other $1500 in something that produces real return on investment. I would add a newer version of that, for those in need of permanent insurance (see my post yesterday, “Why buy universal life….”), and say buy universal life insurance with a no lapse guarantee and invest the difference. Universal life with a no lapse guarantee is a permanent policy that is guaranteed by a rider and not by cash value.
A wise guy once said, “Don’t use your life insurance as an investment, and don’t use your investments as life insurance.” Before committing to a cash value building policy, discuss alternatives with an independent agent.
July 19th, 2007
Every universal life policy sold, is sold as a permanent product. I don’t think there is anything left to the imagination when the word permanent is used. It should never go away.
I can assure you that no agents sell universal life policies and tell you that the premium will be this much for so long and then it may go up a little, or maybe a bunch, and at some point it could very well become unaffordable.
So, a good working definition for a permanent policy if you are a consumer is, “a policy that is guaranteed to always be there and the cost is guaranteed to stay the same”. Sounds like a reasonable goal and a good product. And that is exactly what you should insist on when purchasing a universal life policy.
Unfortunately for consumers and for the industry’s reputation, agents very often try to make things cheaper to win the sale and in doing so they lean on the appearance of a policy that will do what you want, but it isn’t guaranteed. Why would an agent do that?
If Agent A proposes a $100,000 universal life policy with a monthly cost to $120 and Agent B says they can get you a $100,000 universal life policy with a monthly cost of $92, and Agent B says, “same benefit, lower cost, save you thousands over the life of the policy”, most people will go with Agent B. He wins the sale. Life insurance agents get paid when they make a sale.
The problem is in the guarantees. Agent A is offering a policy with a level premium guaranteed to age 100. The death benefit remains level and is guaranteed to age 120 even though you don’t pay a dime after turning 100. Agent B is offering a policy that “assumes” that it can do the same thing, but on the guaranteed side of the policy the coverage will lapse at age 82, about the time most folks are starting to dig out their policies and make sure their life insurance ducks are in a row.
If you are considering purchasing a universal life policy, insist that the agent show you the guarantees. Don’t buy it unless it is guaranteed to an age where you know you will be dead. Remember, this is permanent insurance.
If you have a universal life policy and especially if you have a variable universal life policy, get an inforce illustration from your company and have it analyzed by someone other than the agent that sold it to you. Why? I don’t think I would be exaggerating to say that 75% of universal life policies in force today will fall apart prematurely even if you pay the premiums in full and on time. If you ask the same agent who sold you the policy to analyze it, chances are he will make you believe everything is just fine. A reputable independent agent will let you know exactly what you have, exactly what the guarantees are and honestly what you should do.
July 19th, 2007
