Life In­sur­ance In­dus­try Evo­lu­tion

The sec­tor may catch up in the ar­eas of trust, trans­parency and a fidu­ciary mind­set, and a promis­ing app may help, Bob Veres says.

Financial Planning - - CONTENT - By Bob Veres

The sec­tor may catch up in the ar­eas of trust, trans­parency and a fidu­ciary mind­set, and a promis­ing app may help.

“We’re try­ing to take a very com­plex prod­uct and make it more vis­ual, which the in­sur­ance in­dus­try has never done,” says As­sur­ance co­founder John Lef­ferts.

IN THE BAT­TLE BE­TWEEN THE fidu­ciary sales model for mu­tual funds and the opaque, com­mis­sion-driven model for the life in­sur­ance in­dus­try, guess who has been win­ning over the past three decades?

While to­tal mu­tual fund as­sets have grown from $495 bil­lion to more than $17 tril­lion over the past 31 years, the num­ber of life poli­cies sold an­nu­ally has fallen by al­most half, to fewer than 10 mil­lion from 17 mil­lion, ac­cord­ing to data from the In­vest­ment Com­pany In­sti­tute and LIMRA.

Of course, it’s never too late to rec­og­nize the ad­van­tages of a fidu­ciary model. Whether it’s the re­sult of the Depart­ment of La­bor’s rule, the fact that in­sur­ance agents are ag­ing out of the busi­ness or the fact that the in­dus­try is fac­ing a skep­ti­cal mil­len­nial gen­er­a­tion, it ap­pears the in­dus­try is slowly re­think­ing its sales ap­proach.

Qui­etly, no-com­mis­sion vari­able an­nu­ities have been made avail­able to fee-com­pen­sated ad­vis­ers by, among others, Van­guard, Jef­fer­son Na­tional, TIAA, Schwab (writ­ten through Na­tion­wide), TD Amer­i­trade In­sti­tu­tional (writ­ten through Great West Life), Transamer­ica, Amer­i­tas and, most re­cently, Lin­coln Fi­nan­cial.

Progress has been slower for cash-value (aka per­ma­nent) life con­tracts, in­clud­ing whole, vari­able, univer­sal and vari­able-univer­sal. What these poli­cies have in com­mon, and where they dif­fer from term life, is that they all in­clude a cash ac­count from which the pol­i­cy­holder’s an­nual term life pre­mi­ums, known as the cost of in­sur­ance, are de­ducted to pay for the ac­tual life in­sur­ance cov­er­age.

The in­ter­ac­tion be­tween these two mov­ing parts can be com­pli­cated. How much of the pre­mium dol­lars are ac­tu­ally in­vested on be­half of the pol­i­cy­holder ver­sus be­ing paid to the sales agent? How fast is the in­vest­ment ac­count grow­ing there­after, and ex­actly what fees are be­ing de­ducted?

The COI goes up in­cre­men­tally every year as the pol­i­cy­holder gets older, but how fast does it rise, and does the COI re­main con­sis­tent with the rates the com­pany is of­fer­ing on term poli­cies?

Mu­tual in­sur­ance com­pa­nies also of­fer div­i­dends, which can be thought of as ex­cess pre­mium that was col­lected and is now be­ing re­turned to the pol­i­cy­holder.

Even though they’re called per­ma­nent poli­cies, if the COI ex­ceeds the cash value, the con­tract is can­celed or the face amount is ad­justed. When poli­cies are over­funded, the face amount, and there­fore the COI, au­to­mat­i­cally goes up to main­tain a cor­ri­dor be­tween cash value and face amount.

A PROMIS­ING NEW APP

Fidu­ciary ad­vis­ers are re­luc­tant to rec­om­mend prod­ucts that they them­selves have a hard time de­ci­pher­ing, and un­til now there has been no Morn­ingstar in the in­sur­ance world to help them. But I see the po­ten­tial for

greater trans­parency in the form of a new app called As­sur­ance, which turns in­sur­ance pol­icy il­lus­tra­tions into com­par­i­son charts that even a fi­nan­cial colum­nist can un­der­stand.

“We’re try­ing to take a very com­plex prod­uct and make it more vis­ual, which the in­sur­ance in­dus­try has never done,” says com­pany co-founder John Lef­ferts, who, in a pre­vi­ous life, was pres­i­dent of AXA Advisors and, fol­low­ing that, found­ing CEO of a bro­ker-dealer called Lion Street.

As­sur­ance pulls data for vir­tu­ally any life prod­uct di­rectly from Win­flex, the in­sur­ance in­dus­try’s com­pre­hen­sive data­base of life in­sur­ance pol­icy data. You in­put a face amount and Win­flex pro­vides the an­nual tar­get pre­mium pol­i­cy­hold­ers are ex­pected to pay — which, if paid, will guar­an­tee that the pol­icy will stay in force.

You can spec­ify an as­sumed rate of re­turn on the cash ac­count, and As­sur­ance cal­cu­lates, from the pol­icy il­lus­tra­tion, the var­i­ous costs that will be de­ducted from the in­vest­ment ac­count, in­clud­ing the an­nual COI based on the client’s most likely un­der­writ­ing risk class. Ev­ery­thing is vis­i­ble in graphs, so you can do what you al­ready do with mu­tual funds: run side-by-side com­par­isons of dif­fer­ent con­tracts over dif­fer­ent time pe­ri­ods.

RE­PLACE­MENT CALCULATING

Ini­tially, I ex­pect fidu­cia­ries to use As­sur­ance for re­place­ment cal­cu­la­tions — that is, to com­pare that vari­able-univer­sal pol­icy a new client pur­chased from his brother-in-law with a lean fidu­ciary-friendly con­tract from, say, TIAA, with an eye to pos­si­bly do­ing a 1035 ex­change from the former into the lat­ter. So you call up the cur­rent pol­icy and look at the il­lus­tra­tion at, say, a 7% rate of re­turn, com­pared with the no-load pol­icy.

In the most im­por­tant graph, As­sur­ance will show you the in­ter­nal rate of re­turn on the cash value in the pol­icy, af­ter fees and COIS, as­sum­ing the an­nual in­vest­ment re­turn spec­i­fied. Ob­vi­ously, the higher IRR will re­flect a leaner, less-ex­pen­sive pol­icy, as­sum­ing ev­ery­thing else is equal.

What’s in­ter­est­ing, in the il­lus­tra­tion I looked at, is that the dif­fer­ence in re­turn can change over time. That is, an old pol­icy might be­come more ef­fi­cient and com­pet­i­tive at higher age brack­ets than it was ini­tially.

You can also run an il­lus­tra­tion that shows the death ben­e­fit ris­ing as the cash val­ues start to ap­proach the orig­i­nal face amount, or sim­ply look at the growth in ag­gre­gate pre­mi­ums.

NEW PROD­UCTS TO COME?

Right now, there aren’t a lot of fidu­ciary poli­cies, but Lef­ferts says most life com­pa­nies are look­ing at cre­at­ing leaner com­mis­sion­less prod­ucts.

“As the de­mo­graph­ics of the agency field force gets older,” he says, “the in­sur­ance com­pa­nies are look­ing at pric­ing their prod­ucts for dif­fer­ent mar­kets and dif­fer­ent dis­tri­bu­tion plat­forms. When they do, we’ll be mak­ing it easier for the next gen­er­a­tion of agents and ad­vis­ers to show clients their op­tions.”

As­sur­ance is not a per­fect win­dow into the life world, in part be­cause it doesn’t give the his­tor­i­cal in­vest­ment per­for­mance of the dif­fer­ent con­tracts it de­con­structs. You can find that else­where for vari­able life and vari­able-univer­sal life poli­cies, which mostly use mu­tual funds as their in­vest­ment choices.

As­sur­ance won’t model div­i­dends, which are re­turned to pol­i­cy­hold­ers at the dis­cre­tion of the mu­tual com­pany.

Also, be warned that in­sur­ance com­pa­nies have the op­tion of rais­ing their COIS for pol­i­cy­hold­ers in later years.

In other words, the ex­pense data in the pol­icy il­lus­tra­tion may not re­flect fu­ture pol­i­cy­holder ex­pe­ri­ence.

But As­sur­ance is the first tool I’ve seen that pro­vides out­put com­pa­ra­ble to what Morn­ingstar of­fers in the fund world — a new level of clar­ity and trans­parency into the most com­pli­cated, hard-to-un­der­stand area of our fi­nan­cial land­scape.

For the first time in my 30-year ca­reer, I am be­gin­ning to have some hope that the in­sur­ance in­dus­try might even­tu­ally catch up in the key ar­eas of trust, trans­parency and a fidu­ciary mind­set.

As­sur­ance is the first tool I’ve seen that pro­vides out­put com­pa­ra­ble to what Morn­ingstar of­fers in the fund world.

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