The Life Insurance Jungle

September 25, 2018 5 Minute Read

Last week I came across an article in The Wall Street Journal titled “Insurance Policies Backfire on Retirees.”  The article did a great job of explaining how permanent policies, like Universal Life, work and that historically low interest rates were to blame for their failure.  It went on to say that policyholders in their 70s and 80s were suddenly finding that in order to keep the policies they thought were permanent, they were going to have to put in more premium, a lot more.  How does this happen?  For one thing, life insurance contracts, yes, they are contracts, are too complicated.  Sure, the concept of life insurance is simple enough, pay a small amount each month (premium) in exchange for a large lump sum to a loved one, or a business partner when you die (death benefit).  But that is about where the simplicity ends because insurance companies have been innovating (meddling with) life insurance since life insurance has been around, which is a long time.

Here is where you have to make your first complicating decision.  Do you want term or permanent life insurance?  Wait, what did you say?  Term insurance lasts for an agreed upon time, like 20 years, and then it’s gone.  Live beyond that time and you have no coverage.  For some, this is a problem. For the insurance companies, this product is really easy to price.  They have hundreds of years of information about how long you may live, and they are getting better and better at predicting when you are going to die.  So, they price accordingly, build in some profit and Voila! You have an instant revenue stream to send back to shareholders. Win!

Here’s the problem.  We don’t know when we are going to die, and we don’t like the uncertainty and feel we have a need for insurance that lasts our entire life.  Enter the many flavors of “permanent” life insurance.  Whole Life, Universal Life, Variable Universal Life, Indexed Universal Life just to name a few.  So how do they work?  The insurance company takes their experience with life expectancy and figures in what they think the cost of insurance is and then makes a guesstimate on what they think interest rates will be in the future. Sometimes, a long way into the future. In the case of Universal Life which the WSJ was referring to they were, well, wrong about interest rates.  The consumer needs to pay an additional premium for the shortfall of interest earned.

Why is this a problem?  Didn’t the consumers know that the interest rate assumptions might not be right?  It was right there in the fine print.  Unfortunately, no, because most of us got lost in the weeds right after we made the decision about term vs. permanent and we thought when they said permanent they meant permanent.  Well, they never really used those words and they often used words like guaranteed when they were talking about some of the features of the policies, not the death benefit.  There are policies that are guaranteed. They are guaranteed by the insurance company who issues them and are regulated by the states in which they are issued.

So, what do we do about all this?  If you are buying life insurance, choose very carefully.  Know the features and benefits, what is guaranteed and what is not.  We can help here.  We analyze life insurance contracts all the time and we get on the phone with clients and their insurance companies to get to the bottom of what’s what.  If you already have life insurance and you don’t know what you have, we can help there, too.  We can analyze what you have, and there is a good chance we can help you restructure the policy to avoid problems in the future.  Lastly, if you have a policy and you have received a notice that you will need to increase premium or some of the features and benefits may be changing, give us a call and we will walk you through it and find a new policy for you or sell the one you have.  Yes, I said sell.  There is a growing market that buys and sells life insurance contracts consumers no longer want or need.  Many times, a policy is auctioned to the highest bidder and the bidders are institutions and other insurance companies.  Yes, insurance companies are buying the policies of other insurance companies, paying the premiums and holding them to maturity.  Seem a little strange?  It does to me too, and it can be a big relief for some clients that the policy they have been paying into all these years may actually pay them back.  If you have a policy that you are unsure about, you want to sell or just want stop paying the premiums, let us do the analysis.  You may be surprised by what you find.

If you don’t have a subscription to WSJ, you may not be able to read the whole article.  If you are interested in reprints, please let us know.

Articles Referenced

Wall Street Journal. (2018). Leslie Scism, “Insurance Policies Backfire on Retirees”:

The information provided is for guidance and informational purposes only.  The articles are not the opinions of ProCore Advisors, LLC.