The Source for Unrivaled Expertise, Integrity, and Truly Exceptional Life Insurance Policies, Analysis, Service and Value. Avoid Getting Scammed, Abused, Fooled or Hoodwinked by a Smooth-talking, Seemingly-helpful, Huckster agent.

Learn about life insurance

Fixing the Life Insurance Marketplace - Unpublished Op-Ed Ralph Nader Asked Me to Write

Fixing the Life Insurance Marketplace

A leading Public Citizen asked me in May 2011 to write this “Op-Ed,” but as of July 2012 neither of us

has found a national, mainstream media publisher or broadcaster willing to run it.

By: R. Brian Fechtel, CFA, BreadwinnersInsurance.com

A version of this article was published by the National Underwriter in its March 2011 issue as a Letter to the Editor.

“The life insurance market is characterized not only by an absence of reliable price information, but also by the presence of deceptive price information...the deceptive sales practices found in the life insurance industry constitute a national scandal.” So testified Professor Joseph Belth, an expert on the life insurance industry, before Congress in 1973. Can this statement, from almost 40 years ago, still be as true today? And is it possible for such deplorable industry practices to be occurring without being in the spotlight of public attention?

The short answers are yes. To this day the life insurance industry relies on inadequate product disclosure, misinformation, and fraudulent practices, thereby costing consumers billions of dollars annually. Industry executives have for years acknowledged that no one would buy many of their companies’ products if they were appropriately informed. Regarding such ongoing problematic practices, all should know that industry regulators are currently investigating deceptive advertisements and related practices by New York Life and Northwestern.

The free market economic system is built upon there being informed buyers making educated decisions. Yet so many life insurance industry chieftains who regularly sing the praise of our economic system fail to acknowledge that their businesses have never satisfied the system’s prerequisites or played by its rules.

Empirical proof of the life insurance market’s dysfunction is readily apparent by examining the very products life insurers and their agents sell. While a select few cash-value life insurance policies can provide excellent competitive value, perhaps 95% of such policies sold provide value no informed consumer would accept. This marketplace’s dearth of information also afflicts tens of millions of policyholders at annual renewal, a large percentage of who, if properly informed, currently could readily obtain much better value. Consumers of the industry’s other main products, annuities and long term care insurance, also face enormous disclosure-related problems.

The root of the age-old problem is the inadequate disclosure of information surrounding cash-value policies, such as whole life policies, where the annual cost is not the annual premium. Professor Belth and I have both long recommended disclosure about a policy’s annual costs and rate of return on its cash-values.

Belth, however, has reported: “One company executive told me that companies could not survive disclosure of yearly prices,” and, “Yearly prices [of cash-value policies] are so revealing that the companies took extraordinary action to prevent disclosure of the information.” While the first statement is clearly hyperbole, the second is practically an indictment of the state regulators, as they have never confronted such matters and fulfilled their regulatory duties.

The attached table of an actual policy’s historical performance shows how this information on a policy’s annual costs and rates of return on its cash-values can be presented on a year-by-year basis and summarized over the duration with average or aggregate measures. Similar cost and rate information can be calculated on any and all prospective new and in-force policies via online consumer-friendly analytical tools. Understanding policies from this framework, and with solid knowledge of the differences between illustrated future values and actual future performance, enables consumers to assess the competitiveness of a policy’s costs and rates by comparing such with benchmarks that are available in the marketplace (i.e., costs of coverage on healthy 40 year old male and rates of return on comparable investments).

A cash-value life insurance policy’s unique intrinsic economic advantages arise from its Congressionally-granted tax privileges, not its highly touted permanence which is after all matched by the conversion option in term policies. These tax privileges, which are given directly to policyholders, however, are not a basis for which insurers can charge consumers. No one pays thousands of dollars to set-up an IRA. Consequently, when selling such cash-value policies as whole life agents routinely make assorted misrepresentations, i.e., that one pays for the lifetime of costs up-front, that buying a policy at a younger age locks in a lower level cost for life, and that the annual costs of a whole life policy actually decline as the insured ages because these policies, for instance, involve owning not renting insurance and can pay dividends.

Regulations prohibit such misrepresentations, but they have never been enforced. These and other misrepresentations are all designed to distort a cash value policy’s fundamental difference. For agents, the essential difference between whole life and term is the quantum difference in the sales commissions – up to 5-9 times larger on whole life policies than on term policies. No one familiar with the paramount role that compensation incentives tied to the origination of subprime mortgages and the repackaging of such default-inevitable, toxic securities played in creating the Great Recession can doubt the perniciousness of the life insurance industry’s age-old problematic sales practices. Financial problems should not need to have to drive our country to the edge of a financial abyss to warrant fixing; forty years of documented but unindicted frauds ought to be sufficient.

The industry defends the status quo asserting that because life insurance is sold (that is, that policy are only “sold” because of the agent’s initiative and efforts – that consumers do not actively seek to “buy” life insurance), and that this makes it necessary to protect the large distribution margins built in to cash-value policies to pay agents adequately. The disclosure problem, this defense continues, can’t be solved because to do so would be to undermine the societal objective that families’ breadwinners be insured since the agents’ efforts would cease.

This defense, however, fails for multiple reasons. Its most serious flaw is that a successful consumer-agent relationship can only be built on trust, so predicating it upon inadequate disclosure is inherently counter-productive to all. While inadequate disclosure appears to be in the insurers’ and agents’ interest, it actually has made consumers so leery of agents that the age-old distribution process is so terribly inefficient and ineffective. Americans’ under-insurance – having woefully less life insurance than needed or appropriate - reaches new records every year. Some insurers’ policy lapse rates raise fundamental questions regarding the products’ suitability that regulators have never examined. And, the facts that the typical life insurance agent sells less than one policy per week and that four out of five new sales recruits fail out of the business within a few years are further proof of this failed business model’s dysfunction.

Given the nature of the problem, improved disclosure and publicity of such have always been known to be two indispensable parts of the inevitable solution. Contrary to general opinion, however, there is no need to wait to for this industry’s inept state regulators to act and mandate disclosure. The necessary disclosures, after all, are not proprietary or esoteric. As is shown in the table, life insurance policies, like an automobiles’ horsepower or MPG, can be disclosed, not only by the manufacturer, but by anyone with the necessary expertise and this information is now available online.

Without publicity though, this public good of disclosure remains undiscovered. Reform of the life insurance industry, which has never been technically challenging, has always merely been a battle of wills. Reformers have had to contest an aggressively opposed industry, an uninterested or uninformed media, regulators not understanding their jobs or unwilling or unable to do them, and/or reformers’ own doubts about ever succeeding or how best, if at all, to next attack the monolith. But as recent world events show, tyrants can be overthrown when people act. Most relevantly and significantly, financial markets can be fixed when appropriate policy disclosure for consumers is heralded and becomes pervasive.

The only real remaining question is this: When will this information be publicly disseminated, so that everyone knows about it and can use it, thereby initiating the long-overdue repair of the life insurance marketplace? After all, this disclosure driven transformation will produce the myriad and well-documented benefits of genuine economic competition: consumers will obtain better value, insurers will improve the efficiency of their production processes, and agents will act and be seen as trustworthy professionals.

Clearly, the sooner this time comes, the sooner Americans can start saving billions of dollars per year, the better for everyone.

R. Brian Fechtel, CFA, Agent & Founder of BreadwinnersInsurance.com. Based upon “The Disclosure Solution to the Problems Consumers Face in the Life Insurance Marketplace” in the 2011 Consumer Interests Annual, published by the American Council on Consumer Interests.

 

ABC Insurer Whole Life Actual Historical Performance $250,000 issued in 1989 to a 45 Year Old Male, Best Health
Annual Premium $5815 Paid All Years


Age During Year Insurance Cash- Value Annual Dividend Rate Total Annual Costs At-Risk Amount (in 000s) Ann. Cost/ M$AR Cum. PV Cost /M$AR
45 251425 408 10.00% 5444 248 22.0 22.0
46 253954 5134 10.00% 1556 247 6.3 28.0
47 256890 10188 9.25% 1624 245 6.6 34.0
48 260927 15823 9.25% 1520 243 6.3 39.4
49 265684 21955 8.50% 1403 242 5.8 44.2
50 271380 28709 8.50% 1310 240 5.5 48.5
51 278019 36119 8.50% 1235 239 5.2 52.3
52 285871 44344 8.50% 1064 239 4.5 55.5
53 295056 53487 8.80% 998 239 4.2 58.3
54 305332 63521 8.80% 919 239 3.8 60.8
55 316703 74519 8.80% 844 239 3.5 62.9
56 328867 86417 8.80% 907 239 3.8 65.2
57 341858 99309 8.60% 787 240 3.3 67.0
58 354658 112782 8.20% 889 239 3.7 69.0
59 366807 126628 7.70% 1022 238 4.3 71.1
60 378831 141112 7.50% 1176 236 5.0 73.5
61 391554 156699 7.50% 1160 233 5.0 75.8
62 404738 173322 7.50% 1284 230 5.6 78.2
63 418387 191040 7.50% 1425 226 6.3 80.9
64 429215 207946 6.50% 1601 221 7.2 83.7



8.43% Averages 238



Annual Dividend Rate is the rate the insurer credits, net of investment management costs, on policy cash values.


Total Annual Costs show the amount expensed from policy premiums (and policy cash values if and when necessary) to pay for sales, claim, administrative and any other misc. costs, such as premium taxes insurers pay to the states.


At-Risk is the difference between the policy’s insurance or death benefit amount and its cash value. This figure is calculated as an average of these values over the course of the year.


Annual Cost per M$AR is the Annual Cost divided by the At-Risk Amount. This could be considered the Unit Cost of a thousand dollars of life insurance.


Cumulative Present Value Cost per M$AR is calculated by using 5% interest to discount the stream of Annual Costs per M$AR. The $83.7 figure represents the amount needed on the policy’s first day to be able to pay the costs of a unit of life insurance over these 20 years had the initial $83 lump sum been invested at an untaxed 5% return and each year’s costs paid timely from such. These cumulative present value costs, much like the cumulative average annual dividend rate of 8.43%, and the policy’s average annual At-Risk of $238 thousand, facilitate comparisons with other policies and products when benchmark figures are available.


Two Interesting and Noteworthy Observations: 1) The above stream of annual costs over the shown 20 years has a present value, using a 5% discount rate, of $20,195. Of this total, approximately $9300 (46%) went for sales and distribution related expenses, $8600 (43%) went for claims, administrative expenses, etc., and $2300 (11%) was paid to the state and federal governments for premium and other taxes. 2) The 8.4% average annual compounding rate on this policy’s cash value, returns earned from the insurer’s general/traditional portfolio, is obviously an important and essential fact to know when discussing actual historical performance. It can readily be compared with other alternatives’ returns, the insurer’s own total investment returns, and the insurer’s returns on its own capital or surplus. .

Fixing the Life Insurance Marketplace (1481 words)

by R. Brian Fechtel, CFA, BreadwinnersInsurance.com


“The life insurance market is characterized not only by an absence of reliable price information, but also by the presence of deceptive price information...the deceptive sales practices found in the life insurance industry constitute a national scandal.” So testified Professor Joseph Belth, an expert on the life insurance industry, before Congress in 1973. Can this statement, from almost 40 years ago, still be as true today? And is it possible for such deplorable industry practices to be occurring without being in the spotlight of public attention?

The short answers are yes. To this day the life insurance industry relies on inadequate product disclosure, misinformation, and fraudulent practices, thereby costing consumers billions of dollars annually. Industry executives have long acknowledged that no one would buy many of its products if they were appropriately informed. Regarding such ongoing problematic practices, all should know that industry regulators are currently investigating deceptive advertisements and related practices by New York Life and Northwestern.

The free market economic system is built upon there being informed buyers making educated decisions. Yet so many life insurance industry chieftains who regularly sing the praise of our economic system fail to acknowledge that their businesses have never satisfied the system’s prerequisites or played by its rules.

Empirical proof of the life insurance market’s dysfunction is readily apparent by examining the very products life insurers and their agents sell. While a select few cash-value life insurance policies can provide excellent competitive value, perhaps 95% of such policies sold provide value no informed consumer would accept. This marketplace’s dearth of information also afflicts tens of millions of policyholders at annual renewal, a large percentage of who, if properly informed, currently could readily obtain much better value. Consumers of the industry’s other main products, annuities and long term care insurance, also face enormous disclosure-related problems.

The root of the age-old problem is the inadequate disclosure of information surrounding cash-value policies, such as whole life policies, where the annual cost is not the annual premium. Professor Belth and I have both long recommended disclosure about a policy’s annual costs and rate of return on its cash-values.

Belth, however, has reported: “One company executive told me that companies could not survive disclosure of yearly prices,” and, “Yearly prices [of cash-value policies] are so revealing that the companies took extraordinary action to prevent disclosure of the information.” While the first statement is clearly hyperbole, the second is practically an indictment of the state regulators, as they have never confronted such matters and fulfilled their regulatory duties.

A cash value policy’s performance is a function of annual costs and annual compounding rates, as summarized for the 14th and 15th years of an actual $250,000 whole life policy with a $5815 annual premium issued to a healthy 45 year old male and where dividends had been retained in the policy growing the death benefit and providing a cash value at the end of the prior, 13th, policy year of $99,309:

Age During Year Insurance Cash- Value Annual Dividend Rate Total Annual Costs At-Risk Amount (in 000s) Ann. Cost/ M$AR*
58 354658 112782 8.20% 889 239 3.7
59 366807 126628 7.70% 1022 238 4.3

*At-Risk is the actual amount of insurance provided and Cost/M$AR is cost per thousand dollars of coverage. As this policy was issued in 1989, policy years 14 and 15 occurred during parts of calendar years 2003 - 2005.

Similar cost and rate information can now be calculated on any and all prospective new and in-force policies (for individual years as shown above or summarized over a period of years) via online consumer-friendly analytical tools. Understanding policies from this framework, and with solid knowledge of the differences between illustrated future values and actual future performance, enables consumers to assess the competitiveness of a policy’s costs and rates by comparing such with benchmarks that are available in the marketplace (i.e., costs of coverage on a 58 or 59 year-old male and rates of return on comparable investments).

A cash-value life insurance policy’s unique intrinsic economic advantages arise from its Congressionally-granted tax privileges, not its highly touted permanence which is after all matched by the conversion option in term policies. These tax privileges, which are given directly to policyholders, however, are not a basis for which insurers can charge consumers. No one pays thousands of dollars to set-up an IRA. Consequently, when selling such cash-value policies as whole life agents routinely make assorted misrepresentations, i.e., that one pays for the lifetime of costs up-front, that buying a policy at a younger age locks in a lower level cost for life, and that the annual costs of a whole life policy actually decline as the insured ages because these policies, for instance, involve owning not renting insurance and can pay dividends.

Regulations prohibit such misrepresentations, but they have never been enforced. These and other misrepresentations are all designed to distort a cash value policy’s fundamental difference. For agents, the essential difference between whole life and term is the quantum difference in the sales commissions – up to 5-9 times larger on whole life policies than on term policies. No one familiar with the paramount role that compensation incentives tied to the origination of subprime mortgages and the repackaging of such default-inevitable, toxic securities played in creating the Great Recession can doubt the perniciousness of the life insurance industry’s age-old problematic sales practices. Financial problems should not need to have to drive our country to the edge of a financial abyss to warrant fixing; forty years of documented but unindicted frauds ought to be sufficient.

The industry defends the status quo asserting that because life insurance is sold (that is, that policy are only “sold” because of the agent’s initiative and efforts – that consumers do not actively seek to “buy” life insurance), and that this makes it necessary to protect the large distribution margins built in to cash-value policies to pay agents’ adequately. The disclosure problem, this defense continues, can’t be solved because to do so would be to undermine the societal objective that families’ breadwinners be insured since the agents’ efforts would cease.

This defense, however, fails for multiple reasons. Its most serious flaw is that a successful consumer-agent relationship can only be built on trust, so predicating it upon inadequate disclosure is inherently counter-productive to all. While inadequate disclosure appears to be in the insurers’ and agents’ interest, it actually has made consumers so leery of agents that the age-old distribution process is so terribly inefficient and ineffective. Americans’ under-insurance – having woefully less life insurance than needed or appropriate - reaches new records every year. Some insurers’ policy lapse rates raise fundamental questions regarding the products’ suitability that regulators have never examined. And, the facts that the typical life insurance agent sells less than one policy per week and that four out of five new sales recruits fail out of the business within a few years are further proof of this failed business model’s dysfunction.

Given the nature of the problem, improved disclosure and publicity of such have always been known to be two indispensable parts of the inevitable solution. Contrary to general opinion, however, there is no need to wait to for this industry’s inept state regulators to act and mandate disclosure. The necessary disclosures, after all, are not proprietary or esoteric. As is shown in the table, life insurance policies, like an automobiles’ horsepower or MPG, can be disclosed, not only by the manufacturer, but by anyone with the necessary expertise and this information is now available online.

Without publicity though, this public good of disclosure remains undiscovered. Reform of the life insurance industry, which has never been technically challenging, has always merely been a battle of wills. Reformers have had to contest an aggressively opposed industry, an uninterested or uninformed media, regulators not understanding their jobs or unwilling or unable to do them, and/or reformers’ own doubts about ever succeeding or how best, if at all, to next attack the monolith. But as recent world events show, tyrants can be overthrown when people act. Most relevantly and significantly, financial markets can be fixed when appropriate policy disclosure for consumers is heralded and becomes pervasive.

The only real remaining question is this: When will this information be publicly disseminated, so that everyone knows about it and can use it, thereby initiating the long-overdue repair of the life insurance marketplace? After all, this disclosure driven transformation will produce the myriad and well-documented benefits of genuine economic competition: consumers will obtain better value, insurers will improve the efficiency of their production processes, and agents will act and be seen as trustworthy professionals.

Clearly, the sooner this time comes, the sooner Americans can start saving billions of dollars per year, the better for everyone.

R. Brian Fechtel, CFA, Agent & Founder of BreadwinnersInsurance.com. Based upon “The Disclosure Solution to the Problems Consumers Face in the Life Insurance Marketplace” in the 2011 Consumer Interests Annual, published by the American Council on Consumer Interests.

Search

Call Breadwinners' Ins

Breadwinners' Insurance
Brian Fechtel, CFA, Agent

Headquarters

2975 Westchester Avenue, Suite 410
Purchase, New York. 10577

Additional Office
1 Chatsworth Avenue #47
Larchmont, NY 10538
Phone: (914) 457-0110
Fax: (815) 346-2516

Copyright © 2013. All Rights Reserved.