Life Insurance

Life insurance isn’t the sexiest financial topic, but as an aspect of risk management, it remains a foundational component in every financial plan. And, in its own way, the life insurance industry has some interesting developments. What follows are three life insurance items worth noting.

Note #1: If you are serious about life insurance, get expert assistance.

The purchase of life insurance is rarely a “once-in-a lifetime” thing. Surveys about customer preferences and behaviors may vary in their specifics (what type of policy was purchased, the amount, etc.) but one aspect of their findings seems constant: People who buy life insurance will buy several policies during their lifetime.

In the industry, a typical comment is that people buy seven life insurance policies during their lifetime. Some of the details of this statement are fuzzy (if you buy a policy on your child, does it count as one of their seven policies, or one of yours?), but even if the number is three or four instead of seven, it still means that life insurance is not a “set-it-and-forget-it” financial decision. However, even with seven policies during your lifetime, it’s not like buying life insurance is something you do on a regular basis. Consequently, many people are less than informed when it comes to the status of their life insurance program. What’s worse, there are indications that some “financial professionals” aren’t much better informed than the typical policyholder.

Errold F. Moody, Jr., operates and maintains what he claims is “the largest and most comprehensive planning site on the Internet” (www.efmoody.com). For more than two decades, Moody’s major interest has been “individual fee financial planning.”  It is Moody’s contention that the best way to retain the services of a financial professional is by paying for their advice as opposed to buying their products. Except when it comes to life insurance. Moody observes that many fee-based planners don’t seem to know much about insurance. Besides personal experience, he quotes a 1999 Journal of Financial Planning article which stated:  “…many planners were not looking at, or least not emphasizing enough, the entire area of risk management – not just life insurance, but also disability, health, long-term care and liability coverage.”

Moody follows with some commentary of his own. (As you read this, keep in mind that for the past 22 years, Moody has been a professor at the University of California at Berkley and Irvine, taught classes for Professional Designation in Financial Planning, and from 1995-2004, he was an Insurance instructor for various licenses and continuing education programs.) “Insurance is, in my mind, one of the most difficult of all planning areas. While it is easy to get information about mutual funds and other investments from the likes of Morningstar or Value Line, it is almost nigh on to impossible to obtain objective and intensive analysis of a life insurance product. Therefore, since the analysis is hard, and since very few planners have the capability to do such analysis, they simply have decided to effectively eliminate planning for that area in total. Therefore, while somebody may have limited the conflict of interest in regards to commission, they simply have paid an hourly or flat fee for an incompetent, unknowledgeable adviser who has effectively breached its fiduciary obligation to a client.”

Thus, Moody concludes the only effective way to buy life insurance is from a knowledgeable agent. Moody acknowledges that “while it is unquestionably true that commissions can taint the planning process, it is not a universal fact.” The real issue is the financial professional’s knowledge of insurance, their ability to accurately transmit that information to the consumer, and then deliver the appropriate products. Because of the variety and complexity of insurance contracts, you need to work with someone who is immersed in the business.  And the most likely “expert” is an insurance agent, commissioned or not.

“The problem is that no matter what you think of insurance, past problems, future difficulties, etc., risk management still is a mandatory element of financial planning.” – Errold Moody

Note #2: Guess who’s buying life insurance?

People over 70. Here’s something that actuaries might not have anticipated: Increasing numbers of people over 70 are buying more life insurance.  According to its PR material, Towers Perrin is “a global professional services firm that helps organizations improve performance through effective people, risk and financial management.” One of the reports that Towers Perrin produced in 2005 was the Tillinghast Older Age Mortality Study (TOAMS), which uncovered interesting trends in the use of life insurance among older individuals. In February 2008, Tower Perrin released TOAMS 2, and the updated data was, in a word,
“overwhelming.”

Quoted in a February 12, 2008 Business Wire release, Mike Taht, a principal at Towers Perrin noted “an overwhelming increase in sales activity at the very high issue ages. ” Specifically, Taht reported that “…for some companies, sales at issue ages over 70 represent 30% of all universal life premiums sold – a statistic unheard of five years ago.” Other research from TOAMS 2 found that 2007 life insurance sales were up 4.3% over 2006 for ages 60 and older, while sales among the 45 to 59 age group declined. The TOAMS 2 suggested that this significant increase in older individuals owning life insurance could compel insurers to adjust their prices, underwriting practices and mortality assumptions.

Why are older people buying more life insurance?

Some possible answers:
Greater longevity = lower prices. Many life insurers have repriced their products (or developed new ones) based on longer life expectancies. This has resulted in more affordable premiums at higher ages. Reality turns out to be different than theory. Remember the conventional financial wisdom that says most people don’t need life insurance in their old age? It turns out people either want or need life insurance in their “golden years,” for a variety of reasons. Their retirement resources (pensions, investments, etc.) may not be as great as anticipated. Rising health care costs, especially those from a final illness, may put surviving family members at financial risk. There may be a desire for certainty and guarantees in inheritance bequests or the settling of other financial issues – and life insurance is particularly well-suited to meet these objectives.

The emergence of life settlements as an alternative final transaction.

Through life settlements, policy owners have a secondary market for their life insurance policies – they don’t have to be held until death for there to be a payoff from the insurance benefit. Although some forms of life settlement have come under ethical and legal scrutiny, there are plenty of legitimate and creative ways for policy owners to leverage the financial value of a life insurance policy before one’s death.

Note #3: A Presidential Campaign rescued by a life insurance policy?

In the fall of 2007, Senator John McCain’s presidential campaign was in serious financial
trouble. Just months away from the start of presidential primaries, McCain was broke. Laying off staffers and abandoning his quest for the Republican Party nomination seemed inevitable. So the McCain campaign, like many other struggling enterprises, went looking for a loan. In November, the Fidelity & Trust Bank of Maryland lent McCain $3 million.  According to a February 14, 2008 Wall Street Journal editorial, “there’s no doubt the November cash infusion helped Mr. McCain survive long enough to compete and win in New Hampshire (one of the early state primaries), and ultimately to become the GOP’s presumptive nominee.”

It is not unusual for candidates for elected office to borrow to finance their campaigns. But what got the attention of the Wall Street Journal was the collateral McCain offered in exchange for the $3 million.  According to the Journal, it was McCain’s demonstrated ability as a fund-raiser that convinced the bank he was worth the money – regardless of whether he would eventually win the nomination. But in addition, The Journal noted that “Mr. McCain also put up a life insurance policy and other campaign assets.” Although the article provided no further details, the essence of the transaction could be evaluated thusly: Fidelity & Trust was banking on McCain’s unique personal ability to raise money – and on the policy that insured his life.