Life Insurance
Since the early 1980s, the life insurance industry has shifted most of its risk to its policyholders. For the most part, gone are the days when an insured can take a quick look at the illustrated premium and be confident that the benefit will be there when the family or business needs it.
This all started around 1980 when E.F. Hutton, an investment company (slogan “When E.F. Hutton talks people listen.”) invented universal life insurance as a way to compete with the traditional whole life companies and move dollars from the traditional product to the new product that seemed to promise higher returns on a tax favored basis.
This worked well until interest rates began to fall and the growth in cash value could not sustain the policy expenses. There were guarantees, and they were illustrated showing that the policy would collapse early under the weight of the guaranteed yield and expenses such as mortality and administration. The good news was that the policies could be illustrated with interest crediting rates below the current rate. The bad news was that this was not done often enough or conservatively enough – especially when looking at it with 20-20 hindsight. Our practice was and is to avoid the highest rates, unless requested by the client.
The ability to illustrate varying rates led to interesting competitive situations. If two brokers illustrated the same product at different interest rates, the broker with the lowest interest assumption was the one with the highest premium. It was difficult to convince the customer to pay the higher premium. This was particularly difficult in the era of 10 and 11 percent crediting rates – image that ever happening again. It became even more difficult when customers faced declining interest rates and increased premiums. The good news was that when a customer accepted the lower interest assumption and the higher premium, she actually earned the higher rate being credited, building additional cash to head off the problem of declining yields.
Did all of this make universal life a bad product? No. The experience just shows that all that glitters on a life insurance illustration is not gold, and that an analysis of the various yield and expense risks that are part of the proposed policy is thorough and understood.
Next, variable life, indexed life, tax advantages and deferred compensation --“What should I do?”
Securities offered through Advisory Group Equity Services, Ltd., Member FINRA/SIPC. 444 Washington Street, Woburn, MA 01801. 781-933-6100
