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Dear Everyone!
Again, thank you for all the nice comments you send to me about this newsletter.
This time I thought I'd do a piece that revolves around some of mail I get.
But first I start out with a short history lesson on the insurance biz which I think many of you will find useful.
I hope you enjoy... and learn. As always, let me know if you have questions... write or call.
-Al
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A Little History Lesson
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Everyone that buys life insurance should understand how it's built, and why it's built that way.
In the beginning, there was term insurance. At first, for short time periods, then one year, and eventually, five years.
Term insurance always expired, hence the name, term insurance. It was (is) insurance for a period of time, or term of time. If one lived long enough, they'd get too old to buy new term. Most people at the early days of the insurance biz were farmers, and they worked until they died. They often owed money on their land...until they died, too. No insurance, lose farm.
This is where the phrase "bought the farm" came from. Grandpa "bought the farm" with his life insurance. Until he died, the bank owned it, because they had a lien on the property. The insurance paid off the lien, hence, bought the farm.
Consumers wanted insurance that lasted their whole life, no matter how long they lived. They also didn't like premium increases... they wanted level prems. Actuaries designed a level premium product -- ordinary life, straight life, or whole life.
This level premium product was more expensive that term, because it didn't expire. To guarantee companies could afford to pay claims, the state required that they set aside reserves. Since the law required this, eventually, the term became known as "legal reserves" for reserves required by law.
Companies used this for marketing, which is why literature said "XYZ Life, A Legal Reserve Company" because it made them sound financially solid, perhaps more so than a competitor, like a mutual assurance society, or cooperative benefit association (these companies were cheaper, but went paws-up with regularity). Plus, there were fraternals and assessment companies, the latter distributed by banks.
During the 1870s, there was a recession. Many farmers could not pay their premiums on their level premium whole life, so their policies lapsed. The companies kept those "extra" premiums that went towards the "legal reserves." This caused an uproar, and several states decided that companies needed to offer something else in exchange for the higher premium. This is how "nonforfeiture provisions" were invented, and now required by law. (Nonforfeiture is confusing to many. Use the words "You can't/won't lose it" instead.)
These nonforfeiture options included, over time:
1. Surrender for Cash
2. Reduced, Paid Up
3. Extended Term
4. Policy Loan
5. Automatic Premium Loan (to prevent lapse)
Now, with these nonforfeiture provisions, whole life became a fantastic financial foundation. There was just one problem... the price.
From the 1870s until the 1970s, not much changed. Companies grew. Many survived the depression. State laws were tweaked, making the system of insurance solid and safe. During this time, there were THOUSANDS of companies and THOUSANDS of products, but all fit loosely on three chassis:
1. Term
2. Whole Life
3. Annuity
That was it. Pretty simple stuff, really. Agents had one rate book, and one application.
Computers changed things. Starting in the 1950s, insurance companies invested in computers. This accelerated in the 1960s, and by the 1970s, we had some pretty sophisticated machines (albeit, slow and dumb, by today's desktop standards). These machines allowed for the UN-BUNDLING of the whole life chassis.
The first real derivation was Adjustable Life in 1977, which was still more whole life than anything else, although it could look like term. It was invented by Minnesota Mutual, copied by Bankers Life of Iowa (now Principal). Principal took the lead.
E.F. Hutton introduced Universal Life in 1979.
Computers enabled companies and agents to play with premiums, and show a customer how better than expected returns could reduce their expected premium outlay. This led to gross UNDER funding, which in turn, led to the massive wave of class action lawsuits against every insurer that sold interest sensitive products.
Since the 80s and early 90s many important changes were made to UL... it became GUL... the "G" for "guarantee." This meant that the policy would not "self-lapse" because the return might be too low. GUL has been a huge hit with the public... and for good reason.
Companies also came out with longer and longer term plans... up to 30 years in some cases.
The longer the premium guarantee period, the higher the level premium. This is fundamental. Smart agents noticed that 20-30 year term was often more expensive than universal life UL (and in some cases, more than whole life).
There is a problem with term insurance: Term has no non-forfeiture provisions. No cash values. When you can't pay... it's gone. You lose all you paid in. This is why we now have ROP (Return of Premium) term plans (as I discussed in the previous newsletter.)
What GUL does is mimic the 30 year term. At the end of the rainbow, neither policy has any value, BUT the UL would have SOME cash values during the middle of the policy term. This is one reason I like to sell GUL... it does not lapse and it can have some cash value during its life (but not at the end of it.)
If you remember the history of insurance, the "gold standard" has always been whole life plans.
There is ONLY one type of policy that adequately remunerates a policy owner for pre-mature lapse, and that is whole life.
So what is this all about? Sure, I could preach to you the value of whole life... but no one wants to hear it... because no one can (or thinks they can) afford it.
Except for New York Life, not many companies "push" whole life as opposed to term or GUL. Whole life plans are usually 8 to 10 times higher than term premiums.
The companies know this... and learned it in the late 90s. There was a huge "movement" (which still is heard) called BTITD or Buy Term Invest The Difference. (I've talked about this before... most people lose or spend the difference!)
Companies know that people want term insurance BUT they also want it to be permanent... sort of a HUGE contradiction in terms!
Thus, what the industry has done is create two products. The first is a guaranteed universal life (GUL) plan that has level prems and goes forever... but accumulates little or no cash value if you give it up in the later years (it may have some in the early and middle years. Think of it as permanent term insurance and I think it beats hell out of plain old term by a country mile.
The second is a product that is higher in price, but not as high as whole life, which WILL create cash value similar to whole life. These are often called Accum GULs as they are designed to accumulate money within the plan. This money can be used as a basis for a loan or for surrender (tax free.)
I think that knowing the history of insurance makes you a better consumer.
It is important that you understand what you are buying... and it is important that your agent EXPLAIN to you what he or she is selling.
What is more important is that your agent takes the time to learn about your current financial situation as well as your goals and "prospects" for the future in order to suggest the right plan or plans for "the current."
A good agent is very likely to suggest that you have both a term policy and an Accum GUL. Maybe they won't be huge face amounts, but by combining two plans you can often get the benefits of the one plan you really want... whole life... without the prohibitive cost.
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| Annuities Are Not All The Same, So Be Careful |
I get email.
"I have an annuity purchased for me by an investment broker at my bank," a reader wrote. "I'm having difficulty understanding what this is. He has since left the bank and his successor isn't much help. The money is tied up for four years with a 9 percent early withdrawal penalty."
From another reader: "My husband and I are being pressured to buy a variable annuity. I was told we'd never lose our principal but I am really scared. We have to do this in about two weeks."
Similar e-mails illustrate the problem: Many financially unsophisticated Americans, mostly seniors, are being steered into complex and possibly inappropriate products that even sellers don't always understand.
I am talking about variable annuities with optional guarantees that mitigate against stock market risk, and also about indexed annuities that capture a portion of the return of a market index without risk of loss as long as the annuity is held a minimum number of years.
While suitable for some investors, these products are sometimes pushed indiscriminately by salespeople who collect commissions often ranging from 4 percent for variable annuities to 8 percent or more for indexed annuities.
And no, I am not "thrashing" all these products. But many salespeople have downplayed or totally ignored common drawbacks such as hefty surrender charges the first few years and, for many variable annuities, high annual expenses that seriously curtail investment returns.
You need to consider many factors, such as investment options and insurance charges and management expenses for variable annuities, and how interest is credited for indexed annuities, plus surrender charges, optional benefits and their costs, and the strength of the insurance company guaranteeing those benefits.
Unfortunately, many people are pressured into hasty decisions they often regret.
"A senior adviser wants my husband and me to take most of our IRA savings and place them in an indexed annuity," wrote a worried reader. From another: "My husband and I are very concerned about our decision to put our savings of $133,000 into a variable annuity. It has dropped to $130,000 already. We don't know how to get an honest answer and we don't feel we can afford a financial adviser."
My advice is that if you don't understand it... don't buy it. If you already have it, get a second opinion about getting out of it from someone who won't benefit if you do.
I'm not licensed to sell anything "variable" or equity related (stocks, mutual funds, etc.) I'm on safe ground saying "Don't buy an XYZ product because of risk, etc..." but I'm on shaky legal ground saying "Unload your holdings now" because that is giving equity advice which is something only people who have what is called a "6" and "63" or a "7" license can do. I always refer those questions to a person I know who has a "6" and "63" license... and whom I know to be honest.
One thing I can say with legal certainty is that the term "senior adviser" has no legal standing and may simply mean the person took a short correspondence course or, worse, attended a training session on sales tactics.
Annuity guarantees are often misstated or misunderstood. The guarantee of never losing principal in a variable annuity sounds very fishy. Get everything clearly stated in writing. And when you are being pressured to act quickly, definitely run for the exit.
Again: If you don't understand it, don't buy it. What could be simpler?
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Well, that's a wrap for this issue. I hope you've found some of the info above useful and interesting. If you have questions about life or health coverage, safe-money annuities, or employer group benefits just give me a call or send email.
Sincerely,
Alan N Canton
InsuranceSolutions123 Agency
InsuranceSolutions123.com
916-962-9296
CA License # 0F31110
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Al Canton, Owner
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I'm Al Canton, owner of the Insurance Solutions Agency.
Everyone promises the best service, etc. So I won't bore you with that message.
Bottom line, I know health insurance, work-supplements, medicare, life, and annuities.
Most importantly, I'm honest. I will not put you in a product just for the money. I've been here 25 years and I've built my business reputation on integrity and honor.
It's that simple.
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