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Overfunded life insurance, what on earth is that? I hear you cry out. Perhaps you ran across the concept mentioned briefly somewhere on the internet. Or maybe someone suggested that you buy an overfunded life insurance policy.
If you're trying to discern the notion of overfunded life insurance, we'll break it down for you and details everything there is to know.
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Few subjects related to life insurance cause more hot-tempered debate than life insurance commission. Some believe it's an evil incentive that encourages agents to push “expensive” products like whole life insurance to land a huge payday.
Others look at it simply as the payment mechanism rewarded to agents for the hard work involved with marketing and managing the life insurance policies they put in place for their clients.
Today we'll discuss what life insurance commissions are, what they are not, and attempt to give a little more depth to the discussion.
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In most interactions with prospective clients who are interested in exploring a whole life policy, there's often a conversation that arises about life insurance guarantees. Given that most of the general personal finance writing out there nearly always presents whole life insurance as a heavy on guarantees it's not a big surprise.
We've written plenty about how whole life insurance can work as a tool to accumulate wealth primarily through the cash surrender value generated by owning a policy and we've often noted that design plays a major role in implementing a whole life insurance policy that works for its intended purpose.
When I think of design, there are a few considerations that come to mind that have a lot to do with esoteric insurance concepts. Given the lack of general understanding, I find myself traveling down the rabbit hole of insurance minutia that quickly glosses over the eyes of all but the most knowledge thirsty consumers of insurance.
But ultimately, there is a very easy and universally understood way to communicate, more or less, what I'm doing when I say I'm “properly designing a whole life policy for cash accumulation.” And that, simply put, means I'm doing my darnedest to cut out life insurance guarantees.
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For years, insurance agents, companies, and purchasers have looked at hypothetical ledgers that delineate future policy values in an attempt to articulate policy functionality and understand how one policy's features come together and work compared to another. Additionally, aggressive selling of policy projections overstated by extraordinary economic circumstances from the 1980s resulted in the industries obsession with hedging projections all in the name of full disclosure.
As a result of this cautious approach to depicting future policy values,
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No one wants to quit or be forced to change the primary life insurance company that they are writing business with. Unfortunately, there are times when it is unavoidable…either because the company has changed a key product or because a company decided they don't want to accept new business from you anymore.
We've experienced both on more than one occasion.
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Ohio National officially closed its VA biz and cut trail commissions (fees?) owed to B/D’s and brokers on December 13th, 2018 for any VA sold with a guaranteed minimum income benefit. We don’t know exactly how many VA’s this is but assume that it’s a large block of outstanding business sold within the last decade as these rides were extremely popular features for VA contracts.
As a result, a flurry of lawsuits came about claiming various insidious things against ONL for its refusal to continue payment to brokers who wrote VA business with the company.
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To kick off the new year, we are raising the white flag. We have to concede a position we've long held because consumer sentiment appears to overwhelmingly head in the opposite direction. For years, we've lampooned the notion of the “holistic” financial planner. Simply, the notion that one person or small firm encompasses the entire spectrum of financial planning facets that you will face throughout your life. The appeal is a one-stop shopping experience where one outfit can take care of your investment, insurance, tax, legal, and strategical financial life. Sounds awesome in theory, but we've held sharp skepticism and for good reason.
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The holiday season now firmly has its grip around many of us and since we opted not to produce an end of the year podcast that answered questions we receive from various readers and listeners, I figured I’d entertain a question that came up recently that has been asked probably twice before in emails sent to us. Recently, this email showed up in our inbox:
Brandon,
Just curious. You’ve spent a lot of time highlighting the merits of life insurance as more than just something I buy to give my wife and kids money should I die and I find it very interesting. However, why don’t I find other financial advisors talking about this? To date, I’ve worked with four different advisors and only one of them really cared about how much life insurance I had (the others didn’t even really want to talk about life insurance). So why don’t they know about all of this?
Thank you for your time – Seth W.
Seth was gracious enough to grant my request to make my response in a public blog format so here’s the answer, for Seth and anyone else who has wondered this same thing.
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You are never going to pay less for whole life insurance than the amount you will pay this year. Whole life insurance rates become dramatically more expensive (actual dollar cost and the cost of lost opportunity) but all of this will become much more clear in the next few paragraphs.
You really don't need an advanced education or professional background in insurance to understand this. The reason the cost you pay for life insurance will increase each you comes from two places.
First there's the fact that you are getting older, which also means the probability that you are going to die is inching up year over year.
Second, every year you don't buy life insurance
