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Insurance
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2011 Round-Up Of Good And Bad Trends In Life Insurance And Annuities |
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Wednesday, January 04, 2012 13:34
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What were the major trends in life insurance and annuity products in 2011? Here's my short list when I look back on the past year.
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- Existing whole life policies were among the best investments of the year. My small policy paid a 4.8% rate of return on the cash value, tax-deferred (tax-free up to basis) and virtually risk-free -- and that ignores the value of the life insurance benefit.
- Indexed universal life sales are growing at a brisk pace, rising from about $700 million in 2010 to over $850 million in 2011. Some of these sales are greased with leverage: any policy looks good if you can illustrate a crediting rate of 8% and a borrowing rate of 5%. Other sales are greased with optimism: let’s hope that a hedged S&P 500 significantly outperforms bonds and mortgages. My impression is that few sales occur because the buyer has diligently examined the value proposition of the product.
- The trend in flexible-premium product design is toward making flexibility more expensive to exercise. Some no-lapse universal life products (e.g., MetLife, Northwestern Mutual) restrict free flexibility to a small range. John Hancock’s nonguaranteed Protection UL 11 has a complex design that discourages underfunding. If you’re faced with an inflexible flexible-premium product, shouldn’t you take another look at traditional whole life, which at least has a long track record of success to point to?
- The new commission disclosure regulation in New York (Regulation 194) seems to have accomplished nothing. Agents tell me that no one has asked them for the details that are available upon request; the disclosure form is just one more piece of paper in a stack to sign.
- It is still true that most people do not understand what they are buying in enough depth to be able to take advantage of risk-free opportunities to save money (e.g., blending, non-level premium schedules). I’ll copy and paste this item next year, and the year after that, and…
- What is it about life insurance that produces a constant stream of Missed Fortune, Infinite Banking, Be Your Own Banker and other promotions that sound like these after a few drinks? Is it the commissions? No one has ever asked me about a scheme involving a low-load life insurance policy.
Annuities
- Variable annuity guaranteed living benefits, especially lifetime withdrawal benefits, continue to be popular. To manage risk, insurers have adjusted the charges, benefits and investment options, or have exited the market.
- Indexed annuity sales were probably close to the 2010 record of about $32 billion. Most products continue to fit the stereotype of relatively high commissions, high surrender charges and lack of transparency. The academic debate about the merits of indexed annuities continues.
- Deferred income annuities (often called longevity insurance) are gaining acceptance from the public and the press (e.g., 11/21/11 Barron’s). New York Life’s Guaranteed Future Income Annuity has exceeded sales expectations since its launch last July, although most people seem to be buying it as a pension substitute rather than as the tail end of a life annuity.
Other
- Insurance companies are increasing their promotional activities for combination (also called hybrid or linked-benefit) products. These combine life insurance and annuity benefits with long-term care insurance, taking advantage of the favorable tax treatment provided by the Pension Protection Act of 2006. In theory, combination products are a good thing, so advisors should welcome more product development in this area.
- The life settlement market is still a buyer’s market. Policyholders have to be willing to leave a lot of money on the table if they want to get a deal done. Most of the activity seems to be in the tertiary market, as institutional investors buy distressed portfolios that were created in the pre-2009 glory days of non-recourse premium financing.
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Advisors Often Wrongly Assume Consumer Must Be In Their 40s Before Starting To Worry About Disability |
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Tuesday, December 06, 2011 03:38
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Nearly two-thirds of consumers say it’s important to start planning financially for a potential loss of income “in their 20s” or “at any age," but financial advisors perceive consumers “in their 40s” are most open to discussing income protection. That “divide” is just one of several uncovered by the “2011 Disability Divide: Advisor Study,” a consumer and advisor research study conducted by the Council for Disability Awareness (CDA).
The survey reveals meaningful variances between what consumers perceive about the disability risk and advisor assumptions about the consumer mindset. The positive finding is that consumers, even at younger ages, are more receptive to a conversation about income protection.
The research showed that even though nearly all consumers say their ability to earn an income is their most important asset, astonishingly, 37 percent say they’ve never thought about protecting it. Advisors overestimate consumers’ sense of unpreparedness, assuming that as many as 65 percent of consumers would say they have never thought about an income protection plan.
Read the full survey here.
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New York Life Illustration Is Concisely Informative |
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Saturday, March 26, 2011 14:23
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A few days ago I praised ING’s unusually useful inforce illustration for one of its no-lapse universal life policies. As Insurance Company Appreciation Week ends, I also want to give high marks to New York Life’s sales illustrations for its Universal Life – Lifetime Guarantee policies. This no-lapse universal life product was replaced by a redesigned product (Custom Universal Life Guarantee) in 2010, and that product’s illustrations are also good.
On one page of its Universal Life – Lifetime Guarantee illustrations, New York Life managed to give knowledgeable buyers and their advisors the information needed to choose a premium payment schedule.
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 Universal Life – Lifetime Guarantee uses a stipulated premium design for the no-lapse guarantee. The policy remains in force as long as the actual premiums paid accumulated at the Lifetime Guarantee Annual Accumulation Rate exceed the Required Lifetime No Lapse Guaranteed Benefit (NLGB) Monthly Premiums accumulated at the same rate. This comparison of compounded amounts is done each month.
The sales illustration discloses the Lifetime Guarantee Annual Accumulation Rate; in this example, it is 6.70%, guaranteed for the life of the policy. The required monthly premium is $4,373.15, shown in the Premium Summary section as the Check-O-Matic mode of the Lifetime Guarantee Premium. The annual Lifetime Guarantee Premium is $50,949.81, and you can verify that this is the present value of 12 premiums of $4,373.15 discounted at the monthly equivalent of 6.70%.
You have to pay at least $4,373.15 each month, but you can pay more if you choose. To decide if it makes sense to prepay future monthly premiums, you need to know what the discount rate is. In this case, it’s 6.70%, after tax. You also need to estimate the probability of death during the prepayment period, because you don’t get a refund of excess payments at death.
Universal Life – Lifetime Guarantee also has nonguaranteed cash surrender values, which tend to be higher than those for other no-lapse universal life policies. The same page of the sales illustration says that during the first 10 years the current percent-of-premium charge is 40% up to a Target Premium of $61,139.76 and 20% above that, and the charge drops to 15% after 10 years.
There is no surrender charge, so the percent-of-premium charge has a big impact on the cash surrender values. New York Life created an incentive to bunch up the premiums; for example, instead of paying $51,000 each year, you could pay $102,000 in the first year and nothing in the second year. That would reduce the two-year sum of percent-of-premium charges by $8,172, because $40,860.24 of the $102,000 first-year premium would be subject to only a 20% charge. And that cost saving will increase the cash surrender value.
New York Life also created an incentive to skip premiums in Year 10 and pay more in Year 11, because the premium charge will be 15% rather than 40%.
Most consumers probably do not appreciate how much information is shown on this one page. I don’t know how many advisors appreciate it.
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ING Inforce Illustration Is Far Better Than Most But Still Lacks Some Important Details |
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Wednesday, March 23, 2011 15:47
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An inforce illustration, also called an inforce ledger, is a report that shows an existing life insurance policy’s future premiums, cash values and death benefits. Policyholders usually have the right to receive at least one inforce illustration without charge each year.
The information quality of inforce illustrations varies widely. Most of the time I get the feeling that no one at the insurance company is really thinking about the policyholder, and they are certainly not thinking about the advisor.
This week I saw an exceptionally useful inforce illustration from Security Life of Denver, an ING subsidiary, for a client’s ING Guaranteed Death Benefit Universal Life II policy issued in 2009. This is a no-lapse universal life policy with a hybrid design; there is a minimum monthly no-lapse premium during the first 10 years and then a shadow account (called the Lapse Protection Value) test after that.
Why am I impressed?
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First, the illustration provides a premium history, showing the date and amount of every premium paid since issue. This is useful for determining the cost basis of the policy, and it is also useful if you want to model the no-lapse provisions of the contract.
In my experience, most illustrations don’t even tell you the policy’s cost basis, much less the history of premiums paid.
Second, the illustration tells you the shadow account value as of the illustration date. That is rare. (A quibble: The illustration calls it the Lapse Protection Account Value, whereas the contract calls it the Lapse Protection Value. In high school I had to memorize Ralph Waldo Emerson’s remark that “a foolish consistency is the hobgoblin of little minds”; that does not apply here.)
Third, the illustration provides a breakdown of policy charges, with plain-English descriptions: What You Pay In, What You Take Out, What We Deduct, What We Add, and Policy Values (end of year). The person who designed this had a working brain.
Every universal life and variable universal life illustration ought to have a clear breakdown of the debits and credits that produce the nonguaranteed account value; most do not.
Fourth, the illustration provides a basic description of how the policy works, including the no-lapse guarantees, the nonguaranteed values, the continuation of coverage provision after age 121, and income taxes. Some other illustrations do this as well, but some do not.
What is still missing?
There is nothing missing in ING’s illustration that is generally provided elsewhere, so this is just a wish list:
The illustration does not provide the current financial strength ratings from the major rating agencies, such as A.M. Best, Moody’s and S&P.
The explanation of the Lapse Protection Value test is too superficial to provide any guidance about how to take full advantage of the premium flexibility that the policy offers. You have to read the contract to learn about the 6.0% Lapse Protection Interest Rate that creates an incentive to pay more than the minimum premium, and the punitive Table LPV1 Cost of Insurance Rates that will apply if you make the mistake of letting the Policy Protection Value turn negative at the end of a policy year.
The illustration does not explain how ING determines the nonguaranteed interest rate, cost of insurance rates and other charges, what changes have been made in the past, and what changes might reasonably be expected in the future. ING already provides some information in its responses to the supplemental interrogatories of Exhibit 5 of the statutory annual statement. This is public information, so putting a condensed version in the illustration would require no release of proprietary information.
There is no commission disclosure. Yes, I know, dream on.
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