About Mark Pace

T. Mark Pace

When there is an immediate need for cash at the time of someone’s death, it has been my experience that life insurance, when properly acquired and managed, is one of the best tools ever invented for the creation and transfer of wealth. However, life insurance is rarely acquired properly and, because it is mistakenly assumed to be a "buy and hold" asset, it is never managed. The resulting financial disasters are far too frequent and completely avoidable.

If you would like to learn more about any Pig-in-a-Poke blog posts or discuss any other life insurance issues, contact T. Mark Pace at Mark@objectivereview.com

 

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Pace’s Pig-in-a-Poke

About Pace’s Pig-in-a-Poke

Pace’s Pig-in-a-Poke, provides an arena for sharing the four great passions in my life. My three foundational passions are:

  1. Invest in yourself first;
  2. The genius in all of us, and;
  3. We can all live a long healthy life.

These three support my life work and my fourth passion; LIPM™ (Life Insurance Property Management).

As the blog title suggests, my focus is on debunking all of the myths, misuse, and muddled thinking that has accumulated in the life insurance industry. And, from time to time, I will go outside of the specific world of life insurance and share my views on my other three passions.

I hope you find my blog worthy of your attention, informative, and occasionally inspirational. I welcome your comments, questions and suggestions.

Mark Pace

Beware of wolves in sheep’s clothing crying “wolf”

The Poke

It starts innocently enough.  At or near the end of October, an agency owner walks into a life insurance agent’s office and asks, “So, what do you think your year end numbers will be?”

By mid-November, the agent has made several urgent calls that go something like this: “Mr. Smith, you’re a great client so I thought you would appreciate a heads up on the rate increases the insurance carriers are planning to push through in January.”

And, by early December the agent’s casual comment to every prospective client is, “You know, the big insurance companies are under a lot of pressure to make their year end numbers. We can get a great deal if we apply before the end of the month.”

Sometimes the rate increases are real and sometimes… well, they are not so real. This year, they happen to be real for most death benefit guarantee policies and some term policies.

But, why would anyone believe it when each year-end sees too many agents donning sheep’s clothing and crying “wolf”? Even the most scrupulous of agents find it difficult to protect their credibility because not playing the game is a difficult choice when some policy types are actually going to be significantly repriced or taken off the market all together.

It’s a tough spot to be in. But, if you believe that life insurance, when there is an acknowledged need and desire for cash at the time of someone’s death, is the greatest tool ever invented for the creation and transfer of wealth, here’s some information that could help you escape the conundrum of wolves in sheep’s clothing crying “wolf”.

The Poke Exposed

In September, 2011 regulators raised the issue with the NAIC’s Life Actuarial Task Force (LATF), which then issued an AG 38 statement of caution about the possibility some insurers were holding “reserves that do not properly reflect the full benefits of the secondary guarantee as required by the law, regulation and guideline.”

AG 38 is real; there is going to be a rate increase of a significant amount for some of these products and a few of them will no longer be offered. But, as usual, if we look behind the hype we find there is much more to the story.

In the past we have seen a lot of 1035s transferring the cash value out of old contracts into newer GUL products that either have the same face value and a significantly lower premium or the same premium and a significantly higher death benefit. And, because people think of insurance as a commodity, they find it reasonable when an advisor says: “Hey, this new policy is a death benefit guarantee product just like your old policy, so why not go for it?”

Here’s why not: the insurance companies built in a lot more margin for error with the older GUL contracts than the new ones (i.e.: The shadow accounts built up more equity value in older GULs). This means insurance owners and their advisors have a lot more flexibility in terms of premium adjustments. The death benefit is not jeopardized even though you can manipulate premiums in somewhat the same manner as regular universal life… providing you know what you are doing.

Simply said, old death benefit guarantee policies are really great contracts and they deserve more credit than the receive. However, from the carrier viewpoint, selling a lot of overly-generous policies is bad business. So, in response, they created what appeared to be more affordable products in terms of premium, while they actually gutted product value by making the shadow accounts less generous. They sharpened their shadow account pencils on every new policy series to the point where there is now virtually no margin for error.

In fact, the carriers ran out of room between cash value and shadow accounts several years ago. As the shadow accounts became less forgiving, each generation of contracts became less flexible. With each new generation, the chances major policy issues and failures may occur increased geometrically and the cost of addressing policy issues skyrocketed. The carriers found they had reached a point where raising premiums was the only option, which brings us to where we are today.

Pace’s Poke Remedy

We never met an insurance policy we didn’t like… and that includes the “last-chance-at-this-price” death benefit guarantee products currently being sold. Frankly, if you consider the advice and writing Dick Weber and I have offered on this product type, you will realize we have contributed to billions of dollars of death benefit guarantee purchases.

It is not a bad product, you just have to be certain it is appropriate for your clients’ needs and, above all, you have to manage it over the life of the policy.

Successful management of these assets is made possible when you embrace the fact that permanent life insurance is very valuable property and each policy type comes with complicated Performance Management Rights. Understanding what these rights are and how to use them throughout the life of the policy is the only way to optimize performance and ensure your clients do not waste any of the money they spend on life insurance.

Provide a protocol

When it comes to dealing with wolves in sheep’s clothing crying “wolf”, or avoiding becoming one, there are some key strategies to consider.

Ideally, the process that leads to a purchase would begin with the development of a Life Insurance Performance Management protocol. A protocol not only records the decision-making that leads to acquisition, but also provides ongoing direction for managing performance throughout the life of the policy or portfolio of policies. (This is very similar to the role an investment policy statement plays in directing how an investment portfolio is managed.)

With a protocol in place, any conversation about replacing a policy with something new would have to include an objective analysis of the new policy’s competitiveness in comparison to what is already owned and an analysis of the probability of it actually meeting the owner’s needs.

And, even if replacement is not the topic of conversation, the protocol enables advisors to continuously measure the performance of existing policies against the needs and wishes of its owner.

The most important outcome of any acquisition conversation – replacement and/or new acquisition – is greater confidence that the right product has been chosen. To achieve this outcome the following questions must be asked:

  1. What is the client’s current sensitivity to price?
  2. Will premium flexibility be required to accommodate the client’s future financial needs?
  3. Is the ability to accelerate cash value growth desirable?
  4. Is the ability to increase the death benefit desirable?

So, if you wish to avoid falling prey to wolves in sheep’s clothing crying “wolf” (or joining them!), take the time to understand and assess the value of the Performance Management Rights within in the life insurance property already owned or being considered for purchase by your clients and insist on the creation of a Life Insurance Performance Management protocol.

For more information on Performance Management Rights, LIPM™ Protocols, and how you can help your clients fully realize the value of their life insurance assets, visit the Getting Started section of our website. We provide significant free value to help qualified advisors learn how to deliver Life Insurance Performance Management™ (LIPM™) to their clients.

Educational Opportunity

If you want to protect and enhance your role as an exceptional life insurance advisor, attend our next webinar called:

Inside Level 5 Underwriting: A how-to guide for providing awesome advice

Thursday, November 29, 2012
From 12:00 to 12:45 p.m. EST.

Click here for more information and to register.

 

About the author

Mark Pace
Mark Pace
When there is a need for immediate liquidity at the time of someone’s death, it has been my experience that life insurance, when it is properly acquired and managed, is one of the best tools ever created for the creation and transfer of wealth. However, in my 35 plus years of experience, life insurance is rarely properly acquired and never managed… thereby creating a monumental financial disaster for many individuals that should never happen.

If you would like to learn more about this Pig-in-a-Poke subject or discuss any other life insurance issues, contact T. Mark Pace at Mark@objectivereview.com

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