Friday, July 12, 2019

No. 322: Pamela Yellen—Her Unbelievable "Bank-on-Yourself" Wealth-Building Strategy

Pamela Yellen was born in Buffalo, New York, on November 16, 1952. She graduated in 1974 from the University of San Francisco with a Bachelor of Arts degree, with emphasis in psychology. From 1984 to 1987 she was employed by a publication serving the camping and recreational vehicle industry. Later she became a consultant to more than 400,000 financial advisors across the U.S. and Canada. She is now a proponent of her "Bank-on-Yourself" system, which she calls a "safe wealth-building strategy." She is the author of two books: Bank on Yourself (2009) and The Bank on Yourself Revolution (2016). She donates 10 percent of her royalties to charities such as The Smile Train and The Nature Conservancy. She now lives with her husband outside Santa Fe, New Mexico. This post is based for the most part on her 2016 book.

The Endorsements
The subtitle of Yellen's 2016 book is "Fire Your Banker, Bypass Wall Street, and Take Control of Your Own Financial Future." The first eight pages (before the title page and the other front matter in the book) contain 26 endorsements. Here are the first three:
"Even if you aren't ready to actually fire your banker, you need all the helpful information you can find in these uncertain economic times. Pamela Yellen once again is 'right on the money' when it comes to financial security."—Harvey Mackay, Author of the New York Times #1 bestseller Swim With the Sharks Without Being Eaten Alive, www.harveymackay.com
Pamela Yellen should definitely win a Nobel Prize. With her guidance, you can grow a nest egg into a small fortune without the risks of conventional investments and political uncertainty. I urge you ... no, I beg you ... to get The Bank on Yourself Revolution. It's an investment in yourself and a book that will make a major difference in your life."—Joseph Sugarman, Entrepreneur, Author, and BluBlocker Corporation Founder, www.BluBlocker.com
"The Bank on Yourself Revolution provides a pathway to building your wealth and puts the traditional bank, stock and real estate markets firmly in the back seat. If you are searching for an alternative path to a secure retirement, this is a must read to grow your money safely and predictably ever[sic] year—even when the markets are crashing."—Kristi Frank, Star of Season One of Donald Trump's The Apprentice, well known for helping entrepreneurs start and grow their businesses, www.KristiFrank.com
The Dedication
Yellen dedicated her book to those she calls "Bank on Yourself revolutionaries." Here is the full dedication:
This book is dedicated to all the Bank on Yourself revolutionaries, the people who had the courage to question today's conventional financial wisdom, buck the system, and set out on a path less traveled. In doing so, you created true financial security for yourselves and your families. You are my heroes and my inspiration.
Harsh Criticism of Alternatives
Most of Yellen's book is devoted to harsh criticism of financial alternatives to her Bank on Yourself system. She says on page 7 that over the years she has investigated "more than 450 different financial products, strategies, and vehicles, and only a few passed my due diligence tests." Here are some but not all the alternatives she criticizes (with page numbers shown in parentheses): synthetic collateralized debt obligations (7), adjustable-rate mortgages (9), mutual funds (19), 401(k) plans (29), certificates of deposit (31), real estate investments (33), gold and other precious metals (35), savings accounts (41), traditional whole life policies (44), buy term life insurance and invest the difference (60), equity indexed universal life policies (66), individual retirement accounts (104), paying off home mortgages (162), 529 college plans (174), uniform gifts and transfers to minors (176), student loans (177), and annuities (227).

The Bank on Yourself Plan
As I went through the book, I kept looking for a description of the Bank on Yourself plan. Sprinkled throughout are brief descriptions hinting that the plan is based on some form of life insurance. Not until near the end of the book (pages 255-257) did I find anything close to a detailed description. It begins with this paragraph:
Out of approximately 1,000 life insurance companies, we've found only a handful that offer policies that meet all four requirements needed to maximize the power of the Bank on Yourself concept. When your plan is designed by one of the 200 Bank on Yourself Authorized Advisors, they recommend companies that have the following features and advantages:
The first feature is that the company must offer dividend-paying whole life policies. Also, the company must have paid dividends to policyholders every year for at least the last 100 years. It is not clear how anyone can verify the payment of dividends for at least a century.

The second feature is that the company must not use direct recognition. That means the company pays the same dividends whether the policyholder has or has not taken out a policy loan.

The third feature is that the company must offer a paid-up additions rider (PUAR). Yellen says the authorized advisor's commission "is typically 50-70 percent lower than with a traditionally designed policy." She also says: "At least 50 percent of your premium will typically be directed into this [PUAR] rider." I think commissions on amounts deposited into PUARs are substantially smaller than commissions on premiums for whole life, especially in the first policy year. Therefore the total commission would be smaller than the commission that would have been paid if the entire premium had gone into the whole life base policy.

The fourth feature is that the company must be among the financially strongest in the country. That determination must be made based on financial strength ratings assigned to the company by several independent rating agencies. I will have more to say on this subject later.

Yellen's plan seems to contemplate frequent and large policy loans to make major purchases. For that reason, it is strange that she says nothing about the policy loan clause. Thus she does not say whether the policy loan interest rate should be fixed or variable, what the rate should be if it is a fixed rate, or, if it is a variable rate, how the rate should be determined and what the maximum rate should be.

Accessing Yellen's System
Yellen does not publish a list of life insurance companies that meet her criteria. She says she is an educator, not a financial advisor, and therefore is prohibited from naming specific companies. She does not say whether she is a licensed insurance agent. She says developing a plan for the client is the job of an "Authorized Bank on Yourself Advisor." In other words, only an authorized advisor, who presumably is trained by her, is allowed to design a customized plan for the client.

Nor does Yellen publish a list of Bank on Yourself authorized advisors. In other words, the only way a client may access the Bank on Yourself plan is to contact Yellen, who will refer an authorized advisor to the client. Thus Yellen is operating what amounts to a closed system for accessing the Bank on Yourself plan.

The Lafayette Life Connection
Allan S. Roth is a certified financial planner and a certified public accountant. He has worked as a public accountant with KPMG, and has been with McKinsey & Company, Kaiser Permanente, and Wellpoint. Recently I saw an article by Roth entitled "Bestselling book's financial promises don't add up." On December 11, 2012, CBS News posted Roth's article, which was about Yellen's first book. Roth said in his article that he had met with a Yellen authorized advisor, who had made a presentation. Roth further said in his article that he had tried hard but had not been able to make sense of the numbers in the presentation. Roth said in his article that the authorized advisor's presentation had been based on a policy offered by The Lafayette Life Insurance Company, and that he (Roth) had been in touch with Lafayette Life about the presentation.

Mutual Holding Companies
Lafayette Life, which was established in 1905, is now part of Cincinnati-based Western & Southern Financial Group, a mutual holding company organization. I have written extensively about mutual holding companies. My first article on the subject, entitled "General American and the Mutual Holding Company Concept," was in the March 1997 issue of The Insurance Forum, the monthly newsletter I published from January 1974 through December 2013. Another article on the subject, entitled "Democracy at Provident Mutual—A Case Study in the Suppression of Communication among Policyowners," was in the May 1998 issue of the Forum. Both articles are in the complimentary package offered at the end of this post.

My Correspondence with Lafayette Life
On June 21, 2019, I sent a letter by regular mail to Bryan Chalmer Dunn, the president and chief executive officer of Lafayette Life. I asked several questions about the relationship between Yellen and Lafayette Life. I asked for a response by the close of business on June 28.

On June 27, I received a telephone call from Diane E. Planck, senior media relations specialist at Western & Southern, acknowledging receipt of the letter and asking for an extension. We agreed to extend the response date to the close of business on July 2. She graciously responded by email at the promised time. My letter and her email are shown later in this post.

Planck did not number her answers to correspond to my numbered questions. She did not answer the first question; I think the answer is yes, based on the previously mentioned Roth article. She answered the other questions directly or indirectly.

Planck's discussion of policy loan interest rates was helpful. She said the policy loan interest rate is variable, and is the larger of 5 percent or the "monthly average of the composite yield on seasoned corporate bonds" published by Moody's. I checked Moody's website and found that the averages were 4.08 percent for May 2019 and 3.89 percent for June 2019. Thus it appears that Lafayette Life's variable policy loan interest rate in those months was 5 percent.

Financial Strength
Lafayette Life's financial strength ratings as of September 18, 2018 were A+ (superior) from A. M. Best, AA– (very strong) from Standard & Poor's, and AA (very strong) from Fitch. For many years I published special ratings issues of the Forum. In the final years of the Forum, I deployed a system I had developed for using the ratings assigned by the major rating firms to classify life-health insurance companies, from the standpoint of financial strength, as suitable for "extremely conservative consumers" (category 1), for "very conservative consumers" (categories 1 and 2 combined), and for "conservative consumers" (categories 1, 2, and 3 combined). In the last of the special ratings issues—the September 2013 issue—I listed 19 companies for "extremely conservative consumers," 38 companies for "very conservative consumers," and 157 companies for "conservative consumers." Lafayette Life and two other Western & Southern companies were among the 38 companies for "very conservative consumers." Five pages of the 32-page September 2013 special ratings issue, including a description of the system and the names of the companies in each of the three categories, are in the complimentary package offered at the end of this post.

Text of June 21 Letter from Belth to Dunn
By way of introduction, I am professor emeritus of insurance in the Kelley School of Business at Indiana University (Bloomington). I am also a blogger at josephmbelth.com. For further information, please click "Bio" on the home page of my blog site.

Pamela Yellen wrote a 2016 book entitled The Bank on Yourself Revolution. She also wrote a 2009 book entitled Bank on Yourself. This letter relates to the 2016 book.

Ms. Yellen says on page 255 that there are only a handful of life insurance companies that meet the requirements needed to maximize the power of her Bank on Yourself concept. She does not identify the companies, but I saw an article on CBS News indicating that Lafayette Life is one of the companies. I am working on a blog post about her system, and have a few questions for you.
  1. Are you familiar with Ms. Yellen's book?
  2. Ms. Yellen says on pages 255-257 that the recommended companies issue a participating whole life policy with a paid-up additions rider and do not use direct recognition. Do you offer such a policy?
  3. Ms. Yellen does not mention the nature of the policy loan clause. What is your policy loan interest rate, and is it a fixed rate or a variable rate? If it is a variable rate, what is the maximum rate?
  4. Ms. Yellen says the recommended companies must have high ratings from several independent rating agencies. What are your current ratings by A. M. Best, Standard & Poor's, Moody's Investors Service, and Fitch?
  5. Ms. Yellen says on page 250 that there are about 200 authorized advisors across the U.S. and Canada. She does not identify them, but a person interested in her system may contact her, and she will refer an authorized advisor to that person. Are you aware of any of your agents who are authorized advisors for her system? If so, how many are you aware of?
  6. If your answer to the first part of (5) is yes, do you approve of their use of Ms. Yellen's system?
I need your reply to this letter by the close of business on Friday, June 28. Please send your reply by email to [my personal email address]. If you would like to speak with me, my direct telephone number is 000-000-0000, and I am on Eastern time. Thank you for your assistance.

Text of July 2 Email from Planck to Belth
Thank you again for contacting Lafayette Life concerning your upcoming blog. We share your passion for the life insurance industry and the important role insurance carriers have in providing products that help people with their financial security.

Information on our most current financial strength ratings (Lafayette is not rated by Moody's) and products (and if they are dividend paying) is available in detail at Lafayette Life's website.

The Lafayette Life Insurance Company is committed to offering people in the markets we serve a wide range of life insurance and annuity products to help meet their growing and increasingly diverse set of financial needs. Our product offerings include a dividend-paying whole life policy with a paid-up additions rider. All dividend-paying whole life policies from Lafayette Life are non-direct recognition, which means the dividend credited to the policy will be the same whether there is a loan or not. The loan interest we charge is the greater of 5% or the monthly average of the composite yield on seasoned corporate bonds as published by Moody's Investors Service, Inc., or any successor to that service.

Lafayette Life's products are sold through independent agents and independent marketing organizations. Our role is limited to providing life insurance policies and annuity contracts. We do not endorse or sponsor any selling system nor do we develop, advertise or promote the marketing content or materials for any selling system. We do not inquire about, attempt to determine, or identify in our systems whether any independent agents appointed to sell our products are users of any specific selling system.

Please be assured that Lafayette Life makes it clear through our contracts with those selling our products and disclosures to our customers that our life insurance policies and annuity contracts are insurance products.

I believe this addresses the questions you raised. Please let me know if you need anything else.

General Observations
Lafayette Life appears to take no interest in or responsibility for the methods used by the independent agents who sell its policies. Further, I think the same can be said about many if not all other companies that sell their policies through independent agents. In my opinion, this is a matter of serious concern, for two reasons. First, sales methods may be deceptive, misleading, or otherwise unfair to consumers. Second, companies and state insurance regulators may find it difficult to police the sales methods used in the field by independent agents.

I was not able to find anywhere in Yellen's book a detailed description of her Bank on Yourself system. I think, but cannot be certain, that she recommends clients purchase automobiles and make other major expenditures by taking out loans against life insurance policies and later repaying the policy loans. I think she is saying the procedure will build the client's wealth far more rapidly and safely than any other conceivable system. I do not believe it. Until such time as she illustrates the numbers in detail, I will continue refusing to believe it.

Available Material
I am offering a complimentary 19-page PDF consisting of an article in the March 1997 issue of the Forum (6 pages), an article in the May 1998 issue (8 pages), and an excerpt from the September 2013 issue (5 pages). Email jmbelth@gmail.com and ask for the July 2019 package about the Yellen system.

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Tuesday, July 9, 2019

No. 321: TIAA Is Exiting the Life Insurance Business

On June 26, 2019, Investment News carried an article by reporter Greg Iacurci disclosing that Teachers Insurance and Annuity Association of America (TIAA) is exiting the life insurance business at the end of 2019. The article quotes an industry observer as saying: "Part of the reason they're getting out is because they're not selling enough." Here I discuss this important development.

TIAA's Comments
The Iacurci article alludes to a June 25 memorandum from Dennis Rupp, TIAA's director of insurance wholesaling. I asked the TIAA media office for the Rupp memorandum, but did not receive it. Instead, I received a June 28 letter from Todd Sagmoe, TIAA's vice president of product management. He said:
Thank you for your inquiry into the recent TIAA decision to stop issuing new life insurance contracts. I can confirm that TIAA will no longer underwrite and issue new life insurance contracts. Here is the public response that TIAA has prepared: "While life insurance is a key component of our holistic approach to financial wellness, we have decided to stop underwriting new life insurance policies. To enhance our operational efficiency, we will offer a variety of solutions from other carefully selected providers to meet our customers' life insurance needs. We will maintain and continue to service existing policies to ensure a high-quality customer experience."
The Examination Reports
TIAA and its subsidiary, TIAA-CREF Life Insurance Company, are domiciled in New York. The most recent examination reports of the two companies by the New York State Department of Financial Services are as of December 31, 2013, and are dated June 10, 2015. The TIAA report says it "ceased issuing life insurance policies in 2005." However, I think TIAA-CREF Life continued issuing life insurance policies. Selected pages of the two examination reports are in the complimentary package offered at the end of this post.

The Life Insurance Price Issue
Long-time readers know that I conducted many studies of the price of life insurance protection from the viewpoint of the policyholder, and that I recommended a system for disclosing the information to consumers. Because of strong opposition from the life insurance business, my recommended disclosure system was not adopted. I described the system in an article entitled "Information Disclosure to the Life Insurance Consumer" in the December 1975 issue of the Drake Law Review. The article is in the complimentary package offered at the end of this post.

In the course of my research in the 1960s and 1970s, I became aware of a "lifetime" (whole life) policy issued by TIAA in 1965 to a man aged 35. The policy included the usual premium provision, fractional premium options, grace period and reinstatement clauses, a table of cash values, reduced paid-up insurance and extended term insurance, a loan clause with a fixed annual interest rate of 5 percent, an automatic premium loan clause, an ownership clause, an entire contract clause, two-year incontestability and suicide clauses, a reserve provision based on the 1958 C.S.O. mortality table and 2.5 percent interest, beneficiary provisions, settlement options, and a waiver-of-premium clause. The policy was "non-participating," but TIAA mailed to the policyholder each year a check representing a "voluntary dividend." No dividend options were available other than the cash option.

When I examined the price structure of the policy, I found that the price of the life insurance protection from the viewpoint of the policyholder, including the effect of the "voluntary dividends," was well below the price of the life insurance protection in any other policy I had seen. One explanation may have been that TIAA employed no agents, and instead sold directly to its narrow constituency—the faculty and senior administrative staff of colleges and universities. Another explanation may have been TIAA's reportedly stringent underwriting practices.

The LTC Insurance Incident
In November 2003, TIAA notified its then 46,000 long-term care (LTC) insurance policyholders that it was exiting the LTC insurance business and transferring its LTC insurance policyholders to Metropolitan Life Insurance Company. Because both companies were domiciled in New York, the transfer was subject to the approval of the person who is now the superintendent of financial services. On February 3, 2004, I submitted to the superintendent a "Statement of Joseph M. Belth on TIAA Transfer to MetLife" showing, among other things, five matters that should be conditions for approval of the transfer.

The LTC insurance incident led to three major articles in The Insurance Forum, my monthly newsletter. The first article, which was in the March/April 2004 issue, was entitled "TIAA's Surprising Exit from the Long-Term Care Insurance Business." The article included my statement to the superintendent, and is in the complimentary package offered at the end of this post.

General Observations
When TIAA exited the LTC insurance business in 2003 and sought to transfer its obligations to another insurance company, I had been writing since 1989 about the widespread practice of insurance companies seeking to shed their obligations to their policyholders.  I had deep respect for TIAA, and was disappointed to see it engage in that anti-policyholder activity.  Many of my academic colleagues felt the same way.

I interpret the Sagmoe letter as saying TIAA will not attempt to transfer its life insurance obligations to another company. Instead, I think TIAA will honor its obligations to its life insurance policyholders, and will run off its existing life insurance policies over many years. If my interpretation is incorrect, and TIAA moves to transfer its life insurance obligations to another company, I will report developments.

Available Material
I am offering a complimentary 51-page PDF consisting of selected pages from the latest TIAA and TIAA-CREF Life examination reports (21 pages), the 1975 Drake Law Review article (26 pages), and the March/April 2004 Forum article (4 pages). Email jmbelth@gmail.com and ask for the July 2019 package about TIAA.

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Monday, July 1, 2019

No. 320: Greg Lindberg—The North Carolina Department of Insurance Places Four of His Companies in Rehabilitation

On Thursday, June 27, 2019, four documents relating to Greg Lindberg's insurance companies were filed in a state court in North Carolina. The documents, which are in the complimentary package offered at the end of this post, were filed between 1:17 and 1:48 that afternoon. At 2:48, reporters Leslie Scism and Mark Maremont of The Wall Street Journal posted an article entitled "North Carolina Regulators Seize Control of Life Insurers Owned by Greg Lindberg." They posted an updated version at 6:17. Here I discuss the developments and mention briefly what is happening in a related federal criminal case.

The Verified Petition
One state court document is a "Verified Petition for an Order of Rehabilitation, and Order Appointing Receiver, and Injunctive Relief." The petitioner is Mike Causey, the North Carolina commissioner of insurance. The respondents are Southland National Insurance Corporation, Southland National Reinsurance Corporation, Bankers Life Insurance Company, and Colorado Bankers Life Insurance Company. The respondents are licensed in North Carolina, their principal place of business is in Durham, North Carolina, and Lindberg is the controlling shareholder.

The petition says the commissioner was concerned about the respondents' liquidity. On October 18, 2018, the commissioner and the respondents entered into a consent order for administrative supervision for 120 days. On February 5, 2019, they entered into an amended consent order for administrative supervision for an additional 120 days. On April 4, 2019, they entered into a second amended consent order for administrative supervision, and agreed that appointment of a receiver was necessary for the protection of the respondents' policyholders. The commissioner asked the court to enter an order of rehabilitation naming him the rehabilitator.

The Rehabilitation Order
Another state court document is an "Order of Rehabilitation, Order Appointing Receiver, and Order Granting Injunctive Relief." Senior Resident Wake County Court Judge Paul Ridgeway appointed the commissioner as the rehabilitator and the receiver, issued an injunction against interference with the rehabilitation, and required the rehabilitator to provide quarterly reports to the court.

The Moratorium Motion
Another state court document is a "Motion for Moratorium on Policy Surrenders and Other Relief." The North Carolina attorney general's office asked the court to issue an order granting a moratorium on cash surrenders, annuitizations, and policy loans, and ordering development of a plan for policyholders with legitimate hardship claims.

The Moratorium Order
Another state court document is an "Order Granting Motion for Moratorium on Policy Surrenders and Other Relief." Judge Ridgeway granted the motion and ordered the rehabilitator to adopt a moratorium and implement a policy for legitimate hardship claims.

Secrecy of the Consent Orders
When I asked the North Carolina Department of Insurance for the state court documents, a spokesperson provided them promptly. When I saw them, I requested the three consent orders referred to in the verified petition. The spokesperson said the consent orders are confidential pursuant to Section 58-30-70 of the North Carolina General Statutes. That section reads:
Confidentiality of hearings. In all proceedings and judicial reviews thereof under G.S. 58-30-60 and G.S. 58-30-65, all records of the insurer, other documents, and all Department files and Court records and papers, insofar as they pertain to or are part of the records of the proceedings, shall be and remain confidential except as necessary to obtain compliance therewith, unless the Court, after hearing arguments from the parties in chambers, orders otherwise; or unless the insurer requests that the matter be made public. Until such Court order, all papers filed with the clerk of the Court shall be held by him in a confidential file.
The section does not mention consent orders, and I do not recall any consent order being deemed confidential. I do not plan to appeal the denial. However, I would welcome comments from readers with legal experience in freedom-of-information matters.

The Federal Criminal Case
In No. 309 (April 17, 2019), I posted an item about a federal grand jury indictment of Greg Lindberg and three others for criminal wrongdoing. On April 2, the court unsealed the indictment. On April 3, a docket call was set for July 1. On May 2, the docket call was reset to July 15. Initially the case was assigned to District Judge Max O. Cogburn, Jr. On June 17, the case was reassigned to District Judge Kenneth D. Bell. On June 27, the case was reassigned back to Judge Cogburn and the docket call was reset to September 16. (See U.S.A. v. Lindberg, U.S. District Court, Western District of North Carolina, Case No. 5-19-cr-22.)

General Observations
I plan to follow developments in the rehabilitation proceedings related to Lindberg's insurance companies, and in the proceedings related to the federal criminal case against Lindberg and three others. I anticipate that the proceedings will be lengthy.

Available Material
I am offering a complimentary 46-page PDF consisting of the verified petition (25 pages), the rehabilitation order (9 pages), the moratorium motion (7 pages), and the moratorium order (5 pages). Email jmbelth@gmail.com and ask for the July 2019 Lindberg package.

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