Last week, Equifax, the largest credit reporting company, reported a major breach of its core database. It is by far the largest hack of its kind to date and is estimated to have impacted more than half of the U.S. population–more than 143 million people's records were accessed.
By now, most of you have heard all about this from every other news source on the planet, however, what does it mean for life insurance applications? Will there be any sort of fallout over this for life insurance?
We weigh in with our thoughts in episode 82.
In episode 81, we're talking about the newest trend emerging in the world of life insurance underwriting and that is…
The end of paramedical exams and lab tests.
Now, the exams aren't going away completely. However, after talking with several people working for companies that have been rolling this out over the last several years, the numbers are telling us that about 50% of the people who apply are able to be fully underwritten without an exam.
This trend will surely accelerate and will serve a dual purpose:
- A much more streamlined underwriting process that leads to policies being issued more quickly.
- Add millions of premium dollars to insurance companies with a lower cost to acquire those dollars.
Of course we have more to say in the podcast, listen for our full commentary.
Whole life insurance is often maligned by the rest of the financial services world (those who sell registered investment products) as lacking transparency. It’s referred to as a “black box” for its lack of disclosure. Opponents say that it's not so much about how various pieces and parts are calculated, but more about the walls built around their attempt to reconcile results.
Or at least that's what they want you to believe.
In truth, it’s rather easy to compute expenses associated with whole life insurance. Life insurance illustration ledgers have been a compulsory step in the life insurance sales process since the early to mid 90’s in almost ever state and those ledgers explain a lot in terms of what the insurer is doing and plans to do with your money.
It's true that you cannot request a detailed breakdown of expenses under a whole life contract and compare it against other whole life insurance contracts.
You can easily look at ledger details and compare both guaranteed and non-guaranteed values for whole life policies to discern which ones come at a lower cost.
While some people may not want to perform analysis in this way, it’s no different than looking at a schedule of expenses to see who charges more for what. This view is simply bigger picture.
Expenses are relevant when making any decision, however, I would encourage you to focus on absolute value. How much money you have when you reach your destination is more important than the internal expenses you paid along the way. Whether or not something is expensive is always relative to the value it provides.
For five years, we have tracked the investment yield trend of whole life insurance companies and we continue to analyze this data every year because investment income is a primary driver of dividends paid to participating insurance policy holders.
Investment income is not the only contributor to any insurance company’s dividend payout. The other two factors considered each year by the board of directors is
- Claims experience
- Operational expense
Claims experience plays a much larger role in affecting the overall dividend than operational expense–there simply isn’t large fluctuations in day-to-day operating expenses for companies that have existed for over a century.
We use investment performance data reported in statutory accounting reports published by all insurers domiciled in the United States to compute the five year trend of investment yield on admitted assets. This computation tells us the average change in yield on invested assets over the most recent five year period.
For example, if the result of an insurer for this analysis is -.10% per year that means the insurer has experienced a loss in investment yield of .10% (ten basis points) per year for the last five years.
The results of this analysis are as follows:
Negatives Across the Board
This is the first year since we started this analysis that all insurers show a negative trend. In years past, only a few insurers achieved average growth in investment yield year-over-year with most insurers having experienced a decline on average. This result is not surprising given the current trend in interest rates across the broader U.S. economy.
Size Doesn’t Seem to Matter Much
The asset pool size of the insurer seems to have little effect on insurers 5 year trend for investment yield. The top five insurers on this list represent a broad range of asset sizes and all but one, New York Life, have experienced single digit decline year-over-year.
However, smaller asset pool sized companies to make up the entirety of the bottom 5 insurers on the list. Dividing the list in half, most of the larger insurers are found in the top 11.
This Trend is Likely to Remain
Interest rates remain low and don’t show major signs of improvement in the short term. As a result, we do not expect this trend to reverse in any major way for the next several years. Insurers will likely continue the trend of moving to somewhat riskier assets where available. This strategy will be more impactful for smaller insurers and then large ones due to sheer scale of overall assets and the impact smaller alternatives investments have on the total pool.
To continue on with the discussion of potentially rising interest rates…
We actually get into what it might mean for life insurance companies and for your life insurance policy–whether it happens to be participating whole life or universal life.
Major discussions in this episode:
- How quickly can you expect your dividend (WL) and/or interest rate (UL) to increase if Greenspan's prediction of a whipsaw comes true?
- Will the life insurers who were “forced” to raise expenses in their UL contracts over the last couple of years, lower these price increases as interest rates rise? (given that most of them gave the excuse of having to deal with a “prolonged period of low interest rates” to raise their prices on existing policies)
Former Federal Reserve Chairman, Alan Greenspan, believes the next bubble to burst will not be in the equity markets…it will be a normalizing of yields in the bond market as inflation ticks up.
During a Bloomberg interview, Greenspan said…
“By any measure, real long-term interest rates are much too low and therefore unsustainable”
And he went on to say…
“When they move higher they are likely to move reasonably fast. We are experiencing a bubble, not in stock prices but in bond prices. This is not discounted in the marketplace”
Greenspan also warned that we are headed toward a “stagflation” that we haven't seen since the 1970's.
But what does any of this have to do with life insurance?
As we all know, life insurance companies are large buyers of bonds and have been long-suffering over the last several years as their bond portfolios mature and they're forced to buy bonds with much lower yields.
Come back next week to hear our take on what it all means for life insurance companies.
Did you know that it's possible to outlive your permanent life insurance?
That entire sentence is discombobulating. When does permanent not really mean permanent?
Recently, a pending court case was brought to our attention on Joseph Belth's blog (former publisher of the Insurance Forum) that raises some interesting debate. You should really take a few minutes to read the entire blog post if this sort of thing interests you, it's worth a quick read.
The long and short is that a gentleman and his wife (Mr. and Mrs. Lebbin) formed an irrevocable life insurance trust (ILIT). They made their two children the trustees, gifted money to the trust each year and the proceeds were used to purchase two separate survivorship and/or second-to-die universal life policies from Transamerica. Mrs. Lebbin is deceased which leaves Mr. Lebbin as the insured.
All seems normal. However, Mr. Lebbin is approaching his 100th birthday and the policies were designed to endow (mature) at age 100. Thus he will receive the net cash value (of unknown value to us).
Mr. Lebbin would like for Transamerica to extend his maturity beyond 100. Transamerica has decided not to do that.
And so begins the lawsuit.
Listen to the episode to hear what we have to say about it.
In episode 75, our discussion revolves around a suggestion that comes from this article over at Fox Business. In particular, the article points out that many larger and well-known employers are aggressively raising their matching contributions for their employees in the company 401k plan.
The article goes on to suggest that companies believe this is an effective means of retaining talent and helping workers accumulate enough money to retire–making way for younger employees.
We think that all sounds great. More money from the company you work for toward your retirement is generally a good thing.
But…do people really stay with a company because of the matching contribution in the 401k? Not likely.
We've both been in the business of talking personal finances with people for a number of years and never heard anyone mention their sweet 401k as a reason they stayed at a job. The best retention tool seems to be actually paying people more.
Recent settlements have been reached between policyholders and a couple of mutual life insurance companies. Turns out an obscure bit of insurance regulation from 100 years ago might get you an extra $22 that you weren't expecting.
We've been asked a few times about these lawsuits over dividend underpayment, so we'd share our perspective on the issue in episode 74.
Recent comments from Fed Chairman, Janet Yellen, indicate that she thinks we'll never see another financial crisis like we saw in 2008. She's probably right but is that really a profound observation?