There's never been a better time to talk to clients, prospects, advisers and centers of influence about life insurance portfolio management. Both the New York Times and the Wall Street Journal published articles just last month about “skyrocketing” life insurance premiums and customers pushing back over surprise cost increases.
While insurers spend billions to advertise their safety and security, few if any advertise about the cost-competitiveness or actual historical performance of their products.
In other words, the New York Times, Wall Street Journal and other mainstream media organizations are doing your free advertising for you. Mainstream media is educating clients, prospects, advisers and centers of influence about the undesirable consequences of an unmanaged life insurance policy, namely premium calls and cost increases.
Some practitioners argue these premium calls and cost increases are the product's fault, universal life products lack the guarantees that protect clients against costs increases, or the opacity of whole life products leads to overcharging in the first place.
However, blaming product-type is a hold-over of still prevailing “flavor-of-the-day” sales and marketing practices where some hypothetical illustration for one product-type is compared to some hypothetical illustration of some other product-type to supposedly show why the new product is better than the old product. This is just silly.
So silly in fact that such comparisons are now considered misleading, fundamentally inappropriate and unreliable by financial, insurance and banking industry authorities. As such, the answer to the question — what to do about skyrocketing life insurance premiums and surprise cost increases? — is not found in some comparison of the inforce illustration to some illustration of some other product.
Instead, the answer is life insurance portfolio management. In fact, the reasons for skyrocketing life insurance premiums and surprise cost increases can be largely attributed to such misleading, fundamentally inappropriate and unreliable illustration comparisons. There's even a court case, Cochran v. Keybank, that proves the point.
In the 1980s, Mr. Cochran's insurance agent/broker recommended that his trust buy about $4 million of universal life instead of whole life because interest rates were high and the universal life illustration looked better than the whole life illustration. However, as interest rates declined, the crediting rate on the universal life policy also declined, and with less interest to pay internal policy charges, the policy became underfunded and needed more premium from Mr. Cochran. Sound familiar?
In response, the insurance agent/broker recommended an exchange to variable universal life because another comparison of hypothetical illustrations seemed to indicate his trust could increase the death benefit from about $4 million to $8 million for no additional cost. However, the illustrations didn't actually reveal costs, and instead assumed internal policy charges would be paid by an even higher policy earnings expectation that seemed plausible during the 1990s dot-com boom.
When lofty policy earnings rates weren't realized in the dot-com bust of the 2000s, the insurance agent/broker recommended another exchange to a $2 million guaranteed universal life policy, this time because another comparison of hypothetical illustrations indicated that the variable life policy could lapse before the guaranteed universal life policy. Unfortunately, Mr. Cochran passed unexpectedly just six months later and his beneficiaries lost between about $2 million and $6 million dollars.
Had Mr. Cochran been working with a life insurance portfolio manager instead of a life insurance agent/broker, his beneficiaries would almost certainly have received at least an additional $2 million. Managers differ from agents/brokers in that managers follow a proven process for the prudent selection and proper management of life insurance as an asset over the expected holding period.
We are currently in a low interest rate environment, but interest rates will not remain this low over the typical decades-long life insurance policy holding period for most insureds. Differentiate your advice from those who employ the same prevailing life insurance industry sales and marketing practices that caused the problems in the first place.
Carry around copies of the New York Times and the Wall Street Journal articles to help clients, prospects, advisers and centers of influence understand the undesirable and wide-spread consequences of an unmanaged life insurance policy. Carry around a copy of the West Point Draft of Best Practice Standards for Life Insurance Stewardship to demonstrate your process for the prudent selection and proper management of life insurance as an asset.
Barry D. Flagg is the founder of Veralytic Inc., an online publisher of life insurance pricing and performance research, and product suitability ratings. Follow him on Twitter @BarryDFlagg.