Who profits the most from Black Friday?-the one who was smart enough not to get enough not to camp out the night before for that $25 expresso maker. I am not camping but reminding you of the one who profits most from the sad chronicles of the Circle of Life Insurance and the continuing saga of policy underfunding that has now created barnacles on the cash values of many a contract since EF Hutton bought the first Universal Life Insurance contract in late 1970s. I remember as a young Hutton broker looking at the early dinosaur- like computers spit out illustrations showing 11% returns. I remember the chants of “PUP” paid-up premium from paid up additions providing short pay premiums that at exorbitant interest rates would easily pay a policy off forever with just few premiums. Right and Elephants can fly over ocean front property in Kansas. That never happened unless a policy was juiced with sky- high funding.
My father-in-law bought of those in 1984 for my now 28 year old son and just paid off the premiums about 4 years ago with considerable less cash value that anticipated. Last I remember the siren songs of Variable Universal Life in the mid -90s illustrated at 12% and asking a group of agents why they were illustrating an unsustainable rate that would require a gross rate of return 16% for a standard 45 year old non-smoker to sustain the policy. I remember asking these agents how many 20 year periods there had been since 1926 that produced that rate of return?- Zero. The number of ten year return periods since 1926? Out of 80 plus 10 year rolling periods, there were 2 and we were living in 1998 during the tech run-up in one of them. The “Bank on Yourself” “Tax Free Retirement Income” and “New Insurance Adviser” books have been rebutted except in the realm of policies that are grossly overfunded because of low equity returns and interest rates. I am not surprised when I read that today’s all- time low interest rates are killing life insurance policies once again. This is the great Insurance policy Circle of Life that has pervaded the sales of UL-VUL-and now FIUL. I was therefore not surprised when a recent large life carrier provided warnings of knowing who you are doing business with and chronicling Baldwin-United Piano turned annuity seller from 1983 when in fact they themselves were illustrating regularly 8.5% on their FIUL contract as late as 2009. Now, many of these policyholders will be facing the shock of addition premiums unless they find a “Retirement Savior“. Many times that will involve keeping the policy much to the chagrin of cash- strapped consumers.
If policy holders next year do not kick in additional life insurance premiums, they will be getting a notice that they must add additional premiums to the contract to keep the policy in force or face the prospect of lower death benefits. As the Wall Street Journal mentioned this past week, this is a “ life insurance ticking time bomb” again. There is no doubt that Life Insurance as a potential tax advantaged income source is a powerful concept if illustrated right and if it performs properly. The life insurance illustration is still a shell game and until agents under promise and over-deliver, it will remain a shocker for savers and a reminder that life insurance performs a number of potential beneficial functions but remains a death benefit solution or final expense solution first and foremost. Many advisers are reporting that on pre-2008 policies, 70% of policy holders are facing out of pocket costs and jeopardizing the tax free retirement income story they were pitched. In the meantime, authors who pitched these concepts, some of whom do not even maintain a life and health license are laughing all the way to the bank after millions of book sales. Although agents are required to show three different scenarios in illustrating a policy, many policyholders are lead to the current performance scenario based on past performance which has been heavily geared to the good old 60-40 allocation of stocks and bonds in the case of VUL and FIUL while UL illustrations are plagued by historically low rates. The good old 60-40 Modern Portfolio Theory illustration has been a dud for 13 years, however ,a broader allocation has actually performed at a clip of 8% plus with small caps, real estate and hard assets added. Most agents though still use MPT.
In summary, how many different policy designs and illustration regimens must we go through to get this right? A better educated consumer lies at the foundation of the agent’s first responsibility in “doing no harm” but illustrating policies at zero over common time periods is a viable solution as well. Policy performance hyperbole and exaggeration by some agents is the bigger problem. When the policy holder asks which policy holder wins, we can’t be like the jockey who looked glum and said: ‘The horse was so slow, I had to carry a saddle.” That saddle will be in form of additional premiums that many policyholders can’t afford or a lower death benefit that many beneficiaries can’t afford either.