Life Insurance Consumer Tips

An article in this month’s edition of Kiplinger’s Personal Finance, “Life Insurance After 50,” misses an opportunity to inform its readers about ways to identify the best value from permanent life insurance.

The article perpetuates the myth that whole life insurance inevitably “takes…many years to show value.” That is all too true of the typical policy with very high first-year agent commissions that leave little or no cash value in the policy. However, all the insurance companies mentioned in the article, to some meaningful degree, permit policies to be designed in ways that significantly reduce these commissions. Some permit them to be reduced by more than 80 percent. A good policy sold without commissions is yet another option. These policy designs allow the cash value to exceed premiums paid in just a few years, rather than taking ten or more years to do so. For the same premium, they provide significantly greater cash values and long-term death benefits.

These key point have very occasionally been made in articles in the personal financial press, but all too rarely. This is critical pro-consumer information that companies and agents won’t disclose to their customers, even though they claim to put their clients’ interests ahead of their own.

One can’t help but conclude that the advertising patronage of life insurance companies and their dependence, in turn, on commission-compensated agents makes most every article about life insurance in the personal financial press indistinguishable from something turned out by the industry’s trade association.

Consumers need complete and unvarnished information about that which is in their best interest. It is all too rare that they will find it in the personal financial press. This article, to be kind, was yet another missed opportunity to provide it to them.

Insurers are responding to the decline in the sales of long-term care policies by offering combination policies that potentially offer life insurance or annuity benefits as an alternative if long-term care is not needed. They attempt to overcome the consumer’s objections to spending money on insurance benefits they may not need or receive. But how different is LTC insurance from other forms of insurance in this respect?

The industry’s strategy is understandable from a marketing standpoint. But do these products make sense for the consumer, rather than for companies and their agents? I think not. While I don’t pretend to be familiar with all the variations of these products, I see two main problems with them.

In the first place, they do not offer long-term care insurance as such. They build up a pot of money that could be used to pay some long-term care expenses, but that is no different than setting aside a savings account for the same purpose. It is really not the same as an insurance policy into which one pays an affordable amount in exchange for a known amount of protection against a much larger and unaffordable loss.

In addition, the life insurance and annuity features of these combo policies are usually not desirable or necessary. If they are, purchasing them separately while obtaining actual long-term care insurance will likely provide greater value. Those who need long-term care insurance aren’t necessarily the same consumers who, at older ages, might buy life insurance. And the undesirable tax features and common high costs of most annuities generally make them a poor investment choice.

The “use it or lose it” aspect of pure long-term care insurance may discourage its purchase. But the same objection could be made to most other forms of insurance (e.g., disability, term life, homeowner’s). That is the point companies and agents should make in rationally explaining the costs and benefits of an insurance product with great financial and social benefits for those who can afford it.

In a recent blog discussion, we mentioned the danger that old policies assumed to be “permanent” are on course to “lapse” (i.e., terminate) before the deaths of those they insure. Wasted premiums are not the only disastrous consequence. For policies with loans, usually because premium payments stopped, the borrowed cash value and unpaid interest that exceeds premiums paid is all taxable income – and at ordinary income tax rates. With loans well over a million dollars, such as with two of our recent clients, this poses a real dilemma.

If there is a danger that a policy with a loan will implode before the insured dies, steps need to be taken to avoid or at least minimize that risk. Agents often assume a willingness on the part of clients to pay off these loans. Even when loans ballooned, they did not suggest ways to reduce them or at least to prevent them from growing.

This common problem is only the most compelling reason for a periodic review of existing policies. Do you know how your policies are doing or, if you are a professional advisor, those of your clients? It may be time to find out.

The recent adoption of sweeping life insurance commission disclosure rules by the New York State Insurance Department has agents up in arms, not only in New York but across the country.

Often the trend-setter in the adoption of regulations designed to protect consumers, the New York Department’s new regulation is already drawing fire from the various trade associations representing life insurance agents.

Regulation 194, as it is known, requires agents to disclose that their compensation from the sale of a policy can vary depending on a number of factors and to inform the consumer that information about compensation is available both about the product being purchased and others that were considered during the sales process.

In a provision with certain big-time agents in mind, it also requires the disclosure of any material ownership interest that the agent has in the insurer issuing the policy.

This is a real break-through for consumers of life insurance. Both the adoption of the regulation and the vehement opposition and likely litigation coming from agent groups – and probably also life companies – will draw lots of attention.

All of it will help to alert consumers to the fact that there are unbiased sources of advice about life insurance and frequent opportunities to substantially reduce or even avoid commissions and thereby lower premiums or buy more protection and cash value for the same premium.

This may be the dawn of a new day for life insurance consumers. One can not only hope, but now perhaps believe it is so.

A Wall Street Journal article last Saturday discussed the “new lease” on “long derided” whole life insurance due to what can be competitive risk-adjusted returns on certain policies.

Space limitations prevented the insightful author, Leslie Scism, from discussing in detail how the cash value and death benefits from some of the best policies can be significantly enhanced by structuring them to minimize sales commissions. She was kind enough, though, to cite figures I gave her noting how, in one example, with the typical agent-sold policy, the cash value would not equal the premium outlay until year 12; whereas, by designing the same policy with minimized commissions, the cash value almost equals cumulative premiums by the third year.

These cash value differences in the first and early policy years are magnified over time and substantially increase both cash values and death benefits in the efficiently designed, commission-minimized policy.

The article did not mention a key point – that the consumer will not hear about low or no commission alternatives from agents, and inquiries about such possibilities will be met with a range of reasons why it’s not possible or desirable to pursue them.

The Journal article is at least part of a slow trend among more conscientious and independent journalists covering personal finance to let out some of the most closely guarded secrets within the life insurance industry. That development is certainly long overdue.