Some of you may be wondering how I get the source material for all the crazy things I write. It's easy. There is bad advice about life insurance everyday. Specifically, I go to Google News and enter this search 'allintitle: "life insurance".' Then I sort by date instead of relevance.
So if you want to be the next me, now you know you know just a little bit more about how to do it.
Now I'm going to talk about something I found in that search that is far from news. And frankly I am ashamed that Google would pick up this feed. I mean it's even worse than all the self-serving press releases that flood this search. I know that if I left the default of relevance instead of date, I wouldn't find these types of results for life insurance in the title, but this site should not be in the news feed at all.
Because this blog is about everything that is wrong with life insurance in the news - that's why. Also, because I can do what I whatever I want to.
The site in question is Monitor Bank Rates (no follow), which looks like a cheap knock off of Bankrate. Okay, even Bankrate has too many commercial interests to be objective. Still, these other guys are lousy.
The page in question has grammar and spelling errors throughout. You know, the type of stuff a free text editing program like Open Office would pick up. That's journalistic integrity.
Oh, then it's stuffed with keywords like "insurance" "life insurance" and "insurance coverage" with links out to the old establishment. You know, the big insurance company names I won't mention here - all of them.
They are giving away the generic keywords to the big guys, so they can keep the long tail words for their internal links. "Best life insurance quotes" is too specific to point to someone else. I hope someone at Google is paying attention to this, so they can slap companies like this.
Mind you, I don't read material of this quality, but I found it through Google News when I was looking for rotten stuff to write about. The whole article and life insurance portion are wrapped around a feature that promises to help me find the best life insurance quotes if I enter my zip code. Okay, you zip code has nothing to do with life insurance rates. Not in the US anyway.
I went on ahead and did it just to see what type of quality this misspelled website sent me to. I got a list of about 7 life insurance quoting companies. Some were individual companies, others were the type that collect your information and sell it off as a lead. Um, no thanks.
Now you all know to avoid this site, and hopefully Google learned that Monitor Bank Rates is not a news source (or really all that credible).
Thursday, September 17, 2009
Wednesday, September 9, 2009
Your Life Insurance Policy on the Stock Market
Today's rant is about a post in the NY Times - none other than Jenny Anderson. But while I normally take this spot to rant about the journalist's lack of understanding or misleading language that seems so pervasive in the financial media, she does a pretty good job. Maybe if you are thinking about subscribing to a paper, you should consider them.
Let's get two things straight first:
1. I'm sort of a fan of life settlements. It gives policyholders an extra way to access the value they have in the policy and the value of their own insurability without relying solely on the insurance company. Life settlements are sort of a creative way to stick it to the man. More power to the individuals who can sell their policies for more than the cash value.
2. The slippery slope argument is one of the great argumentative fallacies - meaning while many people might believe it or use it in an argument, it is not always true.
However, in this case, the slippery slope seems to becoming a reality.
Life settlements can be very good things for policy owners, but they should be careful who they sell their policies to. The best choices are usually institutional investors like pension funds and so on. So what would happen if those investors wanted to bundle them and sell them off to other investors?
Well, they would have to create the groups or tranches of the different policies, buy bonds as a way of supporting the value or lowering the risk to those investors and so on. If this sounds like what happened in the mortgage industry a couple years back, you would be correct.
Not only are there questionable moral problems with this type of strategy and the real value of securitization is questionable, but the long term affect for you and me is higher life insurance premiums for everyone down the road. See, when life insurance companies issue policies, they expect a certain number of them will be canceled before the policy owner dies. But if more life policy owners held on to the policies, the life insurance companies would have to set aside more money to pay off those future claims. That extra money comes from the future life insurance premiums you and I pay.
There just isn't a way for that system to work. Eventually, it will be over valued, future premiums will increase, requiring more and more capital to make the machine go, which will cause the bubble to pop. Granted, I think the bubble would take a long time to pop because of the nature of our life expectancy. But this is not a sustainable model. More importantly, it does not offer any real attainable value. It only shifts the value temporarily with a long term negative affect.
My solution would be to let policy owners sell their policies back to the life insurance companies themselves. If life insurance companies competed for old policies the same way new investors do, many people would take a low-ball offer from them over another source any day - solving our problem. What do you think?
Let's get two things straight first:
1. I'm sort of a fan of life settlements. It gives policyholders an extra way to access the value they have in the policy and the value of their own insurability without relying solely on the insurance company. Life settlements are sort of a creative way to stick it to the man. More power to the individuals who can sell their policies for more than the cash value.
2. The slippery slope argument is one of the great argumentative fallacies - meaning while many people might believe it or use it in an argument, it is not always true.
However, in this case, the slippery slope seems to becoming a reality.
Life settlements can be very good things for policy owners, but they should be careful who they sell their policies to. The best choices are usually institutional investors like pension funds and so on. So what would happen if those investors wanted to bundle them and sell them off to other investors?
Well, they would have to create the groups or tranches of the different policies, buy bonds as a way of supporting the value or lowering the risk to those investors and so on. If this sounds like what happened in the mortgage industry a couple years back, you would be correct.
Not only are there questionable moral problems with this type of strategy and the real value of securitization is questionable, but the long term affect for you and me is higher life insurance premiums for everyone down the road. See, when life insurance companies issue policies, they expect a certain number of them will be canceled before the policy owner dies. But if more life policy owners held on to the policies, the life insurance companies would have to set aside more money to pay off those future claims. That extra money comes from the future life insurance premiums you and I pay.
There just isn't a way for that system to work. Eventually, it will be over valued, future premiums will increase, requiring more and more capital to make the machine go, which will cause the bubble to pop. Granted, I think the bubble would take a long time to pop because of the nature of our life expectancy. But this is not a sustainable model. More importantly, it does not offer any real attainable value. It only shifts the value temporarily with a long term negative affect.
My solution would be to let policy owners sell their policies back to the life insurance companies themselves. If life insurance companies competed for old policies the same way new investors do, many people would take a low-ball offer from them over another source any day - solving our problem. What do you think?
Tuesday, September 1, 2009
Life insurance advice gone wrong
I was cruising the headlines recently to see which reporters are most in need of a little life insurance education and came by this fine piece written for the Sun Sentinel. The worst part of it is that the author has an email address on Kiplinger's domain, ugh. I could write her a long email, but that wouldn't be as much fun as parading it around in public. Besides, financial writers who don't know enough about their topics is a sickness that needs to stop. I write as a public service. You're welcome.
The first problem I see with this life insurance article is that the author splits it up into divisions by product categories. This is a pretty basic way to do it that enhances misconceptions about the "types of life insurance". Most life insurance experts will be able to tell you that all types of life insurance are variations on each other, share many similarities, and often you can use one type of life insurance to solve the problems that another is designed to do better. Life insurance is not a world of neat categories. It is all arbitrary nonsense that only serves to confuse the public about the reality.
This is a nit-pick, but when she says, "tax-free death benefits," she ought to say "potentially tax-free death benefits". For a little more on taxes and life insurance, I suggest the author read up a bit. It is usually tax free, but not always.
I'll skip a few more picky points to get to the juice. "Cash-value policies, such as whole and universal life, don't expire." Wrong. They do expire. Even old-school insurance agents will tell you there is a contractual expiration period for most policies, especially whole life. A permanent life policy would certainly expire if it did not have enough value to sustain the death benefit. In fact, I have seen this particular scenario over and over.
Permanent life policies (the all encompassing term for whole life, universal life, etc) can expire for a number of reasons - even if you make the planned premium on time every month. The dividend from the company may go down or disappear. The interest rate you expected to get wasn't reality. The internal charges of mortality costs and administration may have gone up. Or any combination of these.
Another possible reason why whole life and universal life insurance can lapse is because of a bad combination of misinformation. The policy owner reads one article in their local newspaper that says these policies are great because they can't expire. Then they read another one by an against-the-grain financial muckety muck who says these policies are great because you can borrow the cash value from them. Upon calling customer service (because we all know chances are their agent has probably left the business or gone to another company), they are told the truth - that they don't really have to pay back any of the loan. Of course, the policy holder does have to pay back the loan with interest - if they want the policy to continue. But that was just a detail.
Scratch that part about reading another article. In the same Sun Sentinel article, the author speaking about life insurance loans, clearly states, "but you don't have to pay it back." If it weren't for her journalistic exemption, she would be liable for putting this bad combination of advice in print.
So in case I haven't made it abundantly clear, yes, permanent life insurance policies can expire. Making your life policy as permanent as you once thought it was after messing it up with bad advice like this can often be expensive.
The first problem I see with this life insurance article is that the author splits it up into divisions by product categories. This is a pretty basic way to do it that enhances misconceptions about the "types of life insurance". Most life insurance experts will be able to tell you that all types of life insurance are variations on each other, share many similarities, and often you can use one type of life insurance to solve the problems that another is designed to do better. Life insurance is not a world of neat categories. It is all arbitrary nonsense that only serves to confuse the public about the reality.
This is a nit-pick, but when she says, "tax-free death benefits," she ought to say "potentially tax-free death benefits". For a little more on taxes and life insurance, I suggest the author read up a bit. It is usually tax free, but not always.
I'll skip a few more picky points to get to the juice. "Cash-value policies, such as whole and universal life, don't expire." Wrong. They do expire. Even old-school insurance agents will tell you there is a contractual expiration period for most policies, especially whole life. A permanent life policy would certainly expire if it did not have enough value to sustain the death benefit. In fact, I have seen this particular scenario over and over.
Permanent life policies (the all encompassing term for whole life, universal life, etc) can expire for a number of reasons - even if you make the planned premium on time every month. The dividend from the company may go down or disappear. The interest rate you expected to get wasn't reality. The internal charges of mortality costs and administration may have gone up. Or any combination of these.
Another possible reason why whole life and universal life insurance can lapse is because of a bad combination of misinformation. The policy owner reads one article in their local newspaper that says these policies are great because they can't expire. Then they read another one by an against-the-grain financial muckety muck who says these policies are great because you can borrow the cash value from them. Upon calling customer service (because we all know chances are their agent has probably left the business or gone to another company), they are told the truth - that they don't really have to pay back any of the loan. Of course, the policy holder does have to pay back the loan with interest - if they want the policy to continue. But that was just a detail.
Scratch that part about reading another article. In the same Sun Sentinel article, the author speaking about life insurance loans, clearly states, "but you don't have to pay it back." If it weren't for her journalistic exemption, she would be liable for putting this bad combination of advice in print.
So in case I haven't made it abundantly clear, yes, permanent life insurance policies can expire. Making your life policy as permanent as you once thought it was after messing it up with bad advice like this can often be expensive.
Wednesday, August 26, 2009
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.
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.
Sunday, August 23, 2009
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.
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.
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