Monday, March 9, 2015

No. 87: Life Insurance Replacement—Let's See the Numbers

In No. 69 posted September 30, 2014, I discussed the debate over the nature of sales illustrations that should be allowed in the promotion of indexed universal life (IUL) policies. I offered readers a 23-page "IUL package" of documents relating to the debate.

Recently a reader sent me a request for the IUL package. He made some comments that led to an exchange of e-mails. He said he is
genuinely helping owners of older, permanent policies change or restructure them away from the too often "dead money" of old policies into something current much more powerful. My default carrier is Penn Mutual and my nemesis is NML [Northwestern Mutual Life] because of their too successful tactics of being your best friend while picking your pocket.
When I sent him the IUL package, I said I was puzzled by his remarks. I asked what he meant by "something current much more powerful," his "default carrier is Penn Mutual," and NML "picking your pocket."

He responded: "Penn Mutual came highly recommended and my experience has been consistent with those recommendations." He also said:
I have found numerous people/clients with 15-20+ year old permanent policies who can get much greater death benefits and ultimately cash value (after recovering the initial reduction) by 1035ing the cash into a new policy. The old policies are consistently projected to perform much more poorly than a new one but the existing carrier virtually never offers to restructure it unless at risk of losing the policy. There's no reason an old policyholder should accept below market returns for life but typically don't know how to proceed. Mortgages are refinanced frequently but the lack of transparency and self interest make refinancings in insurance much less common.
Most old policies can be improved including NML. They can be greatly improved on but the tenacity (and mendacity) of the agents (through badmouthing other carriers, misrepresenting returns, etc.) frustrates me because they too often succeed in their interests but at the expense of the policyholders in whose interests they claim to work.
I responded that I am not from Missouri but still need to be shown. I asked him to consider a man who bought a $100,000 traditional whole life policy from NML ten years ago at age 35. I asked him to give me figures that show how the man could improve his financial position today by replacing the NML policy through a 1035 exchange with a new Penn Mutual policy. In response he said:
Can't take the time to do that right now, but the approach would be to compare an illustration of a new policy using cash value transferred, paying the same premium, same age etc. vs. in-force illustration of existing policy. It may not be perfect but the improvement is usually dramatic. Often when the policyholder requests the in-force illustration, the agent of the carrier offers to improve the policy.
I said I still need to see the numbers. He said he understood but can't take the time to do it now. He said he will try to do it sometime soon.

General Observations
I have often said some replacements are justified from a price standpoint, some are not justified, and some situations are a toss-up. I said serious consideration should be given to replacement only when it is clearly justified.

The unwarranted replacement situation that I discussed in No. 76 (posted December 15, 2014) admittedly was an extreme case. However, I have never seen a situation where the replacement of a seasoned cash-value life insurance policy issued by NML was justified from a price standpoint. That is what prompted me to ask my reader to show me the numbers. I hope that some day soon he will perform the analysis I requested.