Posts filed under 'universal life'
I just got my new issue of Insurancenewsnet magazine, one of those industry publications that occasionally has some very good information and occasionally has some of the most lop sided, half truthed articles you can imagine.
Obviously I wouldn’t have brought it up if there wasn’t one of the aforementioned articles in this month’s issue. In the life insurance business there is an organization called the Million Dollar Round Table, MDRT, a kind of club you can join if you reach certain levels of premium sold during any calendar year. If you qualify you are eligible to go to their annual meeting and hear speakers tell how they sold sooo much insurance. Now that’s some fun.
The article I referred to above was written by Guy Baker, President of MDRT. His article entitled “The Money Box, A Proven Way to Illustrate Permanent Life Insurance”, was I found, well, a joke. Maybe this is the method you use if you really don’t want to show your potential client a whole life illustration. Instead you tell them a story, which he compares to Jesus telling parables.
Mr Baker’s love of whole life insurance becomes apparent early in the article. He is a cash value kind of guy and makes that cash value the central figure in his parable, er, story. He calls it “The Box”. Kind of a visual thing. A box full of money. The Box is the hero in the story because without The Box, according to him, you can’t afford to have life insurance that is permanent. Remember that point.
He compares whole life with The Box against buying term insurance for life. When the term insurance is going up every year (he calls this the curve), reflecting the true mortality cost, with whole life The Box kicks in and starts paying part of the cost so that insurance will remain in force forever…..maybe!
Quoting from his article I would like to share where his parable all breaks down. “All life insurance is term insurance. The only difference is whether you pay the mortality costs or you let the earnings in The Box pay the curve. So you have a choice. You can either fill The Box or you can pay the curve.
There is one other issue. The performance of The Box is based on the earnings from the general account of the insurance company or from equity sub-accounts. If earnings are higher than illustrated, then you don’t have to put as much into The Box. The Box can get smaller. But if the earnings decline due to poor performance of the underlying investments, then The Box will need more money. The Box must have enough in it to pay the curve.”
First, I just have to say that I think it is just precious the way Mr Baker capitalizes “The Box” and doesn’t capitalize “the curve”. Kind of like he’s subliminally making Whole Life better than term. Cute!
In the article he says “Based on actuarial facts, the sum of the mortality costs at life expectancy averages 74% of the face amount (regardless of age, policy or carrier) Why? Life insurance is a mathematical science.”
He says that mortality costs (term costs) at life expectancy equals 74% of the face value. The actuarial assumption is that at life expectancy 50% of the insured people are dead. He goes on to say that when 2/3 are dead the mortality cost is 119% and when 95% are dead the mortality cost reaches 240%. The only way to overcome this according to him is The Box.
So, since this MDRT whiz seems to think that there are still only two products in the world, whole life and yearly renewable term, let me muck up the waters with a third option. There really is a term for life product out there, call a universal life with a no lapse guarantee. No Box, just fully guaranteed level premium and death benefit carried just like term insurance with company reserves.
Using this product and never having to worry about whether The Box was under funded, I ran illustrations on myself that showed that if I bought $1,000,000 at my age 56, at age 106 I would have paid in 56% of the face value and at age 116, a point where I’m really certain that there won’t be 5% still living, I would have paid in 69%. And the policy, if I do happen to still be around, will stay in force and unless I live to be 145 or something around there I will have never paid in the face amount of the policy.
Bottom line. If you’re going to compare your sales techniques to the parables of Jesus, I think there should be some effort to bring the level of discussion up to, if not biblical, at least a standard of full disclosure. His Box and curve comparisons are bogus in the real world where new products have overcome and replaced the need for his story.
And for reasons that I think are now obvious I highly recommend you choose an agent who uses illustrations rather than stories to explain his products.
February 5th, 2010
In working with a planned giving department of a major university on their life insurance program, I advised their lead attorney that a critical place for them to start is a complete review of the insurance policies that are already on the books.
I’ve screamed and yelled about the horrible state of in force permanent life insurance, whether universal life or whole life, and the fact that a large and completely unacceptable percentage of in force policies are heading for a meltdown. These meltdowns will happen for two reasons.
First, some bottom feeding agent sold a policy that wasn’t fully guaranteed, putting the future health of the policy at risk in the best of times and in imminent peril in times like we are experiencing right now. Second, the bottom feeder made his commission and hasn’t bothered to stay in touch. An annual review of a policy at risk, and quick action if things start turning south, is the only way to keep the insurance in force.
I spoke with an attorney/planned giving specialist with Met Life the other day and he indicated that a percentage approaching 70% of their new permanent life insurance business was directly due to replacement of policies that were failing because of one of the two reasons above.
Planned giving is a generous way to give back to an institution that many attribute their success to. Universities, churches and charities regularly receive gifts of money, land, and are made the beneficiaries of life insurance policies. While life insurance proceeds are, for planning purposes, held way out in the future, they are nevertheless held somewhere in future planning. And if those policies, or a large number of them go belly up, it can damage future plans for the institution and waste all of the money that the donor has put out over the years to keep the policy in force.
Bottom line. Anyone with permanent insurance, whether personal, business, or for planned giving, that doesn’t have their policy reviewed on an annual basis is missing two very important things. Number one is an agent who was in it for more than just a quick commission and number two is the ability to salvage the policy and your investment if things don’t go well.
February 4th, 2010
Just like any life insurance policy, a policy that is taken out for the purposes of charitable giving, whether it’s for your church or your university, has to be reviewed annually.
Too often there’s a big commotion around setting up a trust and getting a life insurance policy in force and making sure that all of the IRS i’s are dotted and t’s are crossed, and then it’s left alone to work the way it was planned, or in far too many cases, not work at all.
Most charitable giving is done with permanent life insurance, either through whole life or universal life insurance and therein lies the reason for remaining vigilant. Far too many permanent policies implode due to lack of guarantees and/or cash value, a problem that can be resolved if a policy is monitored on a regular basis.
That’s not to say that by monitoring a poorly constructed policy on a regular basis you can keep it from falling apart, but if, through annual reviews, you see the early stages of collapse, replacing it with a healthy, fully guaranteed policy is much easier.
A classic case in point was a Mass Mutual whole life policy a client came to me with. He was paying $89,000 annually for the $5 million policy and was sure that it was good forever. At that point it had $1.2 million in cash value.
When we pulled an in force illustration it showed that starting the very next year the cash value was going to start decreasing and that by age 92 his premium was going to be $500,000+ and rising every year. We were able to put that cash value into a fully guaranteed to age 121 UL and his annual premium went from $89,000 down to a guaranteed level $32,000. Estate planning attorneys should push clients to demand this kind of service from their life insurance agents. Being party to sticking a finger in the hole in the dike like the one just described will go a long way toward letting a client know that their best interests are second to nothing else.
Whether it’s for charitable giving or as in the case above, for estate tax purposes, the absence of an agent to keep an eye on the trend of the policy and it’s possible demise, is a real problem. Left unchecked this guy would have put nearly $2 million into this policy when it imploded and left him with nothing. No insurance and no cash value.
Bottom line. There is no substitute for service on at least an annual basis. You should expect it from your agent if you have a $50,000 term insurance policy or a $10,000,000 universal life policy.
January 26th, 2010
At a time when large financial institutions seem to be all about blatantly bilking their customers, as in Wells Fargo just announcing a 3% increase in already stupid high credit card rates, life insurance companies continue to act innocent in the face of evidence that they too are taking advantage of current and prospective policy owners.
My post yesterday calling out West Coast Life on their change of conversion options to a non guaranteed product is just the tip of the iceberg as I expressed in a recently published article.
It seems that the turn many insurance companies are taking toward non guaranteed “permanent” products has, at least to me, an uneasy similarity to adjustable rate mortgages. Lots of ways for the companies to win and lots of ways for the clients and their families to lose. Companies use four primary criteria to justify a change in a non guaranteed rate, mortality assumptions, interest rates and the loose cannons of them all, reserve requirements and company performance.
Reserve requirements have been changed in the recent business environment with state agencies wanting to see more actual cash opposed to leveraged accounts. More cash has to come from somewhere and as I’ve often discussed, non guaranteed values in life insurance are fair game for changing. They were declared non guaranteed for a reason.
Company performance is a more nebulous animal. Non guaranteed gives the company the latitude to raise rates if they are losing money, or if they simply aren’t making as much as they would like. A kind of profit faucet.
Bottom line. Is the sky falling? No. Not really, although some companies are acting like it. The good news is that there are plenty of companies and products out there that still bring fully guaranteed universal life at good prices to the table. An independent agent can steer you in the right direction. Just make sure they know you won’t accept any surprises down the road.
October 9th, 2009
The age old debates about what type of life insurance to buy and at what age a person should definitely have life insurance will go on long beyond me. But this morning I just want to weigh in on with a little different perspective.
There are two things that I think we can all agree on. If we’re old enough to have responsibilities, life insurance is a good idea and second, we don’t want to derail the family budget to have it.
So, in a nutshell, buy it as soon as you have any reason to believe you need it or buy it as soon as you can see that you might be needing it in the not too distant future. Parents and grandparents should weigh in on this as young adults may not recognize the need, never having been there before. I think parents and grandparents should be willing to pay for the insurance to get things going otherwise it may not happen and if it does happen it may not stay in force.
Why buy it when the need first becomes apparent? Two reason really. First, life insurance is all about the fact that unexpected deaths happen. If there is a need, why would you wait? Second, young and healthy is the best time to lock in long term rates. Unexpected health changes happen also. The fact that they are only paying $200 a year for $250,000 of 30 year term insurance now may not mean a thing if you are in their 20’s. I guarantee though that they will not be replacing that gem when they are in their 40’s and married with children.
Bottom line. The best time to buy life insurance is when you first start thinking that it would be a good idea to have life insurance. Get term insurance. Don’t complicate your life with overpriced and complicated cash value policies. If you want to get complicated, be patient. Wait until you have fully grasped why you have that term policy and what it really means in your life. Whole life and universal life are not an appropriate life insurance vehicle for someone too young to know their long term goals and in my opinion, once they do understand the long term picture, it’s probably still not the right choice.
August 17th, 2009
When it comes to universal life insurance policies that question could be asked both of the people who own the policies and the companies that sold them. We are currently collaborating on an article that will hopefully bring the picture into focus, that picture I’ve yelled about so many times, the underfunded UL. The non guaranteed stepchild of a policy that so many people have their family protection riding on.
What is becoming clearer and clearer is that, at least to me, is that all of these precariously balanced, yet doomed to fall policies may in fact be part of the plan. Think about it.
Let’s say I’m the insurance company and you have a $500,000 universal life policy with me that has an annual premium of $6000. You’ve done the math and know that you’ll never live long enough to pay more in than your family will be paid upon your death. And if you happen to die prematurely, they will receive real dollars for your pennies spent. But wait!
What if that $6000 doesn’t really guarantee that policy forever? What if the agent you bought it from sold you a song about how good the company is and how you could depend on their non guaranteed projections because the company has always come through? What if that $6000 assumption really never anticipated bad economic times? What if in the 15th year after, pouring $90,000 into your universal life policy, you get a payment notice telling you that it is now going to take a premium this year of $11,000 to keep the policy in force?
What if when that price starts going up, it keeps going up every year and eventually you can’t afford it and it lapses? What if that is exactly what the insurance company wants to happen? All profit and no death benefit payout is a pretty good deal if you’re the insurance company.
I don’t have a shred of evidence that there is some kind of grand scheme like that, but when I see the number of policies hitting this same brick wall it all seems too much the same not to be planned.
I had a customer once that felt bad when I was able to find a lower price term insurance policy with a different company. He was concerned about how the original company would feel about him bailing on them. Heck guys, they plan on it. The reason term is so cheap is that companies almost never pay claims. People replace their term policy with a better deal or just get tired of paying insurance or space it out and lapse it or just get to the end of a term and forget to die. In the case of term insurance it’s not a disreputable thing that there is an assumption of lapsing. At least they offset that downside with a cheap upside.
It would be quite another thing if there is a built in mechanism on a very expensive product to make it unaffordable at some point, or if the product was just so fragile that the chances of its’ cost ballooning out of control at some point was very good.
Bottom line. I have based this blog on the very same thing that most universal life insurance policies are based on, assumptions. Universal life can be a good and completely guaranteed product, but companies still offer universal life products that aren’t guaranteed at all. If it walks like a duck, ……….
August 13th, 2009
In preparing to help write an article about the catastrophic meltdown of traditional universal life insurance policies I was seeking some industry assistance in nailing down approximately what percentage of the total number of UL’s were in danger of imploding.
To my amazement, sort of, none of the companies I spoke with said they had any idea, not even a wild guess, at the industry percentage of policies that were based on assumptions rather than guarantees. In fact they indicated that they didn’t believe that they could even come up with those kind of figures for the business on their own company books.
Furthermore, not one company had a plan or program in place to try to determine the extent of the problem in order to give policy owners more of a heads up than the normal practice which is to send them a premium notice saying that it will take a lot more money than they’ve been paying in order to keep the policy in force. They said that was the job of the agent who should be doing annual reviews and keeping the client abreast of the health of their policy.
Well, that’s a real problem since a very small percentage of agents ever last more than a year in the business. And for those that last long enough to actually stay around and service their clients, do you really think they, the agents that sold under funded, doomed to fail, UL’s are really going to call their clients and tell them that “you’ve just blown tens of thousands of dollars on my last idea, but I have a new plan you should try?”
That is about as likely to happen as having a company write a letter to all of its’ UL customers saying that there is an inherent problem with the majority of their UL policies and they highly recommend that you get your policy evaluated soon.
Bottom line. It’s an industry wide problem. It’s an insidious problem in that policies, because of low mortality charges in the first years, can hang together for a long time before the disintegration begins. It’s enormously harmful to those that lose everything they’ve put into a policy, but even more so if they lose the policy at a point where they are no longer insurable. If you have a cash value policy, whether universal life, variable universal life or whole life. have a reputable independent agent review it with you soon.
July 30th, 2009
Estate preservation, as I’ve stated in several posts since the first of the year, is becoming more unstable due to a couple of factors. First, Congress has not shown their cards yet on how they expect to handle the estate tax exemption issue in 2010 and second, older universal life policies that carry most of the existing estate preservation coverage are collapsing left and right due to lower than assumed interest rates.
In a Wall Street Journal Article dated May 26 of this year by Arden Dale, he goes into quite a bit of detail about what’s happening to estate protection policies. To paraphrase, he says that people are going along assuming they have a paid up policy with nothing to worry about ever and suddenly they get a lapse notice or get a bill for a huge “catch up” amount to keep the policy in force.
I’ve been blowing this horn for years and I would just go a step further and say that it isn’t just those with survivorship life insurance policies that need to be concerned, but anyone who has a permanent policy in force, whether universal or whole life, unless it happens to have an external guarantee that doesn’t rely on assumed values.
Mr Dale suggests having your estate protection policy checked out by an attorney whom he admits will likely refer it to an independent life insurance agent for review. Let me be very clear. If you have a universal life, variable universal life or whole life policy that is dependent on cash value to keep it in force, you need to get off your duff and have a thorough policy review. Ignoring this whole thing and hoping it won’t impact you is an almost sure way to wake up some day soon having blown thousands or even hundreds of thousands of dollars for insurance you no longer have. And you won’t have any recourse other than to go out and hope you qualify for a new policy.
I’ve been beating this drum hard for years now. It is simply not a drill. Because of the sales tactics that have been used for years with cash value policies, the tendency to sell assumptions versus guarantees, without being overly dramatic, most of these policies will collapse, and given the last year’s economic adversity, sooner rather than later.
People are dependent on these policies for estate preservation, income protection, and family legacies and it could all go down the tubes with their next premium notice.
Bottom line. Ours is an industry that has its’ fair share of honorable, professional and honest agents who have set their customers up to be covered correctly, but it is also an industry that far too many people have jumped into as a way to make a quick buck. The second group far outnumbers the first and those dependent on the insurance are the unwitting victims.
July 23rd, 2009
I received an email from North American Life today touting their indexed universal life products as the second coming of the 1980’s. I can’t believe that life insurance companies still lean on agents to push non guaranteed assumptions on unsuspecting customers. There is a segment of the industry I work in that just strolls through life with absolutely no conscience.
By the way. When I talk about the second coming of the 1980’s, it is not a good thing. Back in the 80’s when the universal life product went bonkers, agents wouldn’t think twice about telling a customer that they were not only going to have life insurance forever, but were going to get filthy rich for having owned it. This was all based on the wildly high interest rates at the time and assumed that those interest rates would always remain high.
While North American and other companies aren’t claiming that their policies will build cash value at the 1980’s 18% rate, to claim in the year 2009 that you should expect a constant 8% or higher return is just wrong. I hate when any agent suggests that any client look at, let alone use, non guaranteed rates as a reason to buy. The higher the non guaranteed interest rate, the more unconscionable the act becomes.
Just like banks and mortgage companies and credit card companies need to clean up their act and change their ways of thinking, life insurance companies need to quit pretending it’s OK to hang a possibility out there to lure customers in knowing full well that historically the assumptions don’t hold up.
All of this is tapping into the greed that has brought our country to its’ knees already. We have great guaranteed products but at some level people want more from their life insurance than just life insurance. They just don’t want to pay for it. Are you getting the drift. These products get sold by greedy agents who don’t do the right thing for their customer that really wants wealth to accumulate where there is none. Something for nothing never has been a good plan.
Bottom line. If you have a need for permanent life insurance, but universal life with a no lapse guarantee and know that what you have isn’t going to come back and bite you in the butt. Steer clear of indexed universal life, variable universal life and whole life. If your needs aren’t permanent, buy term insurance.
July 7th, 2009
It’s certainly not breaking news. But it has been important and timely and will remain important and timely for many years. A very high percentage of the universal life policies in force today are in trouble due to the abhorrent sales pitches of those life insurance agents who were more worried about their bottom line than their client’s family and future.
Those pitches centered around two things. Agents sold the idea that universal life would build tremendous cash value and that it was a policy that would be there for life. What a package! What they didn’t tell potential clients was that there was no guarantee of cash value accrual and also no guarantee that if the policy started bleeding cash due to lower interest rates, that the policy would stay in force at all let alone for life. By the way the majority of estate preservation policies sold in the last 20 years used these types of universal life policies
Now keep in mind that sold correctly with enough premium dollars going in, a universal life policy could be guaranteed to remain in force forever and even be guaranteed to build cash value to some degree.
But also keep in mind that most life insurance is sold in competitive situations and that universal life policies have guaranteed and non guaranteed values. Logically the price is higher to guarantee values like cash and the longevity of the policy.
So, a dirtball agent who wanted to win the day for himself would show a client a non guaranteed policy illustration and talk a lot about how “the company has historically done well and there’s no reason to believe that will change”, and “things would really have to go down the tubes before the guaranteed values will come into play”. Some would simply not show the guaranteed values. It just muddied the waters.
Probably 90% of universal life policies sold in the 80’s were sold like this and the majority since then have gone the same route. It was more prevalent during the 80’s just because assumed interest rates were so high that agents were selling universal life as an early retirement vehicle. You could put in squat and be a millionaire in 20 years according to them.
So these “Bad UL’s looked great on the non guaranteed side and fell to pieces (death benefit went away)in short order on the guaranteed side. On the flip side a “Good UL stays together (death benefit remains intact) on the guaranteed side.
Bottom line. I’ve made a lot of this issue over the years and probably will until I die or retire. What people need to know is that 1. you can’t hang on to it long enough for it to get better and 2. you can replace it with an appropriate product and get back on solid ground right now. There are far too many people out there thinking they can keep dumping cash into a failing universal life policy and someday, somehow, things are just going to be OK. Unfortunately…..NOT!
July 2nd, 2009
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