Why Paying Attention is Important

When new and exciting issues crop up much is written about them and then, just as quickly, it’s yesterday’s news.  The problem is, if it’s not continually related to the consumer and advisor community and you happen to miss it, you’re out in the cold.

I remember a few significant general news events in past years which I missed entirely because I was on vacation and “off the grid”.  By the time I got back the news cycle had moved on to the next thing and when the events were referenced a year or two later it was pretty surprising.  “Really, she’s dead?” or “That country did what?”  At least with the news, if you miss it there generally isn’t much lasting damage.

The point is, sometimes I purposely write about an issue months, or even years, after it initially hits.  One of these matters is the importance of paying attention to details.  Today I have a few reminders regarding Guaranteed Universal Life (GUL).

While working with a policy owner a few years ago I discovered a potential problem which was just coming to light and being written about in periodicals and blogs.  It had to do with the timing of premium payments into GUL policies but not in the way most people already understood.  My client was very aware he could not pay his GUL premiums late so he decided he would schedule the premiums right after the New Year for a policy with an anniversary in May.  Now that’s pretty conservative.  The problem is, this strategy could negatively affect his lifetime guarantees and he would never know it if he wasn’t  paying attention.  The issue is, the internal expense charges in policies aren’t always constant over time.  I will make up a scenario to illustrate.

Let’s assume a policy has a 10% annual premium charge for the first 10 policy years which reduces to 2% in year 11.  If the charge is applied to premium any time during the contract year and my client paid his 11th year May premium in January or in April or even a day before the anniversary, the 10th year 10% charge is being applied on 11th year money which, in some scenarios, will affect guarantees.  After all, on a $20,000 annual premium, this is an extra $1,600 ($20,000 x 8%).  One would never simply write a premium for $18,400 that year and expect the policy guarantees to not be affected.

Unlike what the anti-GUL agitators would have you believe, your guarantees aren’t completely blown up but they may be materially affected.  There are contracts in the market where at a certain point, if the premium is early or late there could be problems.  At least one carrier, like all responsible carriers should, has discovered this and took it upon themselves to fix the problem.  The cynical side of me believes that at least some companies are, and always have been, aware of this and might have even knowingly created a contract with this diabolical catch.

Beyond this, there are innumerable contracts which clients believe to be guaranteed which are not.  Anyone regularly involved with policy reviews knows that a disconcerting percentage of GUL contracts are not currently guaranteed as understood.

A history of being able to pay premiums on traditional insurance contracts during the grace period with no ill effects has carried over to consumers doing the same with GUL policies and not all of the contracts are forgiving.  With some GUL contracts, paying a premium late, even a day in some circumstances, violates the internal guarantee formula.  Sometimes a separate and higher set of charges then kick in which causes the policy to get more and more off track over the years even if the balance of the premiums are paid on time.

I’ve also seen contracts where every premium has been paid on time and we order an in-force ledger only to see it lapses before expectations.  At times this has been caused by the timing of a 1035 exchange.  Assume for a moment that a consumer pulled the trigger on a policy which initiated a 1035 exchange and the money took 60 days to come in from the releasing carrier.  This is pretty normal but what if the writing agent or support staff didn’t account, when running the ledger, for the money taking 60 days to come in?  (There are a variety of choices made in the illustration software with little input, or even awareness, on the part of the consumer.)   What if they assumed it would take 60 days and ran the ledger accordingly but it took 65 days for the money to hit?  Even though the insurance carrier would hypothetically know the actual policy implementation did not parallel the initial ledger, I wouldn’t expect a heads up.  In any of these scenarios, the lifetime guarantees might not, and probably would not, stay in force.  If an ongoing management protocol was not implemented, no one may understand the ramifications for years, or even ever know until too late.

Beyond this, what about plain old home office mistakes?  I’ve ferreted out factual software errors which can cause serious issues.  In one instance I determined the insurance carrier’s own software could not properly account for and credit a 1035 exchange on a backdated policy.  It took me two years to convince the carrier and have it rectified once I proved it wasn’t simply my opinion but objectively a significant software error.  Though the contract I was working on was fixed, I have little faith that the other contracts affected by the same issue were retroactively adjusted.

As a final example, I had a client who was very gun-shy due to being burned more than once.  I was tasked with building a significant life insurance portfolio and brought to them a well diversified offering with various carriers and product types.  Due to their prior experiences I couldn’t move them off of a 100% GUL portfolio.  Furthermore, they tore apart each contract and ledger line by line and I had to answer every question to their satisfaction backed up by supporting documentation.  Finally, they demanded customized “comfort letters” from the carriers signed by an officer and even some of those were modified more than once.

The comfort letters were exceedingly detailed, listing 1035 moneys already in receipt by the carrier and they were drafted and signed by all parties within 24 hours of the policy delivery requirements being signed.  In other words, this transaction was locked down more than any transaction with which I had ever been involved.  I had never been put through the wringer quite like this but I understood why it had to be that way and, frankly, I enjoyed the process.

Immediately after the first anniversary I ordered in-force ledgers on all of the policies, which were each 1035 single pays.  Unbelievably, one of the ledgers came back showing the policy collapsing in the clients’ nineties.  The funny thing about this situation is that I wasn’t even concerned.  I simply and forcibly said “Fix It!”  It took a couple of weeks but they did.  Once again, there was some kind of system error of which not even they were aware.  Though it would be impossible for this single pay contract which was proven to be guaranteed for life at the first anniversary to not be so at the second anniversary, I’ll be getting another in-force ledger next year anyway.  The clients’ cynicism was warranted.

Once again, the importance of ongoing management and review is of paramount importance, even in guaranteed contracts.  You never know if your check fell between two machines at the post office or the intern at the insurance carrier sent it to the wrong department.  By the time it makes its way to the right place and gets credited, something might have come off the rails.

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