Life Insurance and Media Bad Combination

The first thing I want you to do when you hear news about life insurance is to consider the source. I know you may have seen a video floating around that showed up on some late night spot of a 24-hour news network talking about Life insurance as a great investment, but how credible is it? It's just some B-roll footage a bunch of biased life insurance salespeople put together that made it on the news because it was A) free to the network and B) just controversial enough to be interesting.

See, the point of our media is to sell advertising. Yes, there are still some very brave and very dutiful journalists out there digging up the real story. I saw A Mighty Heart. But the media companies that control what stays in and what stays out is all about making money - especially as the thumb screws get tightened on them. That's why a 'cancer-fighting hot dog' would make the front page but 'exercise and eat right to live healthy' never would.

All the articles, white papers, press releases, videos and other content I've seen about life insurance as a great investment had the smell of an insurance company or an insurance agent behind it. Even if they duped one of the good journalists, I bet that biased fellow got a big shout out.

Here is an article from the Wall Street Journal that talks a big game about how great New York Life (NYLIC) is without mentioning part of what makes it such a great company and why its competitors tanked so quickly in the past. Let me start off by saying I am not denigrating any company or supporting any other. I really just want the best to float to the top.

The thing is that not only does NYLIC have a lot of cash that the article reported, but it can also decide to stop paying such a high dividend at any point in time and simultaneously drop its liabilities and increase cash flow. That is a huge advantage that any mutual company has. But before you go running out to buy life insurance from mutual companies just because they are more financially stable, let's take a look at why that might not be so good to the policy holder.

Remember that I said they could achieve this financial double-whammy by reducing the dividend. A dividend in life insurance is not the same thing it is on the stock market. It is a return of over paid premiums by policyholders. They express this return of premium as a percentage rate to make it look more impressive than it might otherwise be. But the thing is that dividends are not guaranteed and can go up, down, or become non-existent year to year.

So if you collect more money than you need for your long-term contracts and pay the rest back to your customers, but you don't have to. And if you have built up some of your following because of how much money you give back to them, when times get tough, you can keep more of that money. You increase your cash flow and those customers who aren't happy leave, reducing your liability to them. Boom. This is great if you own a business, but not so great if you are a patron of that business. I'd rather buy from a place that tells me exactly how much it is and sticks to it.

The other thing the Wall Street Journal articles doesn't point out is that the three competitors mentioned in the piece, AIG, Hartford, and Lincoln National, were pulling in some decent-sized cases on borrowed money but not anymore. What? People were borrowing money to buy life insurance policies? Yes, and how!

These were typically multi-million dollar life insurance policies that were paid for with money the super-wealthy borrowed at lower interest rates than the rest of their capital performed. Very often, they would have to buy even more life insurance than they planned, so that when they died, the death benefit was enough to cover the cost of the loan and leave some money to their heirs.

But as capital was tight (aka it was hard to get a loan) a while back, that has an effect of trickling up into higher markets as things progress. Loan money for mega-million life policies dried up and so did a chunk of the business these three companies were doing. They were certainly doing other types of business at the time, but missing out on these big hits takes a toll on your bottom line.

So an article that covered the story a little fuller would have taken into account these industry nuances and the different ways life insurance companies have to turn a buck. Instead, the story turned out to be flat with an uninspired quote. The meat of the story could have been this industry marketing no-no "The company gave agents a document ticking off rivals' woes." So sad.

Introducing Life Insurance Know How

The main problem with life insurance is that it is too confusing. Therefore, there are a lot of people who don't know enough about life insurance to make a good decision or even create a decent quote. Yes, there are people who need to sharpen their skills on both sides of the life insurance equation. The purpose of this bog will be to convey my life insurance know how by commenting on when other people get it wrong.

Sure, it may seem like I am flaunting my superior life insurance skills, but I think it is self-less that I would my time to tell the world what it is doing wrong. Change the channel if you don't like how right I am.

To make things interesting, I'll start by pointing out some reporting flaws in none other than the Toronto Star. The author writes that Insurance scrimping can end up being costly. Lengthy title aside, there are a few problems I noticed going through this article.

One of the main problems plaguing this article is that it is written for a respectable Canadian newspaper, yet they can't seem to find any Canadian statistics. All the life insurance facts and figures are from US sources.

Just because US viewers watch Canadian design shows does not mean our life insurance markets mirror each other or have the same problems. I ate Indian last night, but I'm not about to pull figures from their census to talk about problems here.

The next big problem is that the author states universal life insurance policies "allow the policy owner to invest cash reserves in the stock market." Um, wrong. Why a journalist (and I use this term lightly) who gets these kinds of material facts wrong allowed to write about life insurance? I don't know.

The fact is that universal life insurance lets the policy owner put excess cash into internal accounts. Very often these accounts credit a fixed amount of interest declared at the beginning of each year. In case this "universal life insurance policy" is actually "variable universal life", that account contains sub-accounts, which may act similar to mutual funds.

The word "reserves" in life insurance is also a very technical one, which I might drop some knowledge about later on. Needless to say, there are better choices to call money that goes beyond the basic cost of mortality and administration costs for a particular year.

Finally, there are other ways to "invest" in life insurance (although I don't really recommend any of them) besides relying on a dividend. The author basically points out a trade-off between perceived stability and reward at the end without acknowledging it. Furthermore, because no life insurance company can guarantee dividends and it may be here today and gone tomorrow, investing in life insurance for a dividend represents a kind of business risk that should be taken into account. Oh, and I should mention a life insurance dividend is an overpayment of your premium, so comparing it to a percentage return on an investment is kind of twisted.

Overall, this article was shallow, said nothing new, and contained misinformation. Way to go. It looks I have it easy - giving you the life insurance know how.