life insurance policy

How Not To Evaluate Life Insurance

A healthy combination of skepticism and analysis is needed.

I’m a life insurance guy, and I feel a properly researched, constructed and managed life insurance policy can be an exceedingly powerful financial tool. However, my daily life is spent trying to find solutions to problems policy owners are experiencing. Decreasing crediting rates and increasing expenses are obviously issues, but we deal with these kinds of things in many areas of life on a regular basis.

What makes life insurance different? I believe it’s the lack of understanding about what modern life insurance is and how it works. Unfortunately, it’s not even close to what many people think it is, and until people start paying attention, my job security is assured. 

Whether it’s a brand new contract or a potential replacement, a healthy combination of skepticism and analysis should be brought to bear. Here’s an example:

Second-to-Die Policy

A file on my desk now is for a policy for a couple referred to me a few months ago. They have a second-to-die Whole Life policy, as well as two single WL policies. The single life policies are in place primarily for the annual dividends to pay the annual premium of their Long-Term Care  policies with the same carrier. 

The policy owners are very bright people. They’re experienced in finance and have run divisions of global companies. Of anyone who could conceivably figure things out, these are the people. But, they couldn’t. They dug deep but ultimately they were dependent on the agent, who to this day, they see as a good guy who gave bad advice.

The single life policies have experienced decreasing dividends and the LTC policy premiums are increasing, so they’re getting squeezed from both ends. However, we’re currently focused on the second-to-die contract. The original death benefit was $625,000, which they procured with a single pay. The nature of this product is if the dividend decreases, then either the death benefit decreases as well or the contract needs additional funding.  

Worst Case Scenario Got Worse

I was shown some modeling originally completed and presented at the point of sale. It was very interesting to say the least. One column was labeled “worst case scenario.” The contract has only been around for five years, but the current dividend is now lower than the “worst case scenario” that was postured as what might only happen if there was a global pandemic and everyone was dying. In other words, real life in the midst of a booming U.S. and world economy and improving mortality experience is worse than “worst case scenario.” Interesting.

The death benefit was initially reduced from $625,000 to $595,000 and then, further to the point that we’re now in the $400,00 range. They’re telling me they want to look at alternatives.

Replacing the Policy

It can be easy to posture market alternatives very attractively in an attempt to replace a policy. We’ll start with the basis that these clients want something rather conservative as they take enough risk with other asset classes. 

We took traditional variable life insurance off the table as they’re not interested in a policy driven by equities. I showed them illustrations for an array of Guaranteed Universal Life policies, but in today’s marketplace, the pricing is such that we can’t beat the currently illustrated death benefit of their WL product. Of course, the current policy may further degrade but given the likely long-term performance of it combined with giving up cash value in the GUL model, it didn’t look attractive.

We then compared illustrations for some traditional, current assumption UL that showed a death benefit of about $650,000 followed by some indexed UL that showed death benefits in the $750,000 to $800,000 range. Now we’re talking!  Right? 

I phoned and ask Barry Flagg what he would say. I’m picking on Barry because his response would be almost robotic. “Comparing illustrations of hypothetical premiums, cash values and/or death benefits is misleading, fundamentally inappropriate and unreliable according to financial, insurance and banking industry authorities.” And he’s right. There are many other very bright and experienced experts in the industry who agree with us. To make these decisions based on ledgers is not only inappropriate, it’s also foolish.

Finally, I showed them what appears to be an oxymoron: a Guaranteed Variable Life policy. Sometimes this type of policy has an edge due to regulations regarding reserving requirements.  

I helped the clients dig deep into the options so they could better understand what the regulations were built upon and how the contracts actually function. Even though it appears to show almost twice the death benefit and accompanied by a beautiful story, it isn’t a slam dunk. 

Understanding the Options

In the end, these policy owners may or may not make a change.  But if they do, doggone it, it’s going to be after I’m sure they understand the options well enough to make an educated decision, know what’s reasonable and what’s a pipe dream, and it’s going to be based on empirical data and not emotion or a gut feeling. Even for this highly educated and conscientious couple, making a sale and pocketing the commission, whether or not in their best interest, would be like taking candy from a baby. Your clients are no different. 

Sometimes replacing an existing policy is absolutely the best thing to do because either the numbers prove it or goals have changed. In the end, their needs, their risk tolerance, their understanding of the financial markets and projections of where those markets will be in coming years and their faith, or lack of it, in the insurance companies and agents is going to determine what direction they’ll go.

Unfortunately, too many people can easily be taken by unrealistic ledgers and a good story. I’ll be their next stop, maybe in five years and maybe in 25 years, to help them understand what happened and pick up the pieces.

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