Cash value life insurance is a funny subject. I strongly admire and strongly detest this product within the American system of finance, long known for its stable returns and obscurity. Proponents tout its many benefits while opponents scream about its expenses and lack of disclosure.
For those who have followed us for a while, you'd expect today might be one where we reinforce the benefits and side with the cash value friendly crowd.
You'd be sorely mistaken.
Let's be clear, I strongly believe that the combined efforts of the talking heads in the financial press couldn't fill a standard sized post-it® note if you asked them all to write down everything they knew about cash value life insurance.
But, there is something they do know.
Maybe I should start with a little story.
I was once approached by a guy who was a chronic under-saver, made a lot of money, and wanted to retire in 5 years. He asked me what he needed to do.
A 10 minute summing up of his finances left me with the following statement: “I don't know exactly what it's going to take to get you to retirement in five years, but I know what you're going to commit to it and you should just learn to like your job a little more.”
Did I forget to mention that he wanted to retire because he hated his job?
Last week Brantley commented that even though the financial press can shrill utter garbage that make those of us in the know cringe, they often get the big picture totally correct.
As sad as it is to admit.
Many agents will sing the praises of cash value life insurance, but very few are willing to commit to a design that maximizes said benefits.
Recently, Brantley and I had the pleasure of meeting a very savvy guy who was contemplating an insurance purchase after being pitched by an agent. The prospect did what a lot of young and intelligent prospects do nowadays and took to the internet to fact check the information coming from his agent.
He became quite displeased to discover that what he had been pitched technically had some of the pieces we'd look for in a cash value life insurance for wealth accumulation scenario, but was woefully sub-optimal.
He asked us to take a crack at a design for him to compare to what he'd seen and was astonished to discover what happens when you don't just settle for some of the good features.
This whole process resulted in a heart-to-heart with the original agent that left the prospect fairly disillusioned with his original agent. He (the prospect) then mused aloud while discussing this whole event further with us.
He noted that the insurance industry isn't very open about how it operates or how it's products operate and that most agents don't appear to have a strong grasp of the products they sell.
We completely agree.
He further noted that unlike cars, televisions, or even a house, life insurance has a sort of third dimension when it comes to the consideration or analysis of a purchase.
You see, I've noted a bunch of times that when you blend whole life insurance or design universal life insurance to maximize the guideline premium, you (the agent) give up a lot of money to the client's serious benefit.
And in this particular situation the original agent flatly refused to do this because (and we'll give him credit for his honesty) he'd make less money.
But what did the agent offer up as benefit for taking the less optimal design?
Well, the prospect would get the agent's knowledge and expertise.
At what cost? A little more than a million dollars in the policy's cash value come age 60.
And this is the third dimension.
See, I can go down to the local car dealership and test drive the latest 5 series BMW. And maybe I pay more for it buying from the dealership that's only 30 miles away from my house vs. the one that's 100 miles away.
But I like the guy at the closer one and I know by the spec sheet that whether I drive 30 miles or 100 miles I'm getting the same car. Not the case with life insurance.
If the client wanted to do business with the other agent, the cost of admission wasn't just a little more money out of his pocket upfront. It was substantially more money over the long haul because he was purchasing a very differently designed product.
People tend to like a comment I once made publicly to someone about a policy they had purchased for college funding, “that policy was designed to put someone's kid through college, but it's not going to be yours.”
And this is where the famous talking heads gain steam. The lack of transparency in the insurance industry allows people to get away with things, they probably shouldn't.
Also, the sheer ignorance agents have (and lots of times it's not new agents) regarding their products also leads to trouble.
Suze gets dandruff just thinking about cash value life insurance as a savings plan and quotes what seems like astronomical commissions because she only understands the rudimentary design of a whole life policy.
Can we beat her expectations and prove her claims about fees incorrect?
But will all agents follow our lead? Absolutely not. And that's where the trouble lies.
For most agents these two notions run rampant in their daily lives. I've had conversations with agents with decades of experience who had no idea you could do what we do everyday with life insurance policy. Giving new meaning to the notion that there's a big difference between 20 years experience and 20 first years of experience.
Recently someone made the following comment on the Insurance Agents' Forum that seemed to sum this all up quite well:
but I definitely have found out from looking for both long term care and life insurances that a consumer [like] myself is at the mercy of the agent he gets. Not only is it a crapshoot if the agent is honest and not just trying to get the highest commission, but his knowledge of the business can vary as well.
Here's the tricky part for a consumer. I can take a product from the same company and design it very differently, and that design will mean a big difference with respect to overall policy performance.
The cool part about this product is that we can custom tailor them for each client's specific wants or needs (we like that, and very much want that to continue to be the case).
But with that power comes a high degree of responsibility, and a need for knowledge regarding the mechanics of a life insurance policy.
Despite all hassle the individual reference above faced regarding a policy purchase, he hasn't given up on the concept.
Why? Because it works. This is a common trait I've seen numerous times.
In fact, while speaking to this individual a friend of his made the comment that when designed properly, these products could potentially perform better than the well regarded bond funds managed by bond investor super-star Jeffrey Gundlach.
The benefits are clear, the chore is in finding someone who can design it properly to get to that benefit.
I'm not saying we're the only ones, but when it comes to cash value life insurance, I haven't found anyone as committed to designing products to maximize cash like us. And if you'd like some guidance on designing cash value life insurance to maximize cash performance, we'd be happy to at least get you pointed in the right direction.
Brandon launched the Insurance Pro Blog in July of 2011 as a project to de-mystify the life insurance industry. A specialist in the design and application of life insurance cash accumulation features, Brandon is one of the foremost authorities on the subject of coordinating life insurance cash values in a financial plan.