Five Common Mistakes Made When Paying Life Insurance Premiums
Whether you(r client) is “shopping” for the lowest premium or getting ready to pay a premium on an existing policy, most policy owners/buyers make the following 5 common mistakes:
1. Comparing premiums shown in illustrations of HYPOTHETICAL policy values.
Policy Review services offered by some agents and/or brokers generally involve “apples-to-apples” comparisons of illustrations of hypothetical policy values for some limited number of products that are, in our opinion, exactly the comparisons that may be deemed “misleading”. Hypothetical illustrations are a comingling of undisclosed policy charges and unsubstantiated performance assumptions, and do not separately measure policy expenses (as required under Section 7 of the Prudent Investor Act) separate from the reasonableness of performance expectations (as required under Section 2 of the Prudent Investor Act), they are clearly not comprised of all required or customary characteristics, and are thus not complete. These services also lack completeness that results from the comingling of data that generally-accepted prudent practices require to be measured separately, lack reference to independent 3rd-party measures for average price and performance, and lack objectivity due to the artificial limitations on the number of insurers included in their sample population.
2. Failing to ask what the insurer plans to charge for COIs, FAEs, wrap-fees and premium loads (which is often NOT shown in the illustrations of HYPOTHETICAL policy values).
The largest single cost in any insurance product is the cost of paying claims. Payments of claims are referred to as the Cost of Insurance (COI) charges. With life insurance, COI charges can account for 75% - 80% or more of the total premium. Few clients or advisors know what they are actually paying for cost of insurance charges (COIs), fixed administrations expenses (FAEs), cash value based “wrap fees” (M&Es), and premium loads or what they are actually getting in the performance of invested assets underlying policy cash values.
Given findings from independent studies indicating there can be as much as a 40% swing between best-available rates and terms and poorly-priced products, the opportunity to bring reduced policy expenses and/or improved performance of invested assets underlying policy cash values can be both significant and meaningful today.
3. Not matching the (client’s) investor temperament to the appropriate product type (and instead falling victim to “flavor of the day” product marketing).
At least 32 million U.S. Households own insurance policies that are not appropriate for them, according to a recent survey. Clients are seeking advice about what is best for them, not an uninformed opinion of what might be good and certainly not some sales pitch for some particular product. Advice, by definition, is the act of making a recommendation regarding a decision or course of conduct. The reliability of any such advice is directly related to depth of knowledge and information supporting that recommendation. Knowledge, by definition, is the fact or condition of knowing something with familiarity gained through (direct) experience or association (i.e., research). As such, clients seeking reliable advice about which life insurance product is best for them must select life insurance practitioners that have both the experience and research necessary to know the facts that then lead to the most suitable life insurance product recommendation.
4. Ignoring actual historical performance of the asset classed into which cash values are invested.
Cash value is generally influenced by the number of cash value investment options, the historical performance of such cash value investment options, and cost-effectiveness of the various cash value allocation options. Cash values of traditional products (i.e. indexed life, universal life and whole life) are invested in the insurer’s general account managed by the insurer. To successfully evaluate the suitability of the cash value investment options for a policy you need to; review the performance of invested assets underlying policy cash values, the number and diversity and asset class coverage of cash value investment options, and the expense ratios for invested assets underlying policy cash values
5. Relying too heavily on sales and marketing material from the insurer, agent or broker without verification with independent research.
Experience alone is no longer sufficient to provide familiarity with all the products in today’s life insurance market. Thirty years ago, there were far fewer products with the only choices being term life or whole life which had been around in mostly the same form for decades. Products were also more highly-regulated with fewer health-risk rate classes and less flexible. As such, there was less difference between best-available rates and terms versus poorly priced products. It was, therefore, conceivable, that a life insurance practitioner could become sufficiently familiar through experience alone to render reliable advice about product suitability in that environment.
Since then, entirely new product types are being introduced about every 5 years or so. Insurers are also pricing products for specific funding strategies and age cells, and closing and reintroducing different versions of the same product type far more often (as often as every 18 months) in today’s life insurance market than in the past. All these product advancements mean that the number of combinations and permutations of pricing factors has increased exponentially and beyond that which experience alone can equip the life insurance practitioner with sufficient familiarity to render reliable advice about product suitability in that environment.
As such, to know just from experience which product is most suitable in a particular client situation, an agent/broker would have to have had experience with all prospective products from all appropriate insurers in all estimated 5,000 possible pricing combinations and permutations. With some 65 insurers comprising 90% of the market (as measured by sales), and with each insurer offering at least 2 different product types, an agent/broker would have to have had experience with and retained the knowledge of that experience with more than 500,000+ possible different answers to the question of which product is most suitable in a given client situation. In addition, because old products are being withdrawn and new products introduced every 18 to 24 months, this experiential knowledge is not cumulative and thus is likely 98% incomplete without the benefit of research (i.e., the ability to look things up).
The good news is that THEInsuranceAdvisor.COM research reports are compliant with regulators for use with all types of life insurance, and do include and consider underlying cost and performance disclosures. THEInsuranceAdvisor.COM research is derived from various independent sources to include thousands of actual insurance company pricing representations for hundreds of different products and actual performance data for invested assets underlying policy cash value, and reveals the overall suitability of a given life insurance product relative its peer-group and based on 5 of the major factors of suitability as to 1) financial strength and claims-paying ability, 2) actual cost-competitiveness (i.e., measured separately from performance assumptions), 3) pricing stability, 4) cash value liquidity, and 5) actual historical performance of invested assets underlying policy cash values.
THEInsuranceAdvisor.COM provides the empirical pricing and performance research essential to any complete investigation of life insurance policy suitability (as defined by regulators or the Prudent Investor Act) and which can then lead to independent and objective suitability determinations. While due care is an emerging field, and while there is room for a difference of opinion in some areas, THEInsuranceAdvisor.COM goes well beyond overly-simplified comparisons of comingled and hypothetical policy values to better protect and/or compete against those misleading Policy Review systems or services.
Use the Confidential Policy Evaluator (CPE) Research Reports to determine the appropriateness of pricing, the reasonableness of performance expectations for invested assets underlying policy cash values, and overall suitability for you(r clients) policies based on the 5 factors of suitability. Click here and get up to 3 Confidential Policy Evaluator (CPE) research reports under our NO-RISK trial subscription.
Tillinghast Towers Perrin study referenced in the May 2003 issue of Trust & Estates, CASCO survey reported in the April 1999 issue of Trust & Estates magazine, and research from TheInsuranceAdvisor.com database.
Insurance Information Institute, 2008
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