Busting Myths About Whole Life Insurance Policies
When I initially speak with clients, I often hear referred to as a “whole life policy”. I learned long ago that this is a generic reference to permanent insurance, as opposed to term insurance. Few policy owners understand that Whole Life (WL) insurance is just one form of permanent insurance and the menu of options available is wide and varied.
Often this generic terminology is harmless, but sometimes it is not. Indeed, there is a traditional association between what WL is and how it works, and this conventional wisdom is too often far from the truth. In fact, “WL” is not always even all life!
A multitude of products
As for permanent insurance, I will include the following in the modern lineup: WL, Universal Life (UL), UL Guaranteed, UL Indexed and Variable UL and WL. Also, within these categories, there are sub-categories. For example, traditional WL can be a mixture of terms, which can cause a WL policy to act like anything else. WL of mutual and joint-stock carriers works differently, to some extent. With WL paying dividends, there can be a handful of different dividend options that can significantly affect politics now and in the future. Regarding the dividend, you can even find a version in which the dividend for the released bonuses is placed in an indexed option instead of the general account. In recent years, there has also been a proliferation of long-term care runners. You can build these policies pretty much any way you want, including from full coverage to taking on significant risks.
That’s it with just WL. The multitude of products built on a UL chassis can be dizzying. In traditional, guaranteed, indexed and variable models, an enormous amount of flexibility and rider options abound. Just when you think you have it on hand, you discover that there are indexed and variable UL options with lifetime warranties, for example. A variable UL in securities with a guaranteed premium and death benefit for life? Yeah.
Try explaining to a traditionalist that there are UL and securities-based products with more coverage than the “WL” policies of leading mutual insurers. It’s not pretty. Why do I have to put “WL” in quotes? I see many fonts with ABC Mutual on the title page of its flagship WL font that has about as much to do with WL as my son has with a clean room. Many times I have looked at a WL policy that turned out to be 1% WL and 99% term insurance. If you expect this policy to work well in a decades-long declining interest rate and dividend market, well, you might want to sit down before you hear the truth. I’ve seen “WL” disasters that make UL disasters look like a recreation.
It is important to understand that there is nothing quite like sitting down at a computer and entering the details of a proposed person to be insured, pressing a button and getting a cost for it. ‘assurance. It doesn’t work that way. There are several different input screens and several fields per screen. There ends up being a figuratively endless number of ways to build a product, and I can assure you of one thing, it’s almost a guarantee that your customer doesn’t understand what went into it. Most of these decisions were made without their input and without understanding the alternatives and potential consequences.
I can build a given life insurance policy with an annual premium of $10,000 or an annual premium of $100,000 that is supposed to do the same thing. My least educated client can tell me it’s probably not the same thing, but my most knowledgeable client couldn’t tell me how.
Who knows why a given proposal was originally presented? Is it the product of the day? Is it something the insurance company is pushing for reasons that may not be in the best interests of the policy owner? Is it for commission purposes? Is it just because it’s the product the agent’s primary carrier specializes in? Was this the product the most recent wholesaler who walked into the agent’s office was talking about? Maybe one more policy with this insurance company was just what was needed to take it to the next level of advice for this cruise to the islands? Was the variable dropped from the table because the agent does not have the appropriate license? Is UL indexed not in the mix because the broker/dealer won’t allow it?
Most policyholders agree to things they don’t properly understand for fear of looking silly, and they take at face value that whatever is suggested is what’s right for them. Things have to change. I have to deal daily with the results of this traditional process. Typical policy placement is akin to pushing pages across the desk for signatures like you see in a mortgage close. You know what I mean. Most people have no idea what they are signing. It is inevitable, but what are the consequences?
When it hits the fan, you know what the insurance company does every time? They pull out all those signatures that show the policy owner has it all figured out. If they didn’t understand, why did they sign it? There is no recourse. Nobody cares what was said because words mean nothing if they are not immortalized. Insurance records that run into dozens of pages are nominally in the name of consumer protection. In reality, they are the opposite and too often used against consumers when things go wrong or a product has been misrepresented.
We all have to agree that it is necessary for customers to finally have faith. George Michael knew what he was talking about. You just gotta have faith. But is it a good idea? What about the “trust but verify” reasoning? I think there is something to that.
Almost every day, I see the results of life insurance transactions that involve as much money as private equity transactions, real estate transactions, business acquisitions, etc. Almost every one of these transactions would have involved tax and legal advisers, consultants, appraisers, inspectors… the list goes on. Tens or hundreds of thousands or even millions of dollars worth of advice one way or another can be leveraged to verify deals. But in life insurance operations of the same magnitude? Do you know the answer. Maybe it’s time to rethink that. I’ve seen people lose millions. I’ve also seen people pay small fees that translate into millions in savings.
Educate the customer
Back to the different products and how to build them. When I can show that a guaranteed policy may not be the best option for the client, or that the best way to get the biggest death benefit may be to buy the least, what can you take at the foot of the letter ? It’s time to admit what we all know; your customers have a chance to snowball into Hades to find out for themselves. It just can’t happen. I testified about it in court. They must have a lawyer. It’s just like that whether you or they want to believe it or not. They must be educated enough to become partners in the decision-making process. It will take time, commitment and a bit of money, but what is it worth?
Bill Boersma is CLU, AEP and LIC. More information can be found at www.OC-LIC.com, www.BillBoersmaOnLifeInsurance.info. Call 616-456-1000 or email [email protected]