Archive for January 31st, 2009
If someone offered you money for your term life insurance policy, which we all know has no value unless you’re dead, would you take it? If you were sick and had been racking up medical bills and someone offered you enough money to pay those bills, let’s say $100,000, in exchange for ownership of your $500,000 life insurance policy, would you do it?
Life settlements, viaticals, really came on the scene in unison the with AIDS crisis. With AIDS victims taking expensive experimental drugs to try to beat the disease, a new market was born under the guise of helping them out, but with the intent of making a quick buck. Often an AIDS patient would be offered as much as half of the death benefit of their policy in trade for the ownership rights of the policy. The patient got money now to pay for treatment and when the treatment didn’t work, the new owner got the death benefit. Back then people with AIDS usually didn’t last more than a few years and the dirtball, I mean new owner, of the policy could often double their money in very short order.
As a practical matter viatical sales to AIDS patients fell victim to better and better drugs that extended their lives well beyond any models used by those selling the contracts. That left the new policy owners holding the policies far longer than anticipated which effectively lowered and often negated any profits.
History lesson over. Fast forward to the 21st century. One thing about dirt balls is that if you don’t do something to get rid of them, they’ll just keep on coming back. Viatical sales were repackaged and given a softer and gentler name, life settlements, and a new way of target marketing was formulated. Rather than AIDS patients, the new audience for this pitch was the older, sicker person with a measurably short mortality expectation. It was the same song and dance, just with new dancers. Depending on the actual life expectancy, a cash offer would be made to purchase the ownership of the policy.
The cash offer is computed by determining life expectancy, and these companies believe they can do that very accurately. Then the annual cost of premiums on a converted policy are determined and the formula is something like years left to live times the annual premium plus a substantial profit subtracted from the death benefit. So, that might look like 4.5 years left to live times the converted annual premium of $32,000 equals $144,000. A little slop in case the person lives too long plus a healthy profit, say another $200,000. If the policy had a $450,000 death benefit, the insured person would receive the leftovers of $106,000.
A real downside to this is that very often this is kind of done behind closed doors and the counsel of family members may never be heard. Many beneficiaries of life insurance policies never find out the policies were sold and they are no longer beneficiaries until after the death occurs and they are cleaning up estate matters. That’s when they find out that because of a slick sales job, the family missed the opportunity to convert that policy themselves and net $300,000+ after premium payments.
Another target for life settlement agents are older people with “excess insurability”. That would be someone who, based on income or net worth, could carry say $5,000,000 worth of life insurance, but because they’ve never felt they needed that much they only carry $1,000,000. The have $4,000,000 of excess insurability. An agent talks them into applying for and purchasing the additional amount, even though they don’t need it, holding it for 2 years to get beyond the incontestability period, and then selling it at a profit over the prermiums they’ve paid.
These types of practices have our governing bodies seriously reconsidering the golden egg in life insurance, the fact that the death benefit is not taxable as income. So, while all the schemes and scams are going on, the goose that laid that golden egg is in real danger.
Bottom line. There are some well oiled life settlement agents out there. They know how to make you want it and how to make it easy. If anyone approaches you about selling your life insurance policy, consult with your state insurance commission on where to get the other side of the story.
Just an aside. There is huge money to be made by agents who handle these transactions. They are not non profit organizations.
January 31st, 2009
It’s not likely that I will live long enough to actually hear every argument for not buying life insurance, but the truth is that the only thing that replaces life insurance is liquid assets, wealth.
Life insurance really has two main purposes. Peace of mind is number one. After all, what is any insurance about if not peace of mind that if something happens things will be made financially whole again. Because I am an advocate of term insurance and not much of an advocate of permanent insurance, you really are buying something that you hope to outlive the need for.
If you can ensure that your family will survive an unexpected death for 15, 20 or 30 years at an affordable price, you should have time and extra money to accumulate the wealth that will replace the insurance down the road. The adage that A.L. Williams laid out 30 years ago, buy term and invest the difference, was an idea that was ahead of its’ time then and is very timely now. Back then it was simply an argument against whole life, the “difference” being between the cost of term and whole life. Today it’s just common sense.
Reason number two is all about your beneficiaries. Too many people, especially men, get caught up in analyzing life insurance from an out of pocket cost only and they make it all about them. What is this going to cost me? What else could I have done with the money? What if I just invest that much each year so I will have it to use when I get older? Men have immortal minds in mortal bodies.
If you truly don’t know anyone who has died prematurely, you are in the minority. Friends who die of cancer in their 40’s. Acquaintances who die in a car accidents. I had a friend die this week of a heart attack at age 50. Well, not me you say. Let’s talk about that. In our country 1 in 6 people who reach 25 won’t make it to 64! 1 in 6 adults die prematurely.
I don’t know how many betting people will read this or how many understand that those odds are very high, but try the argument out on your spouse. “Honey. I’ve decided not to buy life insurance because there’s a 5 in 6 chance that I will live to retirement.”
Knowing how little term insurance will cost that will cover your beneficiary’s needs until you are no longer the breadwinner and stacking that up against those kind of odds, buying life insurance becomes a no brainer. The problem is that most men don’t have the kind of brains it takes to think beyond themselves, and hey, I’m a guy so the shot is fair. In all fairness to me, I am an exceptional guy who carries plenty of life insurance.
Bottom line. At some point the sense of responsibility has to overcome the sense of self, or not. I would hope that it does and that life insurance is brought into the context of the right thing to do rather than just another expense.
January 31st, 2009
The whole subject of life insurance on children has a certain “yuk” factor that comes with it. Parents, even those who would be hard pressed to deal financially with the loss of a child, would really prefer not to talk about it.
I would like to throw out just a little different spin, a consideration that parents probably never get to because their first reaction when the subject is brought up is to stick their fingers in their ears and go, la la la la la…
For now let’s set aside the death benefit and the very thought that children die prematurely. Most children’s life insurance has a guaranteed insurability rider that states that when they reach a certain age, usually 23, they are guaranteed that they can increase the policy size to a grown up amount without evidence of insurability.
To put this in perspective consider this description of a real product. For a $300 one time payment your child between the ages of 0 and 13 will have $5,000 worth of life insurance. At age 13 without any additional premium the life insurance increases to $10,000 and at age 18 it increases to $15,000, again with no further premium. At age 23 your child can convert the policy without evidence of insurability for up to $100,000 of permanent insurance. Double the premium to $600 and all of those values double as well.
The key, and the great thing about this policy in my mind is not the small price tag, or the fact that the death benefit increases with age, but the conversion option. For just $300 you have locked in the gift of insurability at a low rate for your child. This is huge if your child develops type 1 diabetes, a congenital heart defect, epilepsy or cancer of any kind. There are so many things that might not take our child away from us, but can send them off into adulthood without the ability to buy life insurance. If it isn’t guaranteed through a policy that is already in force, the will simply not be able to purchase insurance.
So, for those parents who just don’t want to consider insuring their child’s life because, well, because it’s such a morbid thought, consider giving your child a gift that could be huge to them and their children in the future.
Bottom line. Personally I think carrying life insurance, especially at the low costs available is a prudent thing to do unless you just have plenty of disposable cash to deal with an unfortunate loss. If that part still turns you off, then make some charity the beneficiary and still give your child a future gift.
January 31st, 2009
Anyone who has health insurance has already, or will soon find out the frustration of having insurance that doesn’t have all of it’s features guaranteed. At any point the dreaded letter can come and your copay can change, your premium can change or your deductible can change.
It’s not because you’ve done anything wrong. In fact the most infuriating thing is to have your premium raised on a policy that you’ve never even used, but it happens. It’s also, like it or not, not because the health insurance companies are inherently evil or greedy. From their end with skyrocketing health care costs and drug costs, it simply comes down to things have changed and in order to stay in business, which is in your best interest, everyone has to chip in more money.
Life insurance isn’t subject to similar forces and therefore has the ability to guarantee all the provisions in a policy. They can guarantee that your death benefit and the premium will remain level for whatever period you choose. The question occasionally, especially lately, comes up about what happens if a company goes out of business? In a nutshell, the block of business is purchased by another company and by law the new company has to guarantee that the guarantees remain guaranteed. Just an FYI. The reason I can confidently state that the block of business will be purchased by another company is that, when it comes up for sale, it is a bargain. A new company can pick up that business without the cost of underwriting. Pennies on the dollar for an ongoing revenue stream.
Now lest someone jump all over me and point out that not all life insurance is guaranteed, let me be open about that. Agents can choose to sell and clients can choose to buy non guaranteed policies. Traditional universal life and variable universal life are the biggest culprits in this area although you will occasionally find term insurance and whole life policies that aren’t guaranteed as well.
A non guaranteed policy is generally sold in a competitive situation when an agent wants to win a sale by presenting a lower price. Since there is usually a higher cost to guarantee than not guarantee, if an agent can convince a client that there is little or no danger in a lack of guarantee, the lower price can win the day…..for the agent. So, what is a non guaranteed policy and why would someone buy it?
All universal life policies have an accompanying illustration with two sides to it. One side shows the guaranteed values, what the policy will do even if the bottom drops out of everything. These guarantees are based primarily on mortality experience, company performance and interest rates that the company earns on it’s money. This is a worst case assumption. The other side of the illustration is called the non guaranteed or current side. If it is a non guaranteed assumption they are making a wild guess assumption about future performance in the same areas described above. If it is a current assumption they are assuming that those values that are true today will remain true in the future. A non guaranteed policy is generally sold by making the client focus on the assumptions and saying things like “AIG has met its’ assumptions for the past 15 years. They’re huge and there is no reason to believe things will change”. The guaranteed side might show that a worst case scenario has the policy lasting just a few years if things don’t go right. “But trust me, AIG is a wonderful company……”.
Buyer beware! The truth is that most universal life policies in the hands of policy owners today are not guaranteed and it is rocky financial times like this that will bring the house down. It comes in a letter stating something like, “Your $3500.00 annual premium is no longer sufficient to support the assumptions of your policy. In order to continue your policy at its’ current death benefit your premium for 2009 will be $5600.00″. And guess what, once a policy turns south like that, it’s just like geese migrating. It’s going to happen every year.
Bottom line. Life insurance can and should be guaranteed and you, as a consumer, should insist on your agent showing you the guarantees in writing. If you have an agent that wants you to believe in anything other than guarantees, find another agent, a reputable independent agent.
Another FYI. While I suspect AIG’s non guaranteed product clients are in for a rude awakening, their guaranteed products will remain intact whether they are kept with AIG or sold to another company.
January 31st, 2009
There has been no lack of financial “wisdom” floating around since our economy skipped right past recession and into economic meltdown. The Suze Ormans and Warren Buffets and Dave Ramseys have all espoused the time tested “don’t freak out and eventually your money will come back” philosophy, or the “this is a great time to buy” philosophy.
Personally I believe those are both true. I think the economy will come back and if I had any extra money right now I might very well buy some of the blue chip stock that is selling at hysterical lows. But there’s a piece to the whole investment/retirement puzzle that they used to talk about a lot and they seem to have forgotten at a time when it is more important than ever, life insurance.
I’m going to paint a scenario that I think is pretty close to where most folks are right now. Some will be older and younger than this picture, but the basic premise is still sound.
My wife and I are in our mid 50’s and our income is sufficient to meet our needs most of the time. We’re self employed and had the start of a good retirement portfolio. That has been cut in half in the past few months.
The business is actually mine so I guess I would be considered the primary breadwinner. My wife works for me. If I died it is highly unlikely that she would continue the business. No different really than if I had, as my mom likes to put it, a real job. If something happened to me my wife couldn’t step into that job and have the income continue.
So, as a breadwinner I have always carried life insurance. I don’t want my wife to have to sell assets and go to work somewhere where the employer isn’t as nice as me or where she doesn’t like the work. I want her to be comfortable and not lose anything from the lifestyle we have, modest as it is.
But, the life insurance I’ve been carrying has been based on the assumption that our retirement portfolio would continue to grow, not melt down. So, my advice to myself as a life insurance professional is to take out an additional policy, a ten year term in the amount of our retirement portfolio (in case the rest of it melts) and let financial nature run its’ course. If Suze and Dave and all the rest are right, the ship will be righted and all should be relatively stable within that 10 years. When the ship is solidly floating again I can drop the term insurance policy. If I die in during that period, recovery or not, my bride will have our full retirement tax free.
Bottom line. It’s times like this when we need to hold fast to things we can count on and a guaranteed term life insurance policy is dependable. It isn’t an investment, it’s protection. If you need it you don’t have to hope that it will be there. It will.
Just an aside. I was thinking about the about how frightening the whole financial scene has been and the eery resemblance to that famous short scene in the Wizard of Oz where another famous meltdown occurred. I wonder if she had life insurance?
January 31st, 2009
Ah, the almost age old question, term versus whole life. What is the right thing to do? Forgive me for being more than just a little opinionated on this subject, but personally I think that is a right for anyone that is on the right side of an argument.
Whole life insurance, a cash value building permanent policy is one of the earliest versions of life insurance. Whole life insurance is sold as a savings plan with life insurance, a retirement plan with life insurance, a loan source with life insurance and I’m sure by some, a fountain of youth with life insurance. Whole life insurance is generally sold by life insurance agents that believe that whole life is not just the best way to buy life insurance, but the only way to buy life insurance.
What they don’t tell you, primarily because it would end their career, is that whole life insurance is a horrible savings plan, a worse retirement plan, a silly place to borrow money from and unless it is in fact a fountain of youth, it is grossly overpriced. The cash value that does build in a whole policy doesn’t magically appear but rather dribbles in as the leftovers from your huge premium payments after the internal and company charges. You get the honor of earning a little bit of interest on the little bit that is left. A good example is a policy my Dad had with New York Life. His parents started it in 1935. It had a $1000 death benefit. Since 1935 the premium payments paid have totaled $1387 and the cash value in the policy is now $723. Now there’s some bang for your buck!
Term insurance on the other hand is essentially pure insurance. There is no cash value. No bells. No whistles. Just a guaranteed level premium for a certain period of time (the term) and a guaranteed level death benefit if you die while the policy is in force. Depending on your age you can get guaranteed terms ranging from 10 years up to 30 years.
Term insurance is a small fraction of the price of whole life insurance and really, from a practical standpoint, more appropriate. The truth is that most, and I am thinking that is 95% or more, of life insurance needs are not permanent needs. We carry life insurance because we have a spouse and children who are dependent on our income. Children, theoretically, reach a point where they are no longer dependent on us. That’s a need that goes away. Term insurance! Replacing an income for our spouse is a need that should resolve itself at retirement or sooner if our assets outgrow the need for income replacement. That’s a need that goes away. Term insurance.
Although I’m surprised it was never offered along with all the other magic mortgages of previous years, there are no life time mortgages, so life insurance for mortgage protection is a need that goes away. Term insurance. Business partners that carry business life insurance as a buy/sell life insurance agreement aren’t likely to still be business partners to age 100 or beyond. That coupled with the fact that most businesses and the associated value to a deceased partner’s family change over time makes the need or at least the size of the need a temporary situation. That’s a need that changes or goes away. Term insurance.
Bottom line. When there is a product that is available (term insurance) that meets 95% or more of all life insurance needs and you have people selling whole life insurance and they claim that it is the best thing for all needs, a lot of people are left wondering why. It’s called compensation. An agent makes a lot more money selling whole life than term. Yes, I’m saying that whole life is a product that is primarily sold for the benefit of the agent.
January 31st, 2009
“Should I have life insurance?” The determining question for me is the presence of a need that can’t be met in another way.
In a world that is defined a little more each day by I, me, mine, there is a tendency to dismiss the impact that our premature death could have on those we leave behind. If a person can honestly say that their death would not affect anyone financially and that all of their responsibilities would be taken care of without life insurance, there may not be a need.
So, just for a few minutes, let’s entertain the idea that those without needs are in the minority. There are plenty who would argue that the young and unmarried don’t really have a need for life insurance, but do they really meet the litmus test of not affecting anyone financially and their responsibilities being taken care of? Do they have student loans, car loans or credit card debt? If they were hospitalized before their death do they have adequate health insurance such that no one is left holding the bag (of bills), including the hospital and doctors? Do their parents have disposable income for final expenses? I think young single people are hard pressed to make a case for not having life insurance.
What about married people with no children? In my mind marriage and responsibility go hand in hand. Responsibility equals need and I can’t think, in the absence of a large liquid estate, how any married person can argue there isn’t a need for life insurance. In my mind it is simply unconscionable to consider leaving a spouse in anything but a better financial position than when you were alive. That, at the very least, means the bills, including the mortgage are paid off. The very least!
Add children to that marriage and your responsibility goes through something akin to compound interest. You are not only leaving a responsibility behind, but a responsibility that has a responsibility to take care of other responsibilities. This, I would argue, is a need that trumps even the presence of a large liquid estate and should be addressed with life insurance.
Bottom line. There is a real problem in our country (probably around the world too, but we’ll keep it close to home) with people not stepping up to the plate and taking care of those things that they should take care of. There isn’t any rocket science involved in determining if you need life insurance, but there seems to be a real propensity for that need to be ignored when the focus is on I, me, mine. Term insurance is inexpensive. Should you have life insurance? You tell me!
January 31st, 2009
