Review of Randy Whitelaw’s March 2014 Journal of FSP article

Randy has written about the duties/responsibilities of trustees regarding the UPIA and, given his profession and time in the market, he should know. I always enjoy reading articles like this and he, as usual, has done a great job. However, while not meaning to take anything away from him, I often find something to expand on. Here are my thoughts.

Randy correctly states that the policies primarily at risk are the UL & VUL policies from 1980 to 2000 but I am always fearful that when non-experts read something like that, they automatically dismiss possible problems with other types of policies or policies from other eras. To assume policies issued after 2000 are fundamentally safe would be a big mistake. While Guaranteed UL policies are fantastic when understood, properly utilized and managed, many GUL policies (which are predominantly post 2000) are in trouble and will not perform as expected. Also, the recent surge of Indexed UL policies is certain to keep my consulting operation humming for decades to come. The misunderstanding and abuse I too often see with them is unconscionable.

Also, no one ever seems willing to talk about the huge block of failing whole life policies. The success the old mutual companies/agents have had in convincing the market and advisors that their policies aren’t suffering the same fate is, in my opinion, a significant travesty perpetuated in the industry. Fundamentally most non securities based life insurance policies perform based on interest rate markets so how on earth could whole life policies dodge the negative effects of those declining markets over the past thirty years? They can’t! I regularly analyze and recommend remediation or replacement of whole life policies which are failing miserably.

I’m not going to assert they are failing with the same propensity as UL and VUL policies but they are under-performing original assumptions and many are failing. I see it all the time so no one should believe it’s not happening. As Randy states, UL and VUL contracts transfer performance risk to the policy owner/trustee. There is also a transfer of performance risk with modern whole life, as opposed to old fashioned whole life from many decades ago; the kind of whole life with no moving parts which was quoted out of rate books. “Modern Whole Life” over the past number of decades to the present day factually transfers the risk to the policy owner/trustee. Sure, there are substantive guarantees incorporated into these policies but many of those guarantees are grossly misunderstood or substantively traded away in favor of lower premiums and short pay scenarios. In fact, most whole life polices I see, as sold and understood, have fewer guarantees than properly constructed and appropriately managed GUL polices.

This lack of understanding is shared by the policy holders and agents alike. And please don’t start arguing about the traditional features and guarantees of whole life contracts when they are sold on short pays and with term blends and projected increasing death benefits. When a whole life agent who sold and didn’t subsequently manage a short pay policy from the 80s and 90s with auto loan non-forfeiture provisions tries to say with a straight face that the currently required loan interest payments aren’t really premiums, he starts looking foolish pretty quickly. I’ve never seen a policy owner say “I would have been upset by having to start paying $30,000 a year to the insurance company though I was originally told that $10,000 a year for 10 years would do it but now that you tell me its a loan interest payment and not a premium, that doesn’t bother me.” Come on…

This isn’t the article to deal with these issues in detail but if they weren’t so, then the policies I see from even the name brand, old school mutual carriers wouldn’t be crashing and burning, sometimes with unfathomable income tax consequences.

It should also be noted that though I understand what Randy means by distinguishing skilled trustees from unskilled trustees, consumers may be tempted to believe a professional trustee is skilled and a brother-in-law is unskilled. However, while the brother-in-law may be unskilled, to assume the professional is skilled could be a policy ending mistake.

Randy is right on when he states that life insurance is a “buy-and-manage” financial asset and that carriers and agents provide the “buy” function but not the “manage” function though an extraordinarily good agent might be an exception. He also warns against papering a file with meaningless analysis. I used to think that the low end, low cost “reviews” were better than nothing but I have come to understand they are often worse than nothing as they too often provide a false sense of security. Many times I have been handed the $250 annual review a trustee pulls out of his or her file only to see that it is essentially worthless, misunderstood or even dead wrong. And even if is it fundamentally correct, the trustee, more often than not, has no idea what to do with it. You see, the $250 doesn’t include the doing part. The telling part is easy. Here, I’ll show you how easy it is.

Mr. & Mrs. Policy Owner: your policy is toast.

That doesn’t take much. Researching, analyzing, outlining, presenting, educating, choosing and implementing the remediation options and market alternatives is where the work really starts. This will generally be at least a couple of meetings and numerous hours of time with the decision makers. It’s a rhetorical question to ask how much of that is done for $250.

Randy is right that an initial cost of $2,000 to $3,000 (minimum by my account) should be expected as a one time fee when an account is brought on board. He also does a great job of putting fees into perspective. I would suggest you read my post on the same issue. (Putting Life Insurance Consulting Fees into Perspective)

The first thing I am going to disagree with Randy on (though he may be technically right) is when he states that it is a myth that the selling life insurance agent is responsible for “providing annual or periodic policy performance monitoring information”. Maybe he means the myth is to expect that but I certainly believe it is the agent’s responsibility to do so. After all, he is getting paid to do so. He is right that the agent represents the carrier and is responsible for sales and delivery requirements and he may be technically right that said contract does not include post delivery policy service. However, this runs contrary to every bit of moral decency and business ethic imaginable. Clearly the agent has a duty to take care of a client who is receptive to such efforts, contract notwithstanding.

I will let Randy off the hook by assuming he means a trustee/policy owner should not count on the agent to do so and certainly there is no legal requirement which can be counted on to sink your claws into for recompense when things go wrong.

My final comments are regarding carrier illustrations and “third party vendors that employ illustration based analysis for non-guaranteed products”. I may sound like I am contradicting myself but I believe Randy is right yet off base at the same time. I intellectually understand precisely what he means when he discusses this in his “Myths to Dispel” section and, ideally, analysis is being performed based on more than carrier provided information. However, I am a pragmatist at heart and a part of me is bothered by the drumbeat of “actuarial defensible” and “dispute defensible” commentary when that sometimes puts “proper” analysis out of reach for many.

Take this example: let’s assume I am working with a sixty or seventy year old couple with a survivor UL policy from the eighties or nineties and the carrier provided illustration is showing it will collapse well before life expectancy (par for the course). First of all, should one not depend on this “predictive value determination” to assume there is trouble brewing? Of course you should! Furthermore, let’s assume a GUL policy is an appropriate product for the given scenario and it is available from a respectable carrier and is available for a premium thirty percent less than the premium purportedly required per the existing carrier’s own projections or a death benefit twenty percent more is available for the same cash value.

Rather than worry about not being “dispute defensible” by utilizing only this superficial and carrier provided data, I would be more worried about being “dispute defensible” for not making the change based on such data. Again, I understand and agree with what Randy is saying and in an ideal world he is right but sometimes something is so obvious that it doesn’t require an ethereal analysis. If I am standing in the street watching my home go up in flames I don’t think I am going to react kindly to the person who suggests I contract with an accredited consultant before determining if I should let the assembled firefighters go to work on salvaging what’s left. In fact, the firefighters are going to jump into action before bothering to ask my permission and they certainly aren’t going to be worried about liability for water damage in the part of the house that wasn’t reduced to ashes.

In other words, in the face of nothing, which is too often the case, something meaningful, even if not perfect, can be a lot better. The “80% Rule” is what lets the world keep on moving forward.

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