“I am an Insurance Salesman” – Case Study # 9

I just finished a case that started as a call to the radio show, Money Wise. This listener’s agent encouraged him to replace a whole life cash with a new term policy and put the $45k cash value in an annuity. “Term is cheaper and the cash value will earn more”, sounded plausible. Mark Biller of Sound Mind Investing was the guest and recommended he call me.

First I evaluated the whole life policy to see if it needed replacing and then assessed his overall need for life insurance. The cash value was earning 3.87%, much higher than money in the bank, but lower than long-term equity investments. This wasn’t bad, but it was an inordinate amount of his net worth tied up in a relatively low long-term return.

He was no longer married, and had a 22 year old independent working son and 19 year old student daughter. He already had two good life policies: the 150k whole life and a 200k term policy costing only 342/yr with level premiums for another nine years, more than long enough to see his daughter to independence. The agent recommended a new $400k 20 year term policy costing 1492/year. He didn’t need insurance for 20 more years and he didn’t need that payment.

…there comes a time when emphasis needs to shift from the what-if-I-die scenario to the what-if-I-live scenario…

He had a Roth IRA which he hadn’t been able to fund in recent years. He also had 200k of debt. He’s in his young fifties and dedicated to his children, however there comes a time when emphasis needs to shift from the what-if-I-die scenario to the what-if-I-live scenario. Also, one should never fund an annuity (tax-deferred) when eligible but not funding a Roth (tax-free).

We returned the annuity and rejected the new term policy. The dividends on the whole life policy had bought paid up additional insurance which we surrendered for 13k of the 45k cash value. He will use that to fund his Roth for 2013 and 2014. We’ll keep the whole life at least until Roth funding is due for 2015, then maybe whittle it down further or discontinue it altogether if his daughter becomes independent. He’ll apply that extra $1492 to his mortgage.

I explained the rationale behind these decisions to the agent. He acknowledged it made sense, but then added, “I am an insurance salesman”. That code language meant, “My responsibility is to sell policies; besides I’ll forgo a $1k commission if I don’t place the life policy, aside from the $1500 commission I lost not placing the annuity.” I respected his candor and expected him to try to place this term policy. Indeed he did, but my client had a balanced understanding of the risks of both rejecting the policy (premature death) and accepting the policy (opportunity costs) and stood firm.

It’s not a matter of understanding, but of motivation. What saved this client was reaching outside the traditional box of advice exclusively from a salesman, and getting input from someone who understood insurance nuances and the marketplace, investment alternatives, and had the proper motivation. His retirement should be larger, his debt and taxes smaller, while he saves his fee back three times per year for two decades. It started with a phone call.

The Value of a Second and Impartial Opinion

The way most people buy life insurance is a recipe for poor results. It violates two clear principles of successful decision-making commended in Proverbs 24:6. “By wise guidance you will wage war and in an abundance of counselors there is victory.” Notice two dominant adjectives: wise and abundance. In other words get a second opinion… but be sure it’s wise.

Most insurance is purchased with singular advice from a sales agent, i.e. without a second opinion. Strike one.

What about the “wise” part? We tend to think wise guidance primarily consists of training and experience. While those are important, there is a third element that trumps both…and it has to do with motivation. Proverbs 24:23 gives a clue, ” To show partiality in judgment is not good.” Why is it not good? Because it’s self serving. A similar verse, Proverbs 28:21, inspired the name of our website, “Impartial insurance advisor”: “To show partiality is not good- yet a person will do wrong for a piece of bread.”

This verse described what I observed in sales meetings while an insurance agent. We regularly reported how many policies we sold, the amount of insurance, and the amount of annualized premium collected. With that sort of pressure and the constant enticement of commissions dangling before us, could we be impartial advisors?

Deuteronomy 16:19 says, ” You shall not distort justice; you shall not be partial, and you shall not take a bribe, for a bribe blinds the eyes of the wise.” What does a bribe do to the wise? It blinds (takes away the ability to see clearly), leading to a distortion of justice. When Proverbs 24 commends “wise guidance”, it means guidance not under the influence of a bribe, a “piece of bread”, or any inducement to distort advice. Yet this is exactly what a commission does. It makes the commissioned “advisor” at least to some degree a blind guide. Strike two.

Warren Buffett says it this way. ” In looking for people to hire, you look for three qualities: integrity, intelligence and energy. And if they don’t have the first, the other two will kill you.” Training, experience, and intelligence cannot make up for a lack of integrity (as per Buffett) or being partial (as per Solomon).

Why do consumers buy insurance with singular advice from blind guides? It’s easier (agent takes initiative while consumers are passive), or maybe not knowing where else to turn. That’s why Impartial Insurance Advisor was created, a source for that second opinion that is wise– well-trained and experienced– but most importantly impartial which means not self seeking.

Many are discovering that paying a little for impartial advice is the best insurance money they can spend. So what does Proverbs 24:6 commend for the best decision making?

  • The Value of a Second Opinion
  • The Value of an Impartial Opinion

That’s who we are. Combine that with 35 years of experience in the insurance markets and all the training the industry has to offer and what do you have? Homerun!

An Important (often overlooked) Feature of Term Life Insurance – Case Study #5

I’m currently doing a Life Insurance Checkup for a couple in Tennessee that underscores an important cost aspect of level term life insurance…but it’s not the premium rate.

The first step in a Checkup is rightsizing the size policy. This couple, like many, used a rule of thumb (a multiple of income plus debt) promoted by Dave Ramsey, whom I highly respect. However rules of thumb are a crude way of giving wholesale advice. I prefer fine-tune efficiency which comes best through customization. The difference can be dramatic, as it was in this case.

He is a veteran construction manager who had already retired from one employer and had a pension with a significant monthly survivorship benefit for his wife. (This is tantamount to a lot of life insurance.) There are no kids in the picture, they have a reasonable 401(k) and a $750K life insurance policy on him with Allianz. Their emphasis is on debt repayment and they don’t want to spend unnecessarily on anything, including life insurance. After reviewing her income needs and their assets and debts, they think the appropriate insurance need is $350K rather than $750K. How do we best make this adjustment?

The easiest way would be to reduce the current policy. Allianz is a strong company, ranked AA with Standard & Poor’s. He bought this 20 year level term policy four years ago when younger, so a comparable policy would cost more today at his older age. Also, if he had had a health decline it would put him in a higher rate category.

The problem is, though many companies allow a policy reduction during its lifetime, Allianz does not. Some allow it only once during the policy’s life and some allow multiple times. Since Allianz doesn’t at all, it forces him to consider a new (appropriate amount) policy, at an older age, subject to insurability, losing the reserves of the old policy, new contestability period, new commissions, etc.

Let me take a moment to emphasize an important aspect of insurance planning: the amount of insurance you need is rarely static. For most people it reduces as assets grow (401(k), savings, etc.) and liabilities diminish (mortgage is repaid, young children mature, etc.) So the thought that you’re going to need the same amount of insurance for 20 years is probably unrealistic. Yet many people buy such policies and keep them at the original amount for decades. This accounts for the invisible waste of much premium, as people imperceptibly become over-insured. Few people reassess (even if it’s only every 5 to 10 years) their insurance needs…though it’s usually profitable to do so.

Reducing term policies (almost a relic of the past) recognized this dynamic: the amount of insurance needed declines over time. Today’s most competitive policies (level term policies) do not. Thus it’s incumbent on the consumer to make his own adjustments. To do so your policy must permit it.

So when you’re buying a term policy, be sure to find out if the policy owner can reduce its amount at least once during its life. Another possibility is buying multiple policies for different durations: for example a 20 policy for $350K, and 10 policy for $400K. This automatically schedules a decline in insurance as your needs likely decline. The problem with this is that you don’t know the rate at which your needs will decline. Another problem is poorer pricing on multiple/smaller policies.

We tend to think that buying a good term life policy is simply a matter of buying a strong company with low premiums. However there are other important features. The ability to reduce the policy at least once during its life is one of them.

What does an Insurance Checkup look like? Case Study #1

For those interested in how life insurance checkups work, I thought I’d provide some case studies. The first one is on Brenda, a physical therapist in New Jersey. She came to me after her recent divorce with doubt about whether her current life and disability policies were optimal and would do what her agent said they would (be paid up after ten years). I spoke twice with the agent who had some strong ideas, and she wanted an objective opinion. She had nine policies with four companies, more than most clients.

The first thing we did was assess her overall financial picture and need for insurance. It was simple and straightforward: one daughter almost through college, a small mortgage, healthy 401k and income. She had been sold policies at major life events, mostly with Metropolitan: birth of her daughter, purchase of a home; bought an ING term policy to replace the voluntary payroll deduction term at work; individual disability policies with Unum, Paul Revere, Provident.

Base on her stated goals and in light of an almost independent daughter, low debt, and healthy 401K, she needed about one third the amount of life insurance she had. Interestingly she didn’t realize how much she had until I totaled it up. She described herself as a “worry wart” and had collected along life’s way more policies than needed. The agent had done a good (or poor, depending on which side of the fence you’re on) job regularly promoting the cause. A heart murmur that developed since the purchase of most precluded her from getting better policies (Met is not the best, but not the worst either), so from there it was a matter of discerning which to keep or jettison.

After studying my Life Insurance Needs one page summary/overview, she wanted to keep $100K-150K ongoing, and an extra $100K until her daughter was totally independent, about three more years max. That was more than needed from my assessment (because of other assets- she is really well-managed), but that decision is more emotional than most folks recognize and she’s a mom, not a businessman. I state my case, but then respect the emotional aspect of the decision and help the client figure out how to best achieve their wishes.

I obtained in-force ledgers from Met to see how the premiums, dividends, and cash values of each of her three permanent Met policies grew: one universal life, one variable universal life, and one whole life policy. The whole life was best and the mortality costs within the UL were lower than within the variable UL. It was also lower than within the ING term policy which is rare, but the heart murmur made the ING (the most recent purchase) rate her, skewing those costs.

We dropped the ING term and Met variable UL; kept the whole life (indefinitely) and the Met UL (for three years). The UL was underfunded and on schedule to expire well before her normal life expectancy, a common problem among those type policies (which many don’t recognize, but need to). We reduced its death benefit from 150K to 100K and the death benefit option (from increasing to level) in order to reduce internal mortality costs. After these changes it will serve well as a three year term policy.

Her disability policies were both good, but she has group disability through work, so we dropped the poorest value of the two (and the smallest) today, and the other as soon her primary mortgage is paid in 13 months. They were only 1100/mo and 300/mo benefits anyway.

She now knows her whole life will not be paid up as soon as she had thought. This was due to dividend rate declines which have occurred industry wide. I encouraged her to accelerate paying off her 7% mortgage (only 13 months left; too little to justify refinancing) and we came up with several sources to do so. As a financial planner and investment advisor, it’s rare I don’t come up with additional recommendations beyond the scope of insurance.

She should recover the fee she paid me in 9.5 months and then save it again each year for the next 15 years, over a 125% annual after-tax return on her fee. She was under no pressure to buy anything. She now has peace of mind things are optimized and simplified. For a worry wart this is important.