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Life Insurance revisited

Mention life insurance in social conversation and your listeners’ eyes might get glazed. Cold calls from life insurance professionals are often met with short, terse terminations. Print the words life insurance in a column headline and some readers will automatically turn to another page. Such is the unfortunate characterization of a much needed financial product and some of the professionals consulting in this asset class.

Why the range of reactions from disinterest to intense dislike? Possibly, per David Jones of David Jones Insurance, because “life insurance is the most misunderstood …and poorly explained… financial product.”

Many in the industry have narrow financial exposure, having brokered a sole asset class of life insurance; some are young in life and experience, having gained entrance through merely passage of a test (on heels of a forty hour course); some are career agents, only selling their firm’s products (unless the insurance applicant is denied in by their firm’s underwriting). Many of the products are complex and, even with clear explanation, they are misunderstood. Many of the assumptions used to create the “illustration” of how the life policy will look/expected to perform in future years have changed. And there are changes by the client: many a policy was created in earlier years to assure a family’s financial security ( e.g. basic coverage in case there is pre mature death of the breadwinner) ) but, in later years, the purpose of the life insurance policy changes to become part of a sophisticated estate tax minimization plan.

It is not for this column to sing life insurance’s praises for old or young; it is not for this column to explain the in’s and outs of all policies. But it is to sound an alarm that policyholders really need to bring their in-force policies to their existing and/or original underwriting agent to get an up-to-date assessment; the owners of the policies need to intermittently understand how the policy is performing relative to original expectations and illustrations …and understand how older policies are performing relative to new types of life insurance products previously not available. You should review your policy not just with the issuing agent or company’s representative; you should take your policy and the current in force illustrations to other insurance agents, especially those who can offer a multitude of different products from different companies. Per Jones, “Many agents owe their duties to their employer; they do not have a fiduciary duty to the client; they are brokers.”

How might a comparative assessment of your excising policy help? If you have term insurance, you can visit with your agent to see if a life insurance company is offering term at more competitive rates. It is certainly true that within a ten year period of time, term rates have dropped as term polices have been reprised to reflect improved longevity of the overall population. A new policy might reflect those new mortality tables.

If you have an older life policy, you absolutely need to understand if the policy is performing in line with the assumptions made at time of original issue. Jones says. “For policies that were issued in the 1980’s and 1990’s, a lot has changed … much to the policy holder’s detriment. Because interest rates have dropped dramatically in the past 25 years, it would be surprising if an older non-guaranteed policy is in line with original policy illustrations. These older policies assumed a continuation of then existing higher interest rates to be paid on their large bond portfolio and , in turn, the new policies assumed the insurance company would be able to pay their insured’s rates of return on the cash value at rates higher than the guaranteed minimum rate. Assumptions of 8% in 1990’s were common. Nowadays, if you want that return, you will have to make a switch to policies that give you some of the upside in the equity market.”

Secondly, you want see if a replacement policy would offer a net benefit (after the cost of a replacement policy) based on today’s more favorable mortality tables. In the past twenty to thirty years, great strides in medicine have appreciably extended mortality for men and women. When insurance was priced 25 years ago, the policy was more expensive as policyholders were thought to die sooner. Current policies have more a beneficial mortality table priced into the policies. You might think you will keep your old policy but just the insurance company to update the mortality table underlying it but Jones says, “No possible: older polices cannot switch to an improved mortality table as the National Association of Insurance Commissioners does not allow life insurance companies to change mortality rates midstream.”

The net of it is that replacement of a policy, long held to be unacceptable and costly to the insured, might really save the insured money by taking advantage of new insurance products, exiting policies that will never perform in line with expectations and might soon lapse, and taking advantage of better mortality rates.

Older policyholders should not be forlorn; there is possibly some very good news. “If they’re still healthy (able to be underwritten) and they have built up a large cash value in the older policy, they will have options to “replace” their policy with a new policy that can still get them to their goal. As odd as it sounds, Jones says, “Many who bought a policy twenty years ago when aged 60 can now find a life insurance policy at age 80 that is less costly and offers better returns.”

Bottom line: take the time to make a review of your life insurances a priority.

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California Office

2760 Sycamore Canyon Road
Montecito, CA 93108

Phone: 805-969-2367
Toll-Free: 800-950-8522

Florida Office

4501 Tamiami Trail North, Ste. 419
Bank America Center
Naples, FL 34103

Phone: 239-649-7600
Toll-Free: 800-950-8522