Sleight of Hand?

A love / hate relationship.  That’s basically how I describe my relationship with the life insurance industry.  One day I witness the unduplicable benefits of a well designed and astutely managed life insurance portfolio and the next I’m called in to salvage what I can of the most recent train wreck my advisor network has stumbled across.

In an industry which has struggled for years to gain a sense of trust and credibility, I get frustrated that it continues to shoot itself in the foot on a regular basis.  Here’s a quick example of something which isn’t new but is simply what came across my desk today.

An accountant brings me a policy issued back in 2002.  It’s with a solid carrier and, by and large, the policy is a decent one.  While available, the policy was not issued with lifetime guarantees but the guarantees last for a long time and the policy was projected to last for life.  Of course, in 2002 the interest rates were higher and it was projecting a 6.1% crediting rate with a guaranteed interest rate bonus of 1.25% in year 20 and beyond.  The rates are much lower today and the contract requires some additional premium to go the distance.  While disappointing to the policy owner, the required premium is available and it won’t be an undue burden and the transaction is still attractive.

Concerning the interest rate bonus, it is important to read the fine print.  I’ve seen plenty of contracts which were illustrated with a non-guaranteed bonus only to have that melt away given the interest rate declines.  A carrier which is struggling to make money on a book of business will not voluntarily apply a bonus it is not required to even though this persistency bonus is theoretically a thank you to the policy owner for the long term relationship.

However, when one sees a guaranteed bonus, that seems like a different deal.  How’s this for a foot note on the ledger? “This includes a contractually guaranteed bonus.”  That is the verbatim language on the ledger explaining why in year twenty the projected crediting rate is 7.35% as opposed to 6.1%.  But wait for it…. just kidding.

As is too often the case, what you read isn’t necessarily the deal.  I agree that the above noted language is pretty darn straight forward but you have to dig deeper to figure out what that actually means.  Never mind that it is my belief no one should have to strive terribly diligently to understand what “contractually guaranteed bonus” means, but this is life.

At the bottom of another page of fine print we find the following: “Interest Bonus: The policy provides a guaranteed interest bonus.  Additional interest will be credited monthly to the account value beginning in the twentieth policy year.  The additional interest rate will be determined each year as the lesser of 1.25% or 1.25 times the difference between the declared interest rate and 4.0%.”

What does this mean?  Well, the current declared interest rate is 4.00%.  1.25 times the difference between 4.0% and 4.0% is exactly zero.  Therefore, the guaranteed interest bonus is 0%.  Any fool can figure that out, right?  Why are you complaining?

Remember, the premium the policy owner is paying is a direct function of that projected interest rate.  (This is still news to most life insurance policy owners.)  Of course falling interest rates will have an effect but this contract actually incorporates a formula which exacerbates the reduction.  One would think the difference between 6.1% and 4% is 2.1% but it is most definitely not in this situation.  The difference is 3.35% (6.1% + 1.25% -4.0%).  I’ve seen other contracts with guaranteed bonuses where, as with this one, the formula is guaranteed, not a number.  I think that is sleight of hand.  I might as well tell you that I’ll guarantee to give you a million dollars (as long as the sun rises in the west tomorrow morning).  The point is, you have to be working with someone who knows what they are doing, how to dig deep and what things really mean.

Caveat Emptor needs to be the default mentality in every situation.  If anyone tells you “Not with my company” then that is someone who likely needs to be examined extra closely because they are either nefarious or ignorant.  An independent third party is simply insurance for your insurance.  Anyone can build and sell a structure but if you want it to stay standing you should probably involve an engineer.  The analogies can be endless and the pay back can be astounding.  Yesterday I was on the phone with a policy owner with the results of a multi-policy portfolio audit and I informed them that they were losing roughly $10,000 a month in cash value on policies which were driving themselves into the ground and would pay no death benefit.

The attorney here is the hero.  He brought me in.  I’m charging a modest $3,500 for this particular situation.  My work is definitively salvaging hundreds of thousands of remaining cash value and millions of death benefit.  For $3,500?  Really!  They lost significantly more cash value than my entire fee in the time it took to receive in-force ledgers from the carrier!  And more often than not policy owners won’t stroke the check.  I think it’s partly because of the rampant cynicism the consuming public has regarding the life insurance industry.  Think about that; the deleterious actions of some players in the industry which cause harm is driving the cynicism which results in consumers taking (or not taking) additional actions which cause more harm.

If I was brought in a couple of years ago the story would have been exactly the same and I could have provided the same information and shown them the same timeline for the policies to lapse and they would have had a few hundred thousand more dollars in their pocket and  more options at their disposal.  I’m at my wit’s end regularly.  Do I have to beg?  I will if it works.

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