What’s It Going to Take?
There were multiple articles published in the lates nineties and early 2000s discussing issues with life insurance performance. They all tell essentially the same story: life insurance policies failing because policy crediting rates fell as interest rates declined. Here are just a handful listed below. Additional professional journals published pieces and non-professional publications like Forbes, The Wall Street Journal, Money Magazine, BusinessWeek, USA Today, The New York Times and many others chimed in over the years with multiple pieces.
This isn’t rocket science, but it might as well be given how few policy owners, professional advisors and even some insurance agents fully understand it.
The Common Themes
Nearly every article from that era emphasized:
- Policies illustrated at 10 -12% crediting rates were unlikely to sustain themselves if renewal crediting rates fell to 6 – 7% and eventually 4%.
- “Vanishing premiums” frequently did not vanish.
- Trustees had an affirmative duty to review trust-owned policies.
- Universal life and whole life should be viewed as an actively managed asset, not a “buy it and forget it” product.
- Additional premiums were often required decades after issue to preserve the death benefit.
- Failure to monitor policies created litigation exposure for trustees and advisors.
We’re approaching 50 years of life insurance products built on assumptions that are not fixed and guaranteed, yet the marketplace still hasn’t embraced a simple reality: these policies must be designed conservatively and monitored regularly if they’re expected to deliver the death benefit that was promised.
What Happened?
Prior to the late 1970s, most permanent life insurance was built on fixed assumptions. With a rate book and a calculator, you could determine the premium, cash value and death benefit at any point. Once projected assumptions replaced guarantees, however, the responsibility for policy performance fundamentally changed.
When interest rates soared in the late 1970s and early 1980s, carriers began illustrating policies using those unusually high rates as though they could continue indefinitely. The high rates were real at the time, but everyone knew they wouldn’t last forever. Nevertheless, policies were sold based on projections that assumed they would.
This wasn’t limited to a few aggressive companies. The industry’s most respected carriers participated. The sales illustrations may have complied with the rules of the day, but many created expectations that were unrealistic over the long term.
The pattern repeated itself in the late 1990s. Securities-based variable universal life (VUL) policies were illustrated during one of the greatest bull markets in history using assumed returns of up to 12% year in and year out. Looking back, those assumptions seem extraordinary. Yet in some respects they were no more optimistic than illustrations from the mid-1980s that projected similarly high returns from bond portfolios. There were universal life policies put in force based on permanent 14% crediting assumptions.
Lesson Still Not Learned
Today, many Indexed Universal Life (IUL) policies continue to be illustrated using crediting assumptions that many observers believe are difficult to sustain over the life of the policy. Marketing often suggests policy owners can participate in stock market gains without market losses. While the downside protection is real, the upside is limited by caps, participation rates, spreads and the exclusion of dividends. Over long periods, those limitations can substantially reduce returns compared to the underlying equity market.
I’ve reviewed illustrations showing projected crediting rates of 7% to 8% tied to indexes that have produced disappointing long-term results, with some failing to outpace inflation over extended periods. Yet those illustrations continue to project optimistic outcomes decades into the future.
So, here’s the obvious question: Why does this keep happening?
Life insurance agents frequently describe themselves as advisors, consultants, specialists or financial professionals. Many are exactly that: ethical, knowledgeable and deeply committed to their clients. But the industry’s overall reputation has struggled for decades, and not entirely without reason.
Consumers continue placing enormous trust in illustrations they often don’t fully understand and sign off on paperwork they haven’t reviewed. Too many discover years later that the assumptions underpinning their policies never materialized.
One might expect regulators to solve the problem. They have tried at times, but meaningful consumer protection has often faced fierce opposition from industry groups concerned about limiting sales or harming business interests. In some cases, proposed reforms have been substantially weakened before becoming law. Some politicians kill bills or introduce amendments to benefit industries in their home states.
Meanwhile, many insurance agents continue operating under suitability standards that are considerably less demanding than the obligations imposed on FINRA-registered representatives or SEC-registered investment advisers. Those differences matter when consumers believe they’re receiving comprehensive financial advice.
Every so often, I hit a stretch where several troubled cases land on my desk at once. These aren’t abstract case studies.
- They’re families.
- They’re estate plans that no longer work.
- They’re business succession plans that fall apart.
- They’re charitable gifts and foundations that will never be funded.
- They’re surviving spouses forced to make impossible financial decisions.
I’ve seen families lose hundreds of thousands or millions of dollars, some even bankrupted by failing life insurance policies. I’ve seen retirement plans derailed. I’ve seen life insurance policies become financial liabilities instead of financial protection.
After seeing the same story repeat itself decade after decade, it’s difficult not to ask the same question again:
What’s it going to take?
Bill Boersma is a CLU, AEP and LIC and the founder and owner of OC Consulting Group. More information can be found at www.OC-LIC.com, www.BillBoersmaOnLifeInsurance.info or email at bill@oc-lic.com or call at 616-456-1000.
The opinions expressed in this article are those of the author and should not be construed as specific investment advice.
Securities offered through Valmark Securities, Inc. Member FINRA, SIPC. Investment Advisory Services offered through Valmark Advisers, Inc. a SEC Registered Investment Advisor.
OC Consulting Group and its affiliates are separate entities from Valmark Securities, Inc. and Valmark Advisers, Inc.
