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

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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.

Michael Joseph Cave (Dec 18, 1995–Nov 19, 2010)

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pic-of-Stephen-and-Michael-283x300I just read a tutorial for bloggers suggesting reader-centered-what’s-in -it-for-me writing. Usually that’s what I do, but not today. Instead this will be a window into the state of the heart of the Cave family. Out of the abundance of the heart the mouth speaks.

This last year has been the most emotionally challenging of our lives. A year ago this time everything was pretty normal, with two girls off at college, Annie gearing up for her senior (high school) basketball season, Michael finishing his first year of JV/Varsity football, and all the busyness of a big family at a fun stage of life.

You never know what a day may bring forth. Last November 14th, 2010 our family went to church, drove to Columbia, S.C. to have a picnic lunch with my wife’s cousins, career missionaries, before they returned to Kenya and Ethiopia. The second cousins enjoyed playing football after lunch, the picture of health and happiness. The next day Michael, just shy of age 15, was ill with what appeared to be a virus; the next day was in the local ER, and then in Children’s Hospital; by Friday night he had died from hemolytic anemia.

Neither Beth nor I worried about his destiny, for he looked to Jesus in faith from a young age. Had such not been the case, he had as much opportunity for last minute preparation as for fastening his seat belt after impact. He was in an induced coma the last two days. We were not prepared for Michael’s death but he was. In a journal entry in middle school he wrote that if he could meet and talk to anyone, past or present, he’d like to meet Jesus!

I love that boy whom Beth described as one who had all my strengths without my weaknesses. Part of that is due to rose colored glasses through which we view those who have passed; part of it is parental pride; part is that image-bearers of God reflect the Creator. When we hosted dinner guests and the meal was over, he always stayed for the adult conversation. His pallbearers were two men with whom we hunt, his football coach, his youth leaders, and a mechanic with whom he had done “car care Saturdays” for single moms since a boy.

Michael was very mechanical, a great wing shot and gifted soccer player, had outstanding reading comprehension, and could speak well. He related well to everyone and routinely took initiative. He loved his mother. Michael left a big hole in our family…a big, big hole.

A midwife friend, who delivered most of our children, pinpointed the grief: “Our children are our dreams and aspirations”. Children are, “the message we send to a generation we will never see”, the means by which we touch the future. But which future? Before, the “future” was limited to the future of this current earth and generations that will occupy it. But now I see a horizon beyond the horizon. (Motivated by wanting to know more about where this precious boy is, I’ve studied Heaven, by Randy Alcorn.) It has raised my vistas from the temporal to the eternal in a way that could have never happened otherwise.

For momentary, light affliction is producing for us an eternal weight of glory far beyond all comparison, while we look not at the things which are seen, but at the things which are not seen; for the things which are seen are temporal, but the things which are not seen are eternal. II Cor. 4:16-18

We’ve got a consolation that’s a dream come true. Unless Easter and all the Church stands for is the greatest hoax ever foisted on humankind, we’ve only got a hiatus. Because we have a Savior, “I haven’t lost him (I know where he is) rather I’ve lost contact with him” (Alcorn)…and even that, but for a season. There’s going to be a very noisy day in our future when the “cells dissolution will be reversed, the molecules be reknit, and the amino acids be rekindled” (John Updike). Michael’s spirit will reoccupy his resurrected body and we will have our first reunion in the sky. I Thes. 4

Before Michael’s death, I anticipated an annual camping/hunting trip which always had to end. Now I’m anticipating exploring a new heaven and new earth, similar to but far superior to this sin-scarred earth, Eden-like without sin’s taint. The best is not behind us; it is yet to come.

So we still cry, but we grieve with hope, not despair. My tears are pretty brief these days before hope’s infusion pushes them away. I’m now one year closer to hugging that precious son again. This earthly life will never be the same for me. Before, most of my treasure was here. Now I’ve got more treasure in heaven, and a big part of my heart has followed.

 

 

The Paradox of Insurance

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Moderating or even skipping life insurance can strengthen the widowhood most wives will experience, if those premiums are invested well.  Doesn’t seem right?  It’s a paradox.

There are many economic paradoxes: using a home equity loan to get that new car or vacation “you deserve” ends up reducing long-term life style, raising tax rates decreases total government tax revenue; sponsoring welfare kills personal initiative and fosters generational poverty; lowering lending standards to encourage home ownership creates a housing crisis.

Wouldn’t it be nice if we could trust our instincts to do the right thing?  We can’t.  Since most people pay more into insurance than they receive from it, astute consumers use it sparingly not liberally; and as soon as they can responsibly afford to, they’ll not use it at all.  That’s why Larry Burkett said, “Don’t insure that you can afford to pay for yourself”.

Recently a well-intentioned 61-year old husband called about buying a $250k 15-year level premium term life policy for $1250/year.  The actuarial tables say the chance (after screening with an exam and blood work) he will die within 15 years (by age 76) is highly unlikely.

Normal life expectancy is young 80’s for men, comfortably (for the insurer) beyond the reach of the 15-year level period. Think about it: how many $250,000 claims can they pay collecting $18,750 (15yrs x $1250/yr)?  After 15 years, at age 76, the premiums explode as he approaches normal life expectancy, forcing most policyholders to discontinue.

Many people play this game, speculating on a premature death for a segment of time ending well before normal life expectancy, (age 61-76 in this example).  Somewhat like the lottery, it’s a loser’s game.

Our imagination is often our enemy.  In this case they just had a close family member die from an accident.  With this fresh in their mind, their most easily recallable fear lures them to a plan unlikely to deliver.  She is likely to become a widow, but not in the next 15 years.

Here are some things to get firmly in mind:

  • How well are you self-insured? Get a handle on Social Security widow’s benefit, 401k assets, support from children, etc. “The cheapest form of insurance is self-insurance.”
  • Know what normal life expectancy is, considering your health, etc.
  • Know what future term policy premiums are after the level period.
  • Know the opportunity cost. Figure what premiums would accrue to if invested for the same duration.  Consider a Roth IRA.  Investing that cash flow at 8% grows it to over $50k by his age 81 normal life expectancy.  This is what the policy will likely cost her, i.e. the opportunity cost.

Many people bought level term policies 10,15, and 20 years ago who have exhausted that period and now must decide to let it go or re-up.  Often what made them buy that duration has been accomplished: the kids are independent, the mortgage has been paid, the 401k has grown…but they feel they need a little more time.  What to do?

Re-upping appeals because it creates an illusion of addressing the problem…for a low monthly outlay.  But it’s more illusory than real and for most it’s just kicking the can down the road and at 76 (in this example) they’ll be facing the same decision, but at much higher premiums.

Rather than taking the easy way out, it may be time to do some serious soul searching:

  • Do you have any inheritance coming?
  • At your death where will your widow live? If she moves to be near kids, what will housing cost there?  Will downsizing release equity for income?
  • Seriously consider not taking Social Security until your age 70, which will make her lifetime pension larger.
  • Have a heart to heart talk with your kids. What kind of support might mom expect from them?  I know you “don’t want to be a burden”, and you won’t unnecessarily, but the family unit is the oldest form of insurance, so don’t ignore it.  (This answer impacts the Long-term Care insurance decision too.)
  • Take a pulse on your wife’s fear and contentment level. The more content she is, the less you may have to dissipate on insurance today, the more you can invest, and the better off she’ll like be. If anxiety compels you, try to think like an actuary, and see if you can achieve unity in this delicate decision.

Most advice is given by commissioned agents who are happy to sell a policy.  They will not point out these weaknesses, nor advantages of alternative uses of premiums.  The commission is $900 if you buy, and nothing if you don’t.

Don’t insist on a perfect contingency plan for an unlikely segment of time.  It’s a contingency plan, not a probable plan.  Insisting it be perfect (“comfortable”) today, robs resources and usually leads to less financial margin in later years when health care and other unknowable’s may need it most.

If I’m with a Good Company, Isn’t that Enough?

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Some people are so convinced of how great their insurer is, that they cannot see any benefit from outside advice. Nothing could be further from the truth.

Perhaps the best way to illustrate this is by example. I just finished a life insurance review that illustrates the dramatic potential for improvement within the same company. This client was a little extreme for most of us: his income was higher and what he was asked to spend on life insurance may seem absurd (though it happens all the time). But it graphically shows what frequently happens, albeit often on a lower scale.

A Northwestern Mutual agent approached this newly practicing doctor earning a very strong income and recommended a life insurance policy as an investment. The doctor contacted me for a second opinion. The agent emphasized what an outstanding company he represented (true) and proposed a 3 million dollar policy costing 25k/yr with a surrender value of 3k at the end of first year. I suggested a variation with the same company: a lower death benefit, costing 12k/yr with a surrender value of 10k at end of first year. Over 12k less premium for 7k more value!

The gist of this recommendation was to shelter money in an investment that would be exempt from a medical malpractice lawsuit. Whole life cash values fall in this category. The thing to keep in mind is that it was an investment.

One should not tuck an investment inside a 3 million dollar life insurance policy, with its ever-increasing internal mortality costs, unless you need the death benefit. This was a newly married couple, with no mortgage debt, no school debt, and no children. She was a Peace Corp worker who had never dreamed of marrying a high income professional anyway.

Part of this misdirection lies in the fact that the company has some policies that are (much) better values than others. The consumer doesn’t know that and the agent has no incentive to tell it. The commission on the proposed policy was over 12k; the commission on the variation was less than 2k. The influence of this commission on advice can be profound. It’s much better to get your financial advice from someone not under that influence. How is my compensation influenced by his choice? Zip. I’m paid to help clients find good values.

The conclusion is that connecting with a fine company is just the beginning. Northwestern is such a company that I deal with frequently, and I cannot recall a single time when arrangements with them were not improvable, either with proposed or in-force policies. * There will always be a conflict between your interest and the company’s, no matter how good they are. Paying a guide is money well spent and if you think because you are with a good company you don’t need a guide, think again. This doctor made a 2000% return on his guide fee. Extreme? Yes. But excellent returns on fees for impartial insurance advice (even when you are with a good company) are common- the rule, not the exception.

If you don’t mind living with the advice of an agent who is “under the influence”, you can save that fee. Most people will never know how much better it could have been. However more and more people are discovering the advantage of using an impartial guide, while they save their fee back many times.

*These all had Northwestern policies (see Testimonials):

  • Mark and Liesl Marmon
  • Paul Caldwell
  • Roger Smith
  • Charlton Veazy
  • Bob and Peggy Arrington

I Don’t Do this for the Money

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Part of my routine involves talking to insurance agents around the country. Usually I am chasing down a report on an in-force policy and sometimes aligning a client with an agent to sell them a policy. But it’s interesting the telling vignettes I encounter, including two just this morning.

The first today was on behalf of a widow in Tennessee in my effort to get a report on a $300k life policy. She’s got three adult children (who should no longer be dependent on mom) but a year ago bought this policy for over $500/month. My question was does she even need it/can she really afford it, but in doing my homework, left a message for the agent last week. He apologetically returned my call, “I’ve been touring Europe with my wife for the last three weeks and am sorry to be calling so late.” I don’t mind the tardy call near as much as the thought my client financing his vacation through a sale that should have never been made.

Also this very morning I made another call to another agent, this time soliciting his help to sell a disability policy to a doctor client. I got his assistant, since he had just left for the annual fishing trip in southern Missouri for the agency’s top salesmen. I have to guard against oversell from this guy, despite him being very knowledgeable and with a quality company.

Both these remind me of an incident years ago when an agent was replacing a quality policy which I had sold with a poor one just on the eve of the original policy’s anniversary. There was a several thousand dollar dividend paid on the contract date that would be missed when surrender papers were signed, but could be kept if the surrender were postponed just a couple of weeks. When I called to inform him, I got him on his cell phone, on the slopes in Colorado.

There’s a lot of money to be made in insurance, and most of it is in sales. The consumer can swallow exorbitant commissions, because they are hidden; whereas paying a fee for advice is much harder because it’s all out on the table.

Am I jealous? Probably yes, at least a little bit, at times. But I also know that as an impartial advisor I can, “do unto others as I’d have them do unto me”, and I know that “Jesus came not to be served, but to serve and to give…”. There’s a lot of satisfaction that comes with that, more than from touring Europe, fishing in Missouri, or skiing in Colorado. So part of this may be venting a bit (two such encounters in one morning!), but part is for the record to say, if I did this for the money, I would have never left sales.