Jim Lorenzen, CFP®, AIF®
First, let me state up-front that I AM a big believer in the power of life insurance, especially when designed as a financial tool using an “investment-grade” company in order to execute a larger financial plan.
The fact is life insurance can do things for you – while you’re alive – that no other financial vehicle can do.
And, although being licensed myself as a California independent agent, there are a few things anyone considering a life insurance purchase should remember:
- Be wary of a packaged solution. Participating whole life and Indexed Universal Life can be designed as a financial tool to meet retirement income needs*, but only as a component of a larger strategy, i.e., to supplement other income strategies.
- Don’t believe beautiful illustrations. Identifying an investment-grade insurance company means understanding the company’s own investment portfolio (this might be where an agent who is not only a certified financial planner, but also a Registered Investment Advisor, might come in handy).Before Executive Life of New York went under, they had over 50% of their portfolio invested in less than investment grade ‘junk’ bonds, despite the fact that in June 1987, the New York legislature had mandated that insurance companies licensed to business in that state were to limit their general portfolios to no more than a 20% allocation to such bonds. Remember, there are no guarantees; there are only guarantors.[Source: The New Insurance Investment Advisor, Ben G. Baldwin, McGraw-Hill 2002, p. 37.]. When screening companies for my clients, I like to see what the company promised ten years ago vs. what their clients are actually experiencing today. Quality companies today generally create conservative projections, many using a 7% default rate. I usually ask them to use 6.5%. It’s not as pretty, I know; but, the probability of an unpleasant surprise drops dramatically.
- Most of the well-known rating agencies we’re familiar with are actually paid by the insurance companies they rate. Little wonder many insurance companies that failed during the big ‘melt-down’ actually had good ratings when they went under.While I do check all those agencies, my ‘go-to’ is Weiss, which receives no money from the insurance companies they rate; they’re paid by customers who access their ratings. Like Consumer Reports, their supported by subscribers, not advertisers.Their ratings are called ‘safety ratings’ and they seem to be a little more stringent. For example, according to the September 2002 Insurance Forum, of 1,221 life and health companies rated by Weiss, only 3.9% of companies made it into the ‘A’ category. Compare that with the 54.9% rated ‘A’ by Standard and Poor’s. At Moody’s, 90% of their list made it to ‘A’ that year. A.M. Best gave ‘A’ to 56.3% of the companies they rated. With Weiss, a B or B+ rating can still be regarded as a strong company.
- Company strength is more than assets. It’s about liabilities and the investment portfolio, too.Remember, insurance benefits, including claims and/or loans you may use for income, are paid from the general investment portfolio of the company – money that came from deposits required to provide pure insurance protection. So your safety is as good as the safety of the insurance company’s investment portfolio. Again, being able to understand the company’s investment portfolio – and history – is critical.
Hope this helps!
Jim
* I’ll be conducting a webinar (my first) on this topic on April 22nd and 25th. You’ll likely hear more about it next week.
** Today, many quality companies are using 7% as their default for creating illustrations. While I feel 7% can be considered a responsible, conservative figure, I personally like to use 6.5%. It won’t look as rosy, I know; but, you have a higher probability of never facing an unpleasant surprise.
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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991. Jim is Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.
The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.
