When all of the sub prime mortgages started going south life as we knew it changed, big time. The American dream became the good old days in just a matter of months. I wonder if someone had shouted loud enough or provided disclaimers scary enough before the loans if we could have averted at least some of the mayhem.
I wonder if I scream loud enough if folks will start to understand that there is a sub prime mortgage size mess coming down the tracks in life insurance. It may not leave people homeless or unemployed in the near term, but the individual and overall economic impact of millions losing life insurance will have those same implications upon the death of each person who has lost their life insurance coverage.
What am I talking about? Well, I’ve been ranting for years about the fact that the majority of universal life policies in force today are based not on guarantees, but on assumptions. They are doomed to fail if they haven’t already and when they do the insured and their family will not only lose all the money they’ve put into it over the years, but will also lose their life insurance coverage. If you’re still in great health you will likely be able to apply for a new policy and replace the death trap you have in force or just lost. The problem is that most of us aren’t blessed with the health that we had 10 or 20 years ago.
On top of that comes this new ah-hah moment for some of the most competitive life insurance companies. They have been lowering rates on term insurance for 15 years, always competing to be at the top of the list when people go to choose a company. This by itself wouldn’t be an earth shaking problem, but several years ago these same companies also came out with a no lapse guarantee universal life, a very low price UL with a better guarantee than the older products, often with death benefits guaranteed to 120 or even 130. Then they made this product available as a conversion option from their term insurance.
Now, in an actuarily stable world, the premiums for term insurance not only cover the expected mortality during the life of the term, but the premiums, along with the premiums on any permanent coverage that is converted to should cover the expected mortality for a converted policy. But, having driven the term prices to all time lows and offering a lifetime guarantee term conversion with all time low prices has tipped the balance.
An actuary from one of the larger insurance companies explained that conversions are generally made for two reasons. One is simply financial planning and the other is because a person’s health has changed dramatically and they want to lock in permanent coverage at the rate class they had on their term insurance. According to this expert, in the first five years conversions are primarily for the first reason, financial planning, and the mortality experience really isn’t much different than that of a person who originally purchased a no lapse guarantee UL.
According to this actuary between the 5th and 10th year that shifts dramatically to a majority of conversion being done for health related reasons, and in his words, “a bad mortality risk”. When I asked him how it shook out if someone converted a 20 year term between the 10th and 20th year he simply called it a “real horror show”. The actual statistics will remain a proprietary secret with each company but suffice it to say that they’ve got a mess on their hands.
Those companies whose contractual language permit it have begun to change not only the product that can be converted to, products that can only laughingly be referred to as permanent (West Coast Life), but they have also taken their competitive UL’s out of the equation after the 5th year of a term policy (Banner and American General).
So, after that you might think I’m against term insurance and think that conversion is no longer a great feature but the way I feel about is that life insurance companies are going to do what they need to do, even if it stinks for their customers. Because of that we, as agents, need to adjust and do a better job of planning that will compensate for the changes our clients will see coming from insurance companies. Agents will need to do a better job of staying in tune with what’s being done by companies and staying in touch with clients about those changes.
Bottom line. Maybe it is overstating the size of the problem to call it a sub prime mortgage equivalent, but saying it will impact millions of policy holders is not an overstatement. The impact on families is not overstated.
If you have a universal life policy that hasn’t been reviewed recently or a term life policy that the conversion option has not been fully explained on and your original agent is MIA, call me at 866-539-7914 or email at ehinerman@hinermangroup.com. I’m licensed in all 50 states and have been fixing life insurance problems for the past 13 years.
Everything changes. Nothing stays the same. With these new obstacles a 40 year old who would normally buy a 20 year convertible term might opt for the 30 year contract instead, as well as picking up some permanent coverage earlier than he/she otherwise would have. Makes me glad I converted my six year old Banner Opterm20 to a UL in July. I’m 49 years old.
Exactly the kind of new thinking agents need to get in the habit of knowing about and using.