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The Life Insurance Deception

Back in the old days, insurance companies sold you insurance.

You paid them a premium. They paid you on your claims. Simple.

But some people in the industry came to the conclusion that just selling insurance wasn’t good enough. Mutual funds were growing like gangbusters. Savings and loans were hot on the tail of American savers. Even conservative banks were spreading their wings. Insurance executives figured they wanted a piece of the revenues too.

“Instead of just selling insurance policies, we can sell investment programs with a veneer of insurance,” they reasoned. “Instead of just watching money come in one door (as premiums) and go out the other door (as claims payments), we can actually hold onto people’s money — like a bank or mutual fund,” they figured.

They wanted to expand beyond the boring business of selling insurance to the exciting business of selling investments. They wanted to be in the investment business. Trouble is, they had little experience.

Their first big blunder: They violated a cardinal rule of the investment industry — never guarantee results.

Anyone who’s ever been in the investment industry for any length of time knows that guaranteeing results on an investment is a no-no. On a bank’s Certificate of Deposits, maybe. But an investment program, never.

Yet that’s what hundreds of America’s largest life insurance companies did from their first day in the investment business. And as we’ll show you in just a moment, it got them — and their customers — into big trouble in the early 1990s.

You see, investment companies, like today’s mutual funds, had learned from previous failures in the past. They’d been through hard times before — in the stock market panics of the early 20th century, in the Crash of ‘29, and during the Great Depression. They learned, the hard way, that you cannot predict the future. And since you cannot predict the future, you cannot guarantee your customers investment results. When you do, it invariably leads to more blunders, even lying and cheating.

That’s why, after the Depression and World War II, the Securities & Exchange Commission established some strict rules and guidelines about this. They said, in effect: “If you run an investment company, “you cannot — must not — promise your customers a high return on their investments. In your advertising materials, or in your sales pitches, you can’t say that a particular result is ‘certain,’ or ‘guaranteed.’”

That’s why you’ll never see a mutual fund with a name like “First Guaranteed Mutual Fund,” or even “Safe Mutual Fund.”

But right from the starting gate, they began to offer investment products — like deferred annuities — with guaranteed” high rates of return.

Later, the insurance companies created “Guaranteed Investment Contracts” or “Guaranteed Insurance Contracts” — called GICs — and sold those to large institutional investors.

Not coincidentally, right around that time, interest rates in the United States were unusually high. Even U.S. Treasury bond yields were close to double digits. So the insurance companies though it would be easy to deliver on their promises to investors. All they had to do was take the money from investors, put the money into bonds with high fixed rates of return, take out a share for themselves, and then pass the rest on back to investors.

But most failed to give adequate consideration to what to do if interest rates and bond yields went down ... which is exactly what happened.

This presented a serious dilemma. The insurance companies had guaranteed to pay a high yield, say 10%, but the best they could earn on safe bonds was maybe 9% or 8%.

So how do you deliver high guaranteed yields when interest rates are going down? There’s only one way: You have to buy the bonds of smaller, or financially weaker, companies.

Consider, for a moment, what bonds are and you’ll immediately understand the situation they were in. When you buy a bond, what you’re doing, in essence, is making a loan. If you make the loan to a strong, secure borrower, like the United States government or a major blue-chip corporation, you’re not going to be able to collect a very high rate of interest.

If you want a truly high interest rate, you’re going to have to take the risk of lending your money to a smaller or less secure borrower.

What’s secure and what’s risky? In the corporate bond area, everyone — in or out of Wall Street — has long ago agreed to use the standard rating scales established by the two leading bond rating agencies — Moody’s and Standard & Poors. The two agencies use slightly different letters, but their scale is identical — triple-A, double-A, single-A ... triple-B, double-B, single-B ... etc.

If a bond is triple-B or better, it’s “investment grade.” That’s considered relatively secure. But if the bond is double-B or lower, it’s “speculative grade,” or “junk.” It’s not garbage you’d necessarily throw into the trashcan. But in the parlance of Wall Street, it is officially known as junk.

Our point is that there is clear and specific, universally-accepted definition of what’s a junk bond and what isn’t. A junk bond is any bond with a rating of double-B or lower. And that’s what insurance companies started to buy — junk. They bought double-B bonds. They bought single-B bonds. They even bought bonds that had no rating at all, but which, if rated by Moody’s or S&P, would most probably be classified as junk.

Promising guaranteed high yields was the first big blunder ... which then led to the second big blunder, junk bonds ... which, like a modern-day Pinocchio, then lead to the deceptions you’ll see in just a moment.

Despite the obvious risks, insurance companies wanted to continue growing this very lucrative new business line. They wanted to offer high guaranteed yields to even more investors.

And a few insurance companies — such as Executive Life of California, Executive Life of New York, Fidelity Bankers Life and First Capital Life — took the concept one step further. These companies weren’t just reluctantly forced to buy junk bonds to fulfill old promises. Their business plan was deliberately based on junk bonds from day one.

They contracted with large Wall Street brokerage firms to sell their plans to investors through their extensive branch networks. They attracted investors with their promise of high, guaranteed yields. They became giant, junk bond insurance companies.

The key to their success was to (a) keep the junk bond aspect quiet while (b) playing on the faith people still had in the inherent safety of insurance. But to make it work, they needed two more elements — the blessing of the established ratings agencies, and the cooperation of the insurance commissioners.

The blessing of the rating agencies was relatively not difficult. Indeed, for years, the standard operating procedure of the leading insurance company rating agency, A.M. Best & Co., was to “work closely” with the insurers. If you ran an insurance company and wanted a rating, the deal that Best offered you was very favorable indeed. Best said, in effect: We give you a rating. If you don’t like it, we won’t publish it. If you like it, you pay us to print up thousands of rating cards and reports that your salespeople can use to sell insurance.

Three newer entrants to the business of rating insurance companies — Moody’s, Standard & Poors and Duff & Phelps — offered essentially the same deal. But instead of earning their money from reprints of ratings reports, they simply charged a big fee for each rating — anywhere from $20,000 to $40,000 per insurance company subsidiary, per year. Later, Best decided to change its price structure to match the other three, charging the rated companies similar up-front fees.

Not surprisingly, the rating agencies gave out good grades to many companies that did not deserve one. At A.M. Best, the grade inflation went so far that few in the industry would buy insurance from a company rated “good” by Best. Nearly everyone (except most customers) knew that Best’s “good” might actually mean bad.

Soon, the grade inflation even began to infect Best’s “A” grades. The decision makers at Best were so intent on working with the companies, they became reluctant to hurt the companies with a downgrade, despite obvious problems such as huge junk bond portfolios. So instead of downgrading, Best’s executives often told their analysts to start using lower case letters next to their “A” grades — “moderators” like “w” for “watchlist,” or “c” for “conditional.”

Best said these footnotes were very important. But at the same time, Best allowed the insurance companies to continue advertising the “A” ratings to the public without the footnotes. In effect, Best had two sets of ratings — one for customers and one for professionals.

How Executive Life Got Everything It Wanted — Almost

Executive Life of California was not satisfied with its rating from Best and went to Standard & Poors to get an even better rating.

Moody’s, the least liberal of the established rating agencies, was surprised. They couldn’t believe Carr got an AAA from S&P. So they did something they rarely do. They decided to go ahead and rate Executive Life with no request from Carr and no payment, giving them a grade of A1, which wasn’t as good. But Executive Life had gotten everything it needed from the insurance ratings agencies.

Getting the insurance regulators to cooperate was not quite as easy. In fact, the state insurance commissioners around the country were becoming so concerned with the industry’s rising investments in junk bonds and unrated bonds, they decided to set up a special office in New York — the Securities Valuation Office — to monitor the junk bond situation.

What’s a junk bond? The answer, as we’ve explained, was very simple: Any bond with a rating from S&P and Moody’s of double-B or lower. But the insurance companies didn’t like that definition. The commissioners struggled with this, but amazingly, they finally obliged.

It was like rewriting history to suit the new king. Rather than use the widely accepted standards, they established a new bond rating system of their own that misclassified the bulk of the junk bonds as “secure bonds.” Result: The insurance companies kept buying more and more junk, and no one had any way of knowing how much.

This went on for several years. Finally, however, the insurance commissioners realized they simply could not be a party to this deception. They adopted the standard double-B definition, and reclassified over $30 billion in “secure” bonds as junk bonds.

Soon thereafter, several of the the large junk bond insurance companies failed: Executive Life of California with 452,000 policyholders, Executive Life of New York with 102,000 policyholders, Fidelity Bankers Life with 373,000, First Capital Life with 268,000 — each and every one dragged down by large junk bond holdings.

At one company after another, the insurance commissioners took over the operations, and declared a moratorium on all cash withdrawals by policyholders. Overall, the failed companies (including Mutual Benefit Life which was caused primarily by real estate speculation) had 5,950,422 policyholders, including individuals and groups. And among these, 1.9 million involved a cash value.

If you were among these 1.9 million policyholders, your money was frozen. You could not cancel your policy. Nor could you borrow on your policy.

The state insurance guarantee associations, which were supposed to make policyholders whole in case of an insurance company failure, choked, and then went limp. Reason: They had no money. Unlike the FDIC, the insurance guarantee association in your state usually doesn’t have money in the kitty ahead of time; it raises the money from surviving insurance companies after a failure.

What You Need to Know
About Life Insurance

When you buy a policy to protect yourself against a fire, it’s called fire insurance. When it’s for an accident, it’s accident insurance. So when you want to protect your family from the consequences of your death, it should be called “death insurance,” right?

Yes, but long ago, insurance salespeople discovered that no one wanted to talk about their death — let alone buy insurance for it. So taking a chapter out of Orwell’s 1984, they called it “life insurance” instead.

It didn’t seem to help much, though. Life insurance was still a very hard sell, and agents who pushed it too hard got a bad reputation for bringing up unpleasant subjects. “Want a row of seats all to yourself on your next flight to Chicago?” went a popular joke. “Then just tell your neighbor you sell life insurance.”

Prudential — the Rock-of-Gibraltar-largest-insurance-company-in-the-world Prudential — came up with another very “creative” solution. They figured out a way to disguise the life insurance as an annuity, set up a big sales force trained to obfuscate the real nature of the product and sell it to millions of investors. All annuity policies sold by insurance companies do have a small life insurance component. But that’s a far cry from being an actual life insurance policy.

It took many years of litigation before the regulators caught up with them. Prudential execs said they were sorry. The regulators said that wasn’t quite enough to make amends. After much heated debate and negotiation, the company belatedly agreed to pay $2.7 billion in restitution to more than a million maligned customers, many times more than the largest previous settlement in insurance history. They sold insurance as a “retirement plan,” failing to disclose the risks and using policy illustrations, which projected fabulous dividend accumulations as foregone conclusions.

Meanwhile, Equitable Life Assurance Society was fined $2 million for selling more than $100 million of illegal life insurance policies. If the larger companies can do it, just imagine what the smaller, fly-by-nights are getting away with!

These events reveal serious issues in the insurance industry today:

Problem #1. The shroud of secrecy. The junk-bond related faioures and the giant Prudential scam are just two examples of the secrecy that still surrounds the entire life insurance industry. It’s hard to find out how much a product really costs. It’s hard to figure out how much you’re paying in commissions. It’s hard to know what the true yield will be. And unless it’s term insurance, it’s impractical to compare the products of all competing insurers side by side.

People in the insurance industry who have lived with this problem all their lives don’t pay much attention to it. But anyone who compares insurance to mutual funds or ETFs is appalled. “Can’t you tell me what your 1-year yield is? Can’t you tell me what your expense ratio is? Can’t I compare your policy with a hundred other policies?”

The answers: No. No. No. You can’t do anything even close.

How does the insurance industry get away with this secrecy? By always maintaining that thin veneer of insurance on their investment products. They have to “underwrite” the policy — decide whether or not you’re worthy of their insurance coverage. So their message, in essence, boils down to: “You can shop around all you want. But first, we have to decide whether or not we will accept you.”

If you’re shopping for a mutual fund, you will get a prospectus that discloses all the risks. If you’re shopping for a cash-value life insurance policy, you get a policy illustration that often promises much but discloses little.

What about the actual insurance contract itself — the actual product you’re buying? You don’t get to see that until after the underwriting process is complete. You’d have to go through this same process with several companies before you could make a comparison. Shopping around becomes so impractical as to be virtually impossible.

Problem #2. A patchwork of regulation. Insurance companies are regulated by 50 state insurance commissions, most of which are too small to deal effectively with the most pervasive problems in the industry. Even the largest state offices, with the biggest funding and staff, pale in comparison to the giants of the industry. If New Jersey, for example, conducted a thorough audit of Prudential, they’d probably be doing nothing else for several years.

Problem #3. Deceptive practices. The problem of deception in the insurance industry is rampant, and the attempts made by Joseph M. Belth, the nation’s leading insurance industry critic and watchdog, illustrate how deeply ingrained the deceptions really are.

Belth began with the Society of Actuaries. He hoped that, since actuaries are the insurance company specialists who calculate the costs and benefits of insurance policies, they’re the ones who would know exactly what the deceptions are and who would be in the best position to nip those deceptions in the bud. So Belth wrote the chairman of their professional conduct committee, asking a very simple and pointed question:

“Is it the professional responsibility of the actuary to take positive action to eradicate deceptive practices, or is it the professional responsibility of the actuary merely to refrain from endorsing deceptive practices.”

The actuaries were perplexed. They debated for a full day on how to respond. But at the end of the day, they concluded that the only possible answer they could give Belth was, ironically, that they were unable to answer his question. The reason, according to one of the actuaries who participated in the debate, shows you just how serious the problems really are in the insurance industry:

“If the committee concluded it is the professional responsibility of the actuary merely to refrain from endorsing deceptive practices, the Society would become the laughingstock of professional organizations. On the other hand, if the committee concluded it is the professional responsibility of the actuary to take positive action to eradicate deceptive practices, the Society would condemn many members to being fired by their companies.”

Belth proceeded to write stinging letters to the CEOs who presided over deceptions and to the state regulators who were supposed to do something about it. He testified before the Senate Subcommittee on Antitrust and Monopoly, telling them that “the deceptive sales practices found in the insurance industry constitute a national scandal.”

That was over three decades ago; and today, Belth is still protesting, still writing and still testifying. But virtually nothing has changed. Until this very day, “consumers are trapped. They are victimized by a variety of deceptive methods for portraying the price of the protection component and the rate of return on the savings component in life insurance.” Here are a just a few of the most common examples:

Account churning. If you’ve built up a lot of cash in your policy, unethical agents may try to sell you more insurance or switch you to a policy offering a higher yield. Your agent calls you and says he has found something wrong with your current policy. “But if you just switch to the one he just found for you, you’ll be just fine,” he says. Further, he may sweeten the enticement to switch by telling you your premium will be lower and your death benefit will be higher. What he doesn’t tell you is that he gets another fat commission, which is going to be paid out of your cash values, depleting your investment funds even more than the bad policy.

The mystery of the vanishing premium. The pitch went something like this: “There’s this new policy where the rate of return from the investments is projected to be so fabulous that you will probably be able to stop paying for future premiums after a couple of years—a decade, at most.” Unfortunately, the sky-high projections weren’t accurate (or guaranteed), and sooner rather than later you’d get a bill in the mail for your premium. It hadn’t vanished after all.

The “old-losses shuffle.” When you buy into a new policy, you are effectively buying into the company’s existing pool of investments. If those investments have unrealized losses, it is possible that you will get stuck with those losses, even though they were incurred before you came on board. Only thorough analysis of a company’s holdings will reveal such a problem.

Selling off your policy. Your insurance company can sell off your policy to another company without your consent. For example, let’s say your insurance policy is with company X. One day, you get a notice in the mail that your policy has been sold to Company Y. But you do not want to do business with Company Y because it’s low-rated. The industry’s response: Sorry, you have no choice.

Policy illustrations. Let’s say you’ve got $10,000 to invest. You decide what your goals are. You research some mutual funds on the Internet and compare their 1-year, 6-month and 30-day performance. You send for the prospectuses in the mail, or download them from the Web. You check out their fees. And you make a decision. You can buy the fund directly or you can go through a broker. Then, any time you want to see how your investment is doing, you can check in the daily newspaper or search on the Web.

Now, let’s say you want to buy a cash-value life insurance policy. First and foremost, you have to go to an agent. With very few exceptions, unless you go through an agent, you will get nowhere.

But before you can ask about the product, the agent will make sure the shoe is on the other foot from the very beginning. He will start asking you questions about your medical history, your career and even your personal lifestyle. He will make it abundantly clear that the burden is on you to prove you are worthy of the privilege.

Instead of giving you a prospectus, he runs one of those policy illustrations we told you about a moment ago. Unlike a prospectus, the illustration is long on big-picture projections and short on specific information. Typically, it tells you little about the allocation of your funds or the breakdown of fees. It discloses nothing about the risk or the financial stability of the insurer. It tells you nothing about the commissions your broker will make.

Rather, its primary purpose is to give you scenarios of future performance based on assumptions about inflation and interest rates. Some companies use conservative assumptions. Some companies try to tweak the results to make the policies look better. And some go off the deep end, making assumptions that make their policies really shine.

In the January 2000 report of the Consumer Federation of America, the nation’s largest consumer group, author James Hunt wrote: “For several years, the National Association of Insurance Commissioners (NAIC) has struggled to draft model rules for life insurance policy illustrations and related sales material ... Regrettably, the rules, which were essentially written by life insurers themselves, offer little help to consumers and may add to their confusion.”

You are wary of this. So you ask to see the insurance contract. You figure it’s your right to know what you’re buying. But your agent says you can’t do that yet. You first have to wait until the underwriting process is complete, and you have been accepted by the insurance company. Then they’ll let you see the contract. You’ve already put a lot of time and effort into this project. You don’t want to back out now. So you sign and pay the up-front fee.

You ask the agent what his commission is. His response: “Don’t worry about that, the company writes my commission check.” He doesn’t tell you that no matter who writes the physical check, the money comes out of your pocket.

A few months go by, and you want to see how well your investment is doing. You open the newspaper but can’t find it. You search the Web and still nothing. Except for cryptic statements from the insurer, you have no way of tracking your performance.

What To Do

Right now, you have to use your own common sense and smarts to cope with this industry:

Step 1. Decide whether or not you REALLY need life insurance. Some people need it. Some don’t.

The purpose of life insurance is to replace a deceased spouse’s income, to cover a mortgage, to pay for a child’s education, or pay living expenses during early years following death. Or it could be to provide an inheritance to a needy child or other relative that you were supporting. If you’re not supporting anyone other than yourself, you don’t need insurance to replace that support.

Let’s say you’re a widow or widower with no children. You are in good health and have a comfortable lifestyle. What do you need life insurance for? You probably don’t.

Or suppose you do have heirs. Do you need life insurance to help offset the costs they will have to pay in estate taxes? Maybe. But if your estate is under $675,000, it’s not subject to estate taxes. And if Mr. Bush has his way, all estate taxes could be eliminated. The most your children may need is some money to cover for funeral and burial.

Moreover, all that money you might have wasted on life insurance premiums may be much better spent on your own health, so you can live a longer and more enjoyable life. Plus, why not spend some of it on your children or grandchildren’s education so they can be even more self-sufficient when you’re gone?

Bottom line: If you are not financially responsible for someone and you are not going to have a large federal estate tax bill, the agent who gives you a big pitch for life insurance is wasting your time.

However, if you are responsible for your heirs’ well-being, they do need you for their education, their mortgage, or any other large expenses, then some life insurance may make sense — provided you can afford the premium, which leads us to ...

Step 2. Make sure it’s affordable. Your desire to provide for your children and grandchildren with some extra money is a kind and generous gesture. But remember: It may not be cheap. And it’s certainly not free. Your premium money has to come from somewhere. Our advice: If you have to sacrifice your own health care or adjust your lifestyle just to pay your premium, it’s not affordable and not for you.

“But suppose,” you ask, “even though I don’t really need insurance, I can afford it. And suppose I really want to do something special for my children or grandchildren. Then what do I do?” Then consider giving them the money while you’re still alive and able to enjoy their gratitude. Or contribute directly to their IRAs or other retirement accounts.

For example, you could invest in one of the new “Section 529” education plans. You can open an account in any state, which can be used for tuition at any age, in any state, and in any educational institution — not just college. Further, an individual can have more than one Section 529 account. So if you want to set one up for a grandchild, you can do it separately from any investment or savings plans that the child’s parents might have.

Step 3. Ready to buy life insurance? OK. Then you’d better get started learning all the jargon. Do you know what a “paid-up addition” is? How about a “mortality charge”? “Waive-of-premium rider”? If you don’t, you’re in good company. Most consumers who try to learn about life insurance are overwhelmed by the jargon. As a result, many simply bow to agents’ high-pressure tactics without knowing what they are buying or how much it costs.

Typically, once the agent has his foot in the door, he begins speaking in a language that may as well be Sanskrit. And because most people are embarrassed by their ignorance, they do not ask questions.

Actually, though, the fundamentals of life insurance are not that complicated. You are the insured. You buy the policy by paying premiums that entitle you to a specific death benefit.

The part of your premium that goes to the life insurance protection is known as the mortality charge. The rest may go into savings. When you die, the proceeds of the policy (the death benefit) go to whomever you have chosen as the beneficiary. Those proceeds can often be paid out as a lump sum or an annuity (an annual stream of income) and they are tax-free to the beneficiary.

Step 4. Decide whether you want to (a) just buy insurance, or (b) buy insurance and an investment at the same time. If you’ve read this far, you can probably guess which one we recommend: With rare exceptions, you should stick with buying insurance from insurance companies and investments from investment companies.

To buy pure insurance, stick with term life insurance, and avoid permanent or cash-value life insurance. In addition, some term policies are guaranteed renewable, and give you some of the advantages of permanent insurance without the investment aspect.

As you’ve seen, insurance companies are usually not that good at handling your money. And even if they were, they just don’t disclose the facts you need to be a prudent, informed investor. Another plus: Term insurance is less expensive than permanent insurance.

Term insurance can give you all the death benefits you need. And if you want to save more money, you can simply take the difference between its premium and the premium of a permanent policy, and invest it elsewhere, following our guidelines in our other articles. Even if you have exhausted your tax-deferred retirement account options, you can always purchase a variable annuity.

We repeat. Stick with the KISS principle: Buy insurance from an insurance company, and investments from an investment company.

Step 5. Figure out how much life insurance you need. Remember, the whole purpose is to help your heirs cover critical expenses after you’re gone. So if you — or they — already have resources available to partially fund those needs, you need coverage strictly to fill any gaps, and perhaps give them a bit of an extra cushion.

Ask yourself: What expenses are you trying to cover? Is to pay off a mortgage? If so, it’s fairly easy to estimate how much you’ll need.

If it’s to provide your spouse with enough money to maintain his or her current lifestyle, that’s a bit more involved. Take a look at your current ages and life expectancies. Then consider your health, and make any adjustments that feel right for you. It’s going to be a rough estimate. But that’s the best you can do.

If you need some help, check It helps you calculate the amount you contribute to your family in the form of net earnings, health insurance, and some intangibles, such as certain things you do in the home.

Step 6. Decide which type of term insurance you want. Here are your options:

Annual renewable term life insurance. You buy it one year at a time, and your annual premium is recalculated each year based on your current age and life expectancy. Naturally, as you grow older, the premium will go up each year.

Level premium term life. The idea is that you lock in your premium rate for a longer time period — 5, 10, 20, or even 30 years. That rate is established just once at the beginning of the policy, based on the average annual cost for the death benefit over that time. And it’s the same during the entire term, regardless of your health. Or so they say . . .

The reality is that some companies do not guarantee the premium for a 20- or 30-year term. The guarantee is often for only five years but you may not find out about that detail unless you read the fine print. Ask questions, read the entire contract, make sure you understand everything, protect yourself.

Step 7. Already in a permanent life policy? Then learn about what they’re doing for you — or to you. There are two main types of permanent insurance: whole life and universal life, plus several variations of both. The one thing they all have in common is they all have a death benefit and some kind of investment vehicle that provides for tax-deferred growth of your money.

Remember: The difference between term and permanent insurance is that permanent insurance has the added component of cash value (also known as surrender value). A percentage of each of your payments goes into the savings account that you own, and it gradually grows until it equals the death benefit at age 100. This is known as the maturity of the contract (or endowment of the policy).

If you would like to tap into your policy before it matures, you can take out a policy loan. It sounds great. But it’s your money, and they still charge you interest for it.

And if you would like to terminate the policy before maturity, you will get the cash value (which is not the same as the death benefit). But you may also get socked with a big surrender charge.

Warning on surrenders: Remember we told you that most agents will not reveal how much they’re making in commissions. One reason is that, on many life insurance policies, it is equivalent to 100% (or more!) of the first year premium. Therefore, if you surrender your policy just after the first year, your cash value could be zero because all of your first premium payment went to commission. Some companies may pay the commission out over the first couple of years, and you can accumulate a bit more cash value. But most don’t.

Some different kinds of permanent life insurance:

Whole Life: With rare exceptions, we do not recommend the purchase of whole life insurance for anyone. The fact is that you have no control over the investments within the policy. They are not subject to the regulations of the SEC and the FINRA. Furthermore, if the insurance company becomes insolvent, your investments go down with it.

Universal Life: Universal life provides you with flexibility to decide how much your premium payments will be and how frequently you will make them. And you can even increase or decrease your death benefit. In other words, as your financial situation and your insurance needs change, your policy can change to accommodate. Here’s how it works: Your premium is split out into

1. A mortality charge — the cost for the life insurance protection

2. Expenses, including commissions and administrative fees

3. A savings element ­— the portion that goes toward your accumulating cash value

As you pay your premium and accumulate your cash value, interest is credited to that cash value. As long as there is enough in your cash account to pay for your monthly expenses, you don’t have to put any more money into it.

Now, let’s step back for a moment to a place where many people make a bad decision. Interest is credited to your cash value after your mortality charge and expenses are deducted. That interest rate could be one of two types: current interest, which is a rate that is declared by the company and dependent on the company’s performance with the current market conditions, or a guaranteed minimum specified in your contract.

This is important because many people will purchase a policy based on those policy illustrations that make assumptions about how much your cash value will increase under the most ideal market conditions. That last detail can often be omitted when an insurance agent is trying to sell a policy. Therefore, many people make their purchase decision based on erroneous assumptions that may be unlikely to pan out. They buy a policy because they are told that it will probably increase to a certain dollar amount, when in reality that kind of increase may simply be unlikely to happen.

Variable Universal Life. This is a variation on universal life with one addition: It lets you decide not only how much money you’re going to invest, but where your money is going to be invested. Like with a variable annuity, your money is kept in separate accounts, segregated from the insurance company’s assets. That’s a plus. And, as with a variable annuity, you assume the investment risk. If you choose great investments, you win. If you make bad choices, you lose.

Problem: The commission and other expenses for these policies can be a big drag on your portfolio.

Step 8. Take full advantage of your “free-look period.” This is a 30-day window during which you can review the policy and send it back for a refund. And you are insured during this period.

Step 9. Review your policy periodically. Unfortunately, many people buy a policy, put it in a drawer, and never look at it again. It’s as if buying it was enough, and now they’re covered no matter what. But any policy of a couple of years or more should be periodically monitored for its current relevance and value. Indeed, there are several events that should automatically trigger you to review your policy and perhaps make a change:

1. If your health has significantly changed.

2. If your spouse or other beneficiary has passed away or changed status in some other way.

3. If the insurance company’s financial situation has changed enough to warrant a policy change.

4. If you have taken any loans from your policy. You could be in danger of your coverage lapsing and owing tax on your loan if you don’t replace the money.

Step 10. Get unbiased, conflict-of-interest-free advice. One of the most underhanded aspects of the life insurance industry is that, in the third millennium, you are not likely to encounter anyone who introduces himself as a life insurance salesman. Instead, you will encounter “pension consultants,” “financial advisors,” and “financial planners.” Heck, even stockbrokers and bank tellers are selling life insurance when they can. At one investment seminar, the speaker at a workshop passed out literature that declared, in bold letters, “I won’t sell you insurance.” However, several customers who got his “free consultation” reported that he tried to sell them some very expensive life policies.

Salespeople have been actively creating new titles for themselves, finding new ways to get in front of prospective buyers.

Regardless of their shifting titles, the substance of what they do has not changed: The life insurance agent—by any name—is someone who works on behalf of the insurance company. He solicits the business of unsuspecting consumers like you, using a variety of tactics to get his foot in your door. And when he does get his foot in the door, look out, because he may try to scare you, manipulate you or even charm you into buying his product.

Now, you might think that a possible strategy is to just ask the person who has approached you if he is a life insurance agent, and if he says yes, you will simply say “no thank you.” But it’s not that easy. In fact, he might even say something like, “ I’m no agent, I’m a broker; I work for you.” The truth is that brokers—and all other people who sell life insurance products for commission—are working for themselves.

A broker may indeed research all of your possible options and gather the material you will need to make your decision. But how do you know that he hasn’t limited his search to the companies that pay him the highest commission?

And then there’s “the financial planner” who wants to analyze your financial situation, and creates a personalized, comprehensive financial plan (or estate plan) for you. But then when you meet, you discover—if you are really paying attention—that beneath all the talk of saving on taxes and growing your money, your new financial plan really revolves around an insurance policy that you may not need.

Our advice: Always ask: “Who do you work for?” “In what capacity?” and “What are your credentials?” You might even ask “Who owns the company you work for?” And although you might get some kind of explanation that hints about compensation, always ask: “Would you get a commission from the sale of this product?”

Amid all of the specialists trained to sell you insurance products, Ithere are ethical people who are waiting to serve you right now. You just have to find them. In this environment, the ethical agents have a hard time making a better-than-average living, while the sharks have a field day. Your best weapon is your own education about what you are up against plus a healthy level of skepticism about the sales process.

There are agents who know exactly what they are doing when they sell you a policy that is inappropriate or unnecessarily expensive and gives them the highest commission. There are also agents who know exactly what the policies say and mean, and they are on a mission to find you the best deal and even educate you.

But somewhere in the middle, there are also well-meaning people who were sold a bill of goods while they were being trained in insurance products. They have been conditioned by the industry, they think they know what they are talking about, they tell you what you want to know (according to what they have been told) and they are most likely not out to cheat you! But you get cheated anyway because your well-meaning agent is in the same position you are in: He believed what the “experts” told him.

So what are you supposed to do? Is there a foolproof way to differentiate between the sharks, the ethical agents, and the do-gooders? Unfortunately, no. But there’s something even more effective for you to do. Here’s what we recommend:

1. Use a fee-only insurance advisor. Many Certified Financial Planners (CFPs) work strictly on a fee basis. The money they charge for their advice will be small in comparison to the amount they can save you. Make sure you look for a Certified financial planner, as anyone can call himself a financial planner. And CFP or not, be sure to always ask if the person will get any commission from the sale of insurance products.

2. Enlist the services of a fee-only advisor, such as Glenn S. Daily, “whose expertise in life insurance exceeds any others we know of,” according to the Consumer Federation of America, the nation’s largest consumer group. He can be reached at 212-249-9882 or and his website is

3. We also recommend enlisting the services of companies like Katt & Company, a national fee-only life insurance advising firm based in Michigan. Peter Katt, CFP, the founder of the firm and the author of The Life Insurance Fiasco: How to Avoid it, can be reached at, the general firm number is 616-372-3497, and the web site is .

Because the fees of some fee-only advisors can be pretty steep (some are well over $250 an hour), our advice is: If you are thinking about life insurance because you are looking for a way to cover your estate taxes (so your estate will be more than $675,000 as of this writing), then it’s worth it to pay an expert to do your work.

If not, look to an online quote service for help (e.g., (800-556-9393),,, or Other companies may say they’ll give you free quotes, but that is often a loss-leader to get you to buy from the companies they represent. Beware of general agents giving free quotes.

4. If you have already visited an agent and you have some policy illustrations or you already purchased a policy, you can enlist James Hunt of the Consumer Federation of America ( Mr. Hunt will analyze your existing policy $45 for the first illustration ($75 for second-to-die policies), and $35 for additional policies sent at the same time. In addition, the Consumer Federation’s Rate of Return (ROR) service will give you an estimate of the investment returns on any cash value life insurance policy illustration. You simply send Mr. Hunt the policy illustration. And if you already have a policy, send in a Current Illustration. Contact James Hunt for details at 603-224-2805.

5. Work directly with a strong company that employs salaried people to help you. We can recommend two companies: Ameritas Life 800-555-4655 and USAA Life, 800-531-8000. USAA Life is the only branch of USAA ( that is not restricted to members of the military, so don’t let their website or their ads prevent you from contacting them. Because the agents are salaried, you don’t have to worry about the motivation behind their recommendations.

Your First And Last Step: Always Consider Financial Soundness

When you receive any kind of recommendation regarding life insurance, make certain you check the financial stability of the company through Weiss Ratings before you sign anything. After all, what good is life insurance if you outlive your insurance company? The same applies to every kind of insurance product — especially annuities, the subject of our accompanying article on annuities.

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