Insurance Pro Blog Podcast | Life Insurance and Annuity Insights

Today, we’re talking about the “scam” that has been perpetuated by life insurance companies for over a hundred years. I know, I can hear you saying to yourself, “which scam is that, there are so many to choose from”? Am I right? I'm talking about the supposed scam to sucker you out of the gains ... Keep Reading

Why don't life insurance companies do a better job of marketing the many benefits of using their cash value life insurance policies?  They talk a lot about death benefit, not so much about anything else.

Example of the industry frames one of the “benefits”:

What the industry says, “You can leave the legacy of a sizeable estate to your heirs”

What your clients hear, “I can spend a bunch of money to leave my kids rich when I'm gone”

Hmmm…let me think about that one…NO.  Everybody can think of a couple of teenagers or early 20-somethings who inherited a bunch of cash from grandma or their great uncle Bill.

How many of those stories have a happy ending?

The truth is that most advertising and/or marketing that's done by large life insurers is more focused on brand recognition than anything else. Running ads during the Superbowl with calving whales and people sailing on their yachts is about as obscure as it gets.

But it makes someone in the marketing department look good to all the C-level people who happen to be watching the big game.  None of it does anything to actually convince a consumer to buy a product from the company in question.

And why, why, why…

Is the life insurance industry so willing to concede victory to the investment industry? Yes, we know the argument is that “we're not competing with the investment industry.”

Actually, I agree with that…technically speaking.

But evidently, the investment industry missed the memo. It's time to get in the game folks!

Why don't life insurance companies do a better job of marketing the many benefits of using their cash value life insurance policies?  They talk a lot about death benefit, not so much about anything else. Example of the industry frames one of the “benefits”: What the industry says, “You can leave the legacy of a ... Keep Reading

We like life insurance because it marches to its own beat.  In other words, when CNBC is reporting panic over Facebook, life insurance carries on almost as if its never even heard of Mark Zuckerberg.  A majority of our clients adopt a similar view on life insurance.

Life insurance serves as a wonderful complement to a portfolio of stocks and various other securities largely because it's not inextricably tied to performance underpinning those other assets.

It might make sense to assume, therefore, that indexed universal life insurance plays a different role.  It is, after all, tied to the stock market so it should follow that such a life insurance product is too tightly associated with stock market movements to serve any useful purpose of diversifying economic exposures.  This sounds plausible in the most elementary sense of the understanding.  It is, I'm afraid, however, dreadfully wrong.

Market Neutral and Non-Correlated Assets

While some of the more technical among us might argue my casual association between market neutrality and “non-correlated assets” is a confusion of two unique concepts, I beg that you allow me the leeway to group them together for the time being.  I promise there's a point to doing this and that we will arrive at this point by the time I'm done today.

Lets first ensure that everyone is working with the same definitions moving forward as I use these terms.

Market Neutral

Market neutral generally concerns an investment strategy that seeks to lessen the extremes of owning any asset where the risk of loss presents itself.  Think of it in terms of giving up a certain amount of likely gain in order to shield yourself from a certain amount of potential damage.  If you are comfortable with some more technical investment jargon, it's commonly a practice of taking a long and short position on an asset.  If you don't know what that means, just understand that you stand to gain from both appreciation and decline of the asset's value.

For an investment strategy to be neutral, it must satisfy two requirements.

* It must benefit from both an increase and decrease in the asset value

* It must (at least theoretically) remove (or reduce) the risk of loss from owning the position in the asset

Non-Correlated Asset

A non-correlated asset is merely an asset that is not correlated to the stock market.  In other words, an asset that does not move with the movement of the overall stock market.

Indexed Universal Life Insurance Market Neutral and Non-Correlated

Indexed universal life insurance is a form of cash value life insurance that earns an interest rate on cash values derived by the movement in an index over a specified period of time.  Usually, the index is a stock index.  I don't have exact data on how often a stock index is chosen over other indices, but I would estimate well over 95% of the time.

Given the ubiquity of stock market indices chosen for indexed universal life insurance, it makes sense to assume that this product would closely mimic overall stock market results.  But a closer review of the precise functionality of this product tells a different story.

Caps and Floors

The most common index chosen for indexed universal life insurance is the S&P 500 and the most common time frame is one year.  This means the interest rate paid on cash values will be the calculated percentage change of the index over a one year period.  These products use a cap or an absolute maximum interest rate and a floor or an absolute minimum interest rate.  Caps and floors vary, but on average caps are around 10% and floors 0%.  This means the interest rate will not exceed 10% but will also never be negative.

We like life insurance because it marches to its own beat.  In other words, when CNBC is reporting panic over Facebook, life insurance carries on almost as if its never even heard of Mark Zuckerberg.  A majority of our clients adopt a similar view on life insurance. Life insurance serves as a wonderful complement to ... Keep Reading

Since 2013, we have published the only public analysis of variation in dividends for major participating whole life insurance products.  This analysis is a better gauge of product dividend performance than traditional reporting that focuses on the absolute declared dividend announced by each company.

We have long argued that our analysis is superior because of the critical role variation over time plays in our approach.  Rather than allowing a singular good or bad year influence perceived value, we use the rate of change in dividends over time to compare dividend actions taken across life insurers.

This is preferable because there is no standardized reporting method used in the life insurance industry for dividend scales.  Mathematically we do not have a coefficient for the dividend variable, so the raw numbers reported by insurers are meaningless when compared to one another.

We can, however, use changes in the variable (whole life insurance dividend rates) to make meaningful inferences about the superiority or inferiority of one company’s dividend performance vs. another over a period of time.

The information taken from this analysis is broad, which means we can only identify large trends and not superfine explanations regarding actions taken by one company or another.  This broad trend, however, is very useful for our purposes.

Why the Dividend is so Important

We use whole life insurance to build wealth.  This wealth is not so much focused on the death benefit that will eventually be left to the heirs of the insured under the policy.  Instead, it is focused on the buildup of cash value inside the whole life insurance policy.

All whole life policies have a set of guarantees with respect to the buildup of cash value, but this guarantee is mostly uninspiring in its purest sense.  The reward of dividends paid to policyholders through the legal promise mutual insurers have is the key driver behind this strategy as one for wealth creation.

To put it another way, better dividends create more wealth through policy cash value buildup and we want to speculate on where the best dividends can be earned.

Methodology

We measure the standard deviation and compound annual growth rate of seven top life insurers using their declared dividend rates over the most recent 10-year period.

We look at these two metrics for the following reasons:

Standard Deviation

We use standard deviation as a volatility marker.  Has the dividend rate move sporadically over the 10 year time period, or has the company tended to hold the dividend constant?

A higher standard deviation likely indicates that the dividend has experiences sharper movements (either up or down) over the time period than a company with a lower standard deviation.

Compound Annual Growth Rate

Compound annual growth rate shows us the change in the dividend rate taking time into account.  This means it shows us how much the dividend rate has tended to change year over year for the specified time period (10 years in our example).

If You'd Like to See the 2018 Results…

Since 2013, we have published the only public analysis of variation in dividends for major participating whole life insurance products.  This analysis is a better gauge of product dividend performance than traditional reporting that focuses on the absolute declared dividend announced by each company. We have long argued that our analysis is superior because of ... Keep Reading

We love paid-up additions and if you've listened to us at all, you're not all that surprised. But we’ve made a little misstep in terms of being so broad in our discussion about them.

And we're always adding new people to our audience. So it bears repeating…

Not all paid-up additions are created equal.

While there are more characteristics with paid-up additions that are similar than different, there are some sharp contrasts that very much matter.

There are four key elements that you need to understand to make an informed decision before purchasing a whole life insurance policy using a paid-up additions rider:

1. Maximum annual paid-up additions payments

2. Lifetime maximum paid-up additions payments

3. Payment flexibility (can the policyholder adjust the paid-up additions rider up and down and can the policyholder make paid-up additions payments as lump sums throughout the year instead of systematically with the premium mode [annual, monthly, quarterly]?)

4. Paid-up addition rider load fees

You can’t just blindly assume that because a policy uses paid-up additions it meets the criteria that we would demand of a properly designed whole life policy.

If you'd like our definitive guide to paid-up additions click the button below.

Here's a picture of the Table of Contents to give you a better idea of what's included:

If that looks like something you might find useful, please go over and purchase the guide here.

We love paid-up additions and if you've listened to us at all, you're not all that surprised. But we’ve made a little misstep in terms of being so broad in our discussion about them.

And we're always adding new people to our audience. So it bears repeating…

Not all paid-up additions are created equal.

While there are more characteristics with paid-up additions that are similar than different, there are some sharp contrasts that very much matter.

There are four key elements that you need to understand to make an informed decision before purchasing a whole life insurance policy using a paid-up additions rider:

1. Maximum annual paid-up additions payments

2. Lifetime maximum paid-up additions payments

3. Payment flexibility (can the policyholder adjust the paid-up additions rider up and down and can the policyholder make paid-up additions payments as lump sums throughout the year instead of systematically with the premium mode [annual, monthly, quarterly]?)

4. Paid-up addition rider load fees

You can’t just blindly assume that because a policy uses paid-up additions it meets the criteria that we would demand of a properly designed whole life policy.

If you'd like our definitive guide to paid-up additions click the button below.

Here's a picture of the Table of Contents to give you a better idea of what's included:

If that looks like something you might find useful, please go over and purchase the guide here.

We love paid-up additions and if you've listened to us at all, you're not all that surprised. But we’ve made a little misstep in terms of being so broad in our discussion about them. And we're always adding new people to our audience. So it bears repeating… Not all paid-up additions are created equal. While ... Keep Reading

Few aspects of life insurance are more misunderstood than the guarantees of a permanent life insurance contract (particularly whole life insurance).  You wouldn't believe many of the claims we've heard concerning life insurance guarantees, and we continue to be astonished at the perpetuation of inaccurate statements that surround discussions of guarantees.

Some of my personal favorites include:

* The guarantee of whole life is 4% so that means you'll receive 4% on your money

* The guaranteed column shows you losing money in the first year so you're guaranteed to lose money

* You're highly unlikely to achieve much better results than the guaranteed depiction

* It's best to go with the contract that shows better guarantees because you can be guaranteed a better result

* Pay close attention to the guaranteed ledger because your insurance agent can use another ledger to showing you pretty much whatever he/she wants to overstate how good the contract is

* If the guaranteed ledger shows the policy lapsing, that means it most likely will at some point

Flight to Safety?

Listen I understand the appeal of the word guarantee.  It solidifies a sense of safety and calm in an otherwise chaotic world where we mostly worry nonstop about our demise.

The word, “guarantee” brings a lot of power to the table and I've often wondered if its use with life insurance doesn't bring some people to develop an unrealistically high expectation about what life insurance has to offer.

However…

We need to understand that in life ultimately nothing is guaranteed nor is anything permanent.  If we accept this, we can shed necessary worry and focus on riding waves when they are in our favor.

What's in a Guarantee?

Let's stop thinking about guarantees as never-ending minimums and instead about long-term obligations.  In the spirit of life insurance, it's the insurer's commitment to policyholders to uphold various aspects of an insurance contract almost entirely concerned with the continued establishment of the death benefit.

Notice I didn't say cash value or cash value accumulation.  I want to be very clear in pointing out that the guarantees associated with life insurance have everything to do with death benefit and almost nothing to do with cash value and its accumulation–at least as it relates to cash benefits usable by a policyholder.

I'll make it even simpler for you.  99.99% of a life insurance contractual guarantees are concerned with guaranteeing a certain level of death benefit in exchange for a certain payment of premium.  That's it–end of story.  Whole life insurance, no matter how manipulated to accelerate cash value growth, is no different.

Why Guarantees Exist…on Paper

The largest source of misunderstanding life insurance guarantees lies in the very tool regulators sought to help understand proposed life insurance contracts–the voluminous depiction of policy details in both written and numerical delineation known colloquially as the “illustration.”

If you've never seen one, simply understand that it's a 10-50 page document that includes a lot of information regarding the proposed insurance contract.  This information includes both a narrative outline that defines certain terms and details the functionality of various policy features and benefits.  These documents also include a numerical depiction of guaranteed and projected policy values given the life insurance policy and design chosen.

Illustrations are a handy tool used to introduce the concept of life insurance to an otherwise unknowing crowd.  They were also once a source of rampant manipulation used to twist facts and dupe unsuspecting people into buying life insurance–or a specific type of life insurance.

To combat the issue, regulators established a basic protocol for illustrations tha...