Posts filed under 'whole life'
Yesterday I offered a post about term insurance versus whole life. There was on piece of the puzzle I left out, a particularly disturbing one since, first and foremost a life insurance agent should be all about making sure there is enough death benefit to take care of the family.
I have a young couple as clients who came to me a few years ago concerned that they might not have enough life insurance. They had been sold whole life policies by a Northwestern Mutual agent who had started out suggesting $500,000, 6 times the husband’s annual income, but they insisted that whatever insurance they bought had to fit within their budget. (Dave Ramsey would have loved them for that) Being the dutiful Northwestern agent that he was, he didn’t let go of whole life. He came down to their budget and ended up selling this young couple $150,000 worth of whole life, not quite 2 times the husband’s annual income.
Based on their age and income and family situation this couple felt like they needed at least $1,000,000 on the husband and at least $500,000 on the wife. They admitted that they got all wrapped up in the agent’s pitch about the cash value aspect and all of the advantages it would have down the road and finally just signed on.
We were able to get this couple into 30 year term insurance for the amounts they felt they needed and stay within their budget. This is the point I get hung up on with agents that are wholly sold on whole life. To the detriment of the family’s needs, they will stick to their guns and under insure them rather than go to a term product and make sure that the family is taken care of completely if something happens. All the rap about cash value wouldn’t have done these folks any good if the husband had died. The family income would have been gone and the widow and three children would have had just a fraction of the money they needed to carry on.
So why did this agent beat them down in death benefit and stick to whole life when it made no sense for the clients? Whole life insurance is insanely profitable for life insurance companies so they spend more than just a little training time teaching agents how to keep turning clients back to whole life and how to make sense of too little insurance. They of course also remind them of the commission and renewal advantages of whole life just in case the agent has a conscience but is able to be swayed by money.
Bottom line. The most important components of a life insurance sale are the client’s needs and their budget. The needs should be met and the budget should remain intact.
March 9th, 2010
Clients being ever vigilant for the fine print or hidden costs occasionally ask how I get paid. The core of the question for them is, of course, any additional cost they might incur above and beyond the premium.
Almost all life insurance agents are paid on a commission basis by the company. For term insurance it is generally a percentage of the first year premium with no renewal commissions paid. With whole life or universal life it is generally a percentage of the first year premium and a modest renewal commission for anywhere from 5-10 years.
I’ve made no bones about the fact that I’m not a fan of whole life insurance and that I believe that if you get down to the core of why agents choose to concentrate on whole life versus versus term insurance or even universal life with a no lapse guarantee, it’s commission. I’ve been torn asunder for this assertion on a number of occasions by whole life agents who will claim to their death that they really believe whole life is the answer for all life insurance needs.
I maintain there is a point when a person “outlives” the need for most of the life insurance they might carry during their child raising, higher income days. So, let me just throw out some facts and you can give it some thought. Maybe I’m all wet. Maybe not.
Let’s use a 48 year old guy who needs $1 million of coverage. He’s a doctor and is confident he will be comfortably retired by age 70. Just to give him a little wiggle room we got him $1 million of 30 year term that will cost $3320 a year at the preferred rate he qualifies for due to his being a private pilot. At the end of 30 years he will have paid $99,600 for the protection he wanted. If he reached a point before then that he had outgrown the need for it, he could have dropped it and paid less.
He can get $1mm of whole life for $21,000 a year. Over the next 30 years his premiums will total $630,000, but that will be offset (according to the whole life agents) by the fact that the policy will have accrued cash value of $591,572. So, without digging any further it’s plain that a person could take the cash value and end up paying about $38,500 for the insurance over that 30 year period. Good deal?
So, where’s my leg to stand on? Well, let’s start with the most obvious, $300 a month versus $1750 gets my attention. But what if money just really isn’t an issue. I know “buy term and invest the difference” is a worn out, beat up old piece of common sense, but really, it still is common sense. If you can afford $21,000 a year without stressing your budget, buy the term and free up $17,680 a year to invest outside the policy.
Whole life guys will tell you no one has the discipline to actually budget that $17,680 and invest it, so the whole life is a kind of forced investment/savings/retirement plan. Well, that may be true for some, but I would venture a guess that if someone can’t do that, they will also eventually lapse the whole life policy. If they lapse their insurance their family has no coverage. If they don’t invest the $17,680 one year, they still have all of their life insurance.
So, what if a disciplined investor socks away $17,680 a year for 30 years? At a fairly modest 6% return, that generates $1,481,000. There are plenty of mutual funds out there that have averaged 12% or more for a very long time now. What if they put that extra money into those kind of funds? At 12% “the difference” generates nearly $5 million. Even with the taxes that will be due it beats whole life.
And about that cash value. Generally it isn’t left alone. The truth is that the agents will tell you that you can borrow it (use it as your personal bank) or pay premiums from it. Well, unless you pay back the loan the death benefit has been reduced.
Now all the claims I’ve made came from a real whole life policy from a highly rated company. I took all of my numbers off of the guaranteed side of the illustration. Any agent that would use the non guaranteed figures to sway you to buy should have to take in your family and care for them when you die without any insurance.
Bottom line. If you lack discipline and have enough money to buy whole life, buy term and put the difference on an automatic eft into an investment plan.
I almost forgot why I got off on this subject. It’s the commission. On the term insurance an agent would typically get about 90% of the first year premium or about $3000. The whole life agent would typically get about 70%, so they make $14,700 the first year. Normally they would get around 3% annually on renewals, $630 a year, for at least 5 years, another $3150 in commission, $17850 total. So, all I’ve been saying is that the amount of commission could certainly be a factor in swaying someone to push a client in a direction that just might not be best for the client.
March 8th, 2010
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
A client of mine asked me an interesting question over the weekend about the status of whole life insurance cash value as an asset. His question was whether it was protected from lawsuit judgments?
This question came because he had been approached by an agency that purported to represent large numbers of doctors from India. They highly recommended that all doctors have large amounts of whole life insurance as a way to protect at least some of their assets from possible malpractice suits. My initial take on this, that the cash value was a safe haven, was that it sounded like a good sales pitch but that with the huge variance in state laws it was doubtful that one size would fit all.
Let me tell you what really smells right up front on this. If the cash value is what is shielded from lawsuit garnishing, then to be significant in planning there would have to be large amounts of cash value stuffed away in the policy. Unless you can strategically plan on not being sued for 20 years or so, the only way to have significant cash value accumulation is to over fund the policy. In layman’s terms, pay way too much for your policy so the excess goes into the cash value.
I have feelers out to several advanced planning departments and independent attorneys on this question and hope to be able to pass on more than just my opinion this week. What I have found so far is that if this situation were in Colorado, which is a pretty typical state from an asset protection standpoint (according to Russ Lombardy with Clear Wind Law), up to $50,000 in cash value would be sheltered from attachment.
Bottom line. There’s probably only one thing that would make a whole life prone life insurance agent salivate more than just an average over priced sale. That would be talking someone into over funding a policy, thus driving the policy cost, and more importantly the commission on the sale, through the roof. More on this soon.
January 25th, 2010
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
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
Some have noted that I’m more than just a little opinionated when organizations and companies try to sell overpriced, under guaranteed term insurance or whole life policies as final expense policies.
First let’s kind of define the final expense need so people will understand the target, or if they even have a target that needs to be aimed at. Having just been through this with my Dad’s passing away 8 months ago I can tell you that final expenses included a funeral, legal fees to close out his trust, fees to change property ownership documents, final medical expenses and hospice care.
Because of planning well and choosing to be cremated versus buried, Dad’s final expenses were under $10,000. If you add a burial and take away the existence of his trust and insurance that covered about half of his hospice stay, the bill would have run closer to $25,000. My professional opinion is that today, in the absence of $25,000 cash set aside for this purpose, a person should have at least a $25,000 permanent life insurance policy in force.
Since I normally beat AARP to death on this subject, for the sake of spreading the beatings out, we’ll actually take a look at Globe Life, a more respectable but still overpriced option. I ran quotes for a 60 year old from their website and was presented with 7 and 15 year term options and whole life as their permanent recommendation. Their whole life product was priced at $119.25 a month and illustrated that the policy would generate $1900, $5200 and $12,000 cash value at 5,10, and 20 years respectively. Concerning that cash value their website states “Builds cash values! Yet another quality benefit is the guaranteed cash values that build up tax-deferred over the life of the policy. Once they start accumulating, the money can be used any way you see fit.”
OK, I want the cash value to be added to the death benefit when I die. That’s the way I see fit. But that’s not happening. If you die 20 years down the road your beneficiary doesn’t get $25,000 plus the $12,000 cash value. They just get the $25,000. And, if you chose to use that cash value in some other way you saw fit, and didn’t pay it back, it will be deducted from the death benefit. What a deal I have for you.
Soooo, I ran rates on what I recommend for a permanent life insurance solution. If you don’t have that money socked away for final expenses I highly recommend a universal life policy with a no lapse guarantee. This product is permanent. You will not outlive it. It has a level premium guaranteed for life. And it doesn’t use cash value as an internal guarantee so the cost is much lower. To be fair, even though most 60 year olds can qualify for better than standard rates, I ran a quote at standard with Genworth Life and Annuity for $25,000 and the monthly cost was $52.52.
The difference between these two policies? You have to take an exam for the lower rate which is at no cost to you. You can have Globe manage $65 extra a month for you or you can do it yourself. With Genworth if you decide to use that $65 “any way you see fit”, it doesn’t have to be paid back to keep your policy intact. If you choose to invest it I think you will see that beating the cash value accumulation in a whole life policy isn’t that tough even if you pay taxes on the interest gain.
Bottom line. Final expense is a valid reason for life insurance if you don’t have it truly covered in some other way. Simplified issue whole life policies such as AARP and Globe Life are, in my professional opinion, a bad idea. Don’t let the lack of exam entice you into paying far too much. The exams and quick and easy and don’t cost you anything…and you get the results whether you ultimately accept the policy or not.
We will be joined shortly for a comment from Hadley who represents Globe Life. He is a fine agent and I have a lot of respect for him. We disagree on this subject, but there are a lot of things we do agree on, so………
June 23rd, 2009
90% of life insurance agents cash those commission checks and forget anything they said about service. If this past year has taught us anything, we should have learned that a financial adviser that doesn’t stay on top of changes and doesn’t stay in touch can cost us tons of money, quickly.
Transamerica just posted a piece today talking about the new, even more important role that life insurance plays during these “uncomfortable” times. But along with the comforting features of life insurance such as tax free benefits, comes the bad news, a real ongoing black eye for the life insurance industry, the fact only 10% of agents do annual reviews with their clients.
Annual reviews are a two edged sword among the 10% of agents that actually participate in the practice. I know agents that will follow up with clients annually at least a few times with the express purpose of up selling or proposing stupid ideas such as life settlements. If they find the client isn’t going to be an ongoing cash cow, they never call again.
Annual reviews are a service that clients should expect. They have put their trust and faith in an agent that is handling what is being called the “new asset class”, their families future as held together by life insurance. Clients should come to trust that an annual letter and call from their agent won’t have hidden agenda, but will keep them current on their coverage and educate them on changes that have occurred that might have an impact on their overall financial plan. Clients should expect an agent to let them know when there are opportunities to save money either with new products or when laws change and the client’s need for life insurance becomes less.
Just a few questions concerning your current agent.
1. If you have an estate tax plan that uses life insurance has your agent let you know that over the last 6-7 years there have been huge opportunities to save amazing amounts of money on the permanent universal life or whole life policy that is funding that plan?
2. Has your agent let you know that right now there is the end of an era of prices that will likely never be seen again? Term insurance prices are no longer going down and there is still time to lock in rates that will soon be known as the lowest that ever were. But not much time. A call from your agent a year from now will be too late.
3. Has your agent that sold you that whole life or universal life policy ever told you about universal life policies with an external no lapse guarantee, a product that can replace traditional policies for pennies on the dollar with better guarantees? Has your agent told you that opportunity is taking the same turn as term insurance and will cost more or be unavailable with many companies very soon?
4. Has your agent that worked so diligently to sell you life insurance for your estate plan 5 or 10 years ago called to let you know that the estate tax exemption has gone from $600,000 to $3,500,000 since 2001?
5. Did your life insurance agent call to let you know that your term insurance policy was coming to the end of its’ guarantee period or did you just get a much larger bill from the insurance company?
6. Do you know if your life insurance agent is even still in business?
Bottom line. It’s called service folks and we, as life insurance agents, should be expected to provide it even if we never make another dime. We have asked you to allow us to manage part of your family asset portfolio and we should provide the service due from a financial professional.
June 1st, 2009
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