You've got to be kidding me! I've paid tens of thousands of dollars in premium into that damn insurance policy! I was planning on leaving that money to the kids! What the hell happened?
OK, this is a real story, but I want you to imagine that you're the client.
Imagine you're a guy...married to a girl you fell in love with after school...and you married her. House, mortgage, and kids - maybe not in that order - but they come into the picture. Like most upstanding people, you bought life insurance as protection for your family in the event that you were ever hit by the proverbial bus. It's 'permanent' insurance....the kind that builds cash value. Your agent called it Universal Life and said it was more flexible than whole life and paid a higher rate of interest.
Anyway, you bought the insurance and you never really heard from the life insurance agent again. Sound familiar?
Oh, but you kept paying your premiums. For years. Decades. But you never managed the product...because you didn't even realize you needed to.
Time passed and now you're a hop, skip and a jump away from retirement and you want a little advice about your retirement and estate plan. When you talk with your CPA about it, she recommended that you talk to me.
And now I have the pleasure of telling you the bad news.
"Odds are," I say, "your insurance is going to die before you do."
You look at me with an irritated look in your eye. "You've got to be kidding me! I've paid tens of thousands of dollars in premium into that damn insurance policy! I was planning on leaving money to the kids! What the hell happened?"
"Well, it boils down to low interest rates," I say. "You see, the kind of life insurance you own is NOT GUARANTEED the way most people think it is. The cash value earns interest, yes, but that rate of interest can fluctuate. And as you know, interest rates have been pretty low and they've been trending downward for nearly 20 years. Because of those low interest rates, your cash values haven't grown as much as projected....and because that cash value supports the insurance benefit when you get older...and you don't have as much cash value as you though you would....well, things get ugly in a hurry. You can Google it and find stories from the Wall Street Journal, Forbes, and Fortune that talk about this. It's a sleeping giant of a problem and unfortunately, it's actually worse than most people realize."
I can see you face drop at that comment. "What do you mean?"
"Well, the insurance company wants to make a profit from the policy, right? At the end of the day, a life insurance company is similar to a bank in how it makes money on a cash value product. The carrier makes what is called the spread - which is simply the difference between how much the carrier earns on its investments and what it credits to your cash value. That sounds easy, but with interest rates so low, most insurance carriers aren't earning the spread they want. As a result, some carriers are starting to raise the internal costs inside their inforce life insurance policies as a way to generate the additional profit. That's what it looks like your carrier is doing with your policy. So now you're catching it from two ends: Your policy has higher costs than were projected and it is earning less interest than projected.....which ultimately means that your policy is projected to lapse before you die."
Sigh. "Will my kids at least get the premiums I paid?"
"No. If the policy lapses before you die, there's no value left to anyone. Nada."
"Your carrier isn't the only one with this problem. A large and generally well regarded insurance company called Transamerica recently made an announcement regarding an increase in the cost of 'mortality deductions' on some of its inforce policies. Voya, another insurance company, put out an announcement just a month or so ago about a similar issue. It said that internal costs will be increased by as little as 9% to as much as 42% on some of its life insurance products."
"They can do that?"
"In a word - yes. I am seeing this problem all over the place - personally owned life insurance like yours, life insurance in trusts for estate tax reasons, business owned life insurance for succession planning. It is getting to be a big issue."
"So what do I do?"
Fixing the Problem
"Well, you're lucky. If you weren't insurable any longer, the only option would be to either raise the premium so that the policy would stay inforce longer, lower the insurance benefit, or some combination of the two."
Smiling. "Actually, I guess there's a third option, but I don't think you want it. You could hope that you die before the policy does."
You grin in response. "Thanks, but no thanks! I want the kids to inherit the insurance from me, but they can wait a while!"
"Because you're insurable though, we can look at other insurance companies to see what they offer. Here's a report the team created to show you some options."
"Of course, you need to have your health checked out by the insurance companies for a formal offer, but we'll bid the coverage to a few different companies in an effort to keep everyone's pencil sharp on their offer. Your timing for this is actually pretty good. We are coming into the 4th quarter of the year and life insurance companies are like every other company.....they want to have great sales numbers in the 4th quarter. In my experience, underwriting offers can get pretty aggressive in your favor as a result."
"You're in a rock and hard place now. You might as well check and find out what you're options are. After all, what do you have to lose?"
I believe that the life insurance industry does a lot of good for a lot of people. Unfortunately, it's not known for being the most customer friendly - or the most communicative - of industries. Because of that, the management of these permanent insurance products is important.
If you have a permanent life insurance policy, we'd be happy to analyze it for you. The goal of that analysis is to do two things: (1) to make sure the policy is on track to do what you want it to do, and (2) to see if other carriers can do it more effectively (same benefit for less money, same benefit for less risk, more benefit for same money). If you don't use us for this kind of analysis though, find a firm that knows what it's doing so that you can have it done.
I really am worried about this issue. Life insurance is supposed to be the rock-solid foundation on which the rest of a financial plan is built. In many cases though, that foundation has turned to sand.
Bruce Wing, ChFC, CLU, RHU, REBC
Strategic Wealth, LLC
5975 Shiloh Rd, Suite 114
Alpharetta, GA 30005
Tel: (678) 456-5060 | Mobile: (678) 814-3667
Entrepreneur, financial guy, husband and father of two great kids.