Insurance or Insult?

Today I spoke with a clinical scientist who wanted a second opinion concerning an Indexed Universal Life (IUL) insurance policy that had been suggested for him as something that would perform better than if he contributed to his employer’s 401k plan.  And with his expressed permission, here is his estimation of the IUL, “This is a fraud.  Nobody would purchase this product if they understood the risk involved in purchasing this.  In fact, after looking this Flexible Premium Variable IUL policy over, it drove me to sign up for my 401k plan. That is how bad it is.”

Wow!  That’s a pretty formidable pronouncement. Never have I heard such a strong response from anybody who had been sold, or attempted to be sold, a life insurance policy. And I’ve looked at thousands and thousands of life insurance policies over the years.

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Subsequently, what did this scientist find so appalling, so offensive, yes, so repulsive and insulting, that he decided to ignore the advice of his trusted banker, the one who had recommended he purchase this IUL policy in lieu of contributing to his 401k plan, rush out, and sign up to start contributing to his 401k plan?  Here are a few reasons:

1. There were 33 pages of fine print that he read through before he made his decision.
2. Many of those pages had statements that began with the words, “We reserve the right to adjust, reduce or remove…without any notice”.
3. Guaranteed accumulated cash values were reduced to $0.00 by year 25 in the IUL policy.
4. The non-guaranteed cash values had unrealistic projected values…this was based upon his own due diligence and research of the indexes on which the insurance company was making those projections.
5. There was going to be a premium charge every time he would have made a premium payment.
6. The earnings rate on his accumulated cash value was capped so that he would never benefit from the real returns that his accumulated cash value might actually earn the company.
7. He didn’t like the fact that when he borrowed against his policy that the accumulated cash value that he borrowed against would be transferred into a loan fund and would stop earning any return until the loan was repaid.

And those are only some of the reasons this clinical scientist found this IUL insurance policy so insulting.  Moreover, he further stated, “It seems to me, that any court of law would side with a policy owner who filed suit claiming a lack of full disclosure on such a policy.”

Of course, we know that many attorneys at insurance companies have worked even many more hours to make sure that such a judgement might never occur. Yet, I would have to concur, based on my empirical observations and reflection, that this scientist is spot-on when he speaks of full disclosure, because many agents, let alone clients, really don’t understand what an IUL contract means and/or how it will actually perform.

Life insurance, like many other specialized fields, has developed a language all of its own.  Speaking that language to the public doesn’t necessarily provide the public with the adequate knowledge needed to make a good judgement when it comes to selecting the product or design of a product which best fills their needs.  That is why most people who purchase life insurance purchase from a friend or close family member who they believe will look out for their best interest. But again, this can leave the client holding the bag, so to speak, when things don’t turn out the way they expected them to. Let me digress a moment to evaluate the dangers of trusting someone else to make sure your best interest is being considered.

Reflect on the practice of medicine for a moment.  Practicing medicine is an art that takes many years of training and practice to be skilled at. And getting licensed and becoming a great cardiologist takes even longer than simply becoming a medical doctor.  However, in Volume 96(4), March of 2017, Medicine published an article concerning the cause of death determined by autopsy versus the clinical (live) diagnosis cardiologists had provided their patients prior to their death.

Appallingly, “Discrepancies between clinical and autopsy diagnosis occurred in 82.3% of patients.”

And those discrepancies occurred with highly trained and skilled cardiologists! Do you think there might be some statistical probability that some less trained and/or skilled life insurance agent or financial planner could advise you to purchase a life insurance product that is NOT in your best interest?  If you don’t think that very probable, would you think, at least, that it would behove you to take some time and learn how to read a policy illustration and contract instead of always trusting (and wondering) what all that insurance jargon really means?

I think so. That is why we spend so much time developing educational books, study guides, YouTube videos, Podcasts, as well as setting up one-on-one strategy sessions with you and all our clients. Once you comprehend and appreciate all the language and nuances used in the insurance world, nobody can make a better decision than you can concerning what insurance policy you need.

For example, if you don’t know what any of the following terms mean, when referring to life insurance, you should make yourself familiar with them before you sign any insurance application or get your paramedic examination completed for life insurance coverage.  If you don’t, you could be in for some appalling, offensive, yes even repulsive and insulting news down the road.

• Paid up additional Life Insurance Rider
• Accumulated Cash Value
• Surrender Value
• Guaranteed Cash Value
• Fixed Interest Rate
• Variable Interest Rate
• Policy Premium Fee
• Face Value
• Paid Up
• Variable
• Fixed Account
• Flexible Premium
• Permanent Insurance
• Variable Participation Rates
• Participating
• Dividend Paying
• Loan Fund

Make no mistake about it, life insurance is a great financial tool that can be used in many different ways to enhance your financial security, protect your assets, take better than average care of your savings, and much, much more.  But it can become a nightmare of regret, where it feels like you’ve thrown money down a rat hole and have nothing to show for it, if you don’t start out with the product that fits your needs best.   What you understand about a life insurance product before you enter into a contractual agreement with any life insurance company can be crucial to your own long-term financial success. Because nothing can replace the due diligence that you need to put in before you take that first step.

Here are some good guidelines to follow when it comes to life insurance.

1. Never buy, sell or let your life insurance lapse or take a loan against your policy without understanding the tax liability, the fees and the penalties such action might cost you.
2. Never base your decision on the non-guaranteed values of any life insurance policy, illustration or prospectus. If any agent attempts to focus your attention on these non-guaranteed numbers, while down playing the guaranteed values of a policy, know that such behavior is considered unethical according to ethical guidelines of the life insurance industry.
3. Never be embarrassed to ask your questions, express your fears or doubts, or even your expectations concerning a life insurance agent, a life insurance company or a life insurance product.
4. Never move forward until your questions, fears, doubts, and expectations are fully addressed.
5. Never purchase a policy that is not affordable for you to pay the premium with money from your income or savings. Never plan on paying premiums from investment returns or the policy’s returns.
6. Never purchase a policy if you are uncomfortable with making the premium payments.

If you stick to these guidelines, you will never have to be concerned that you will end up with a policy that is appalling, offensive, or even repulsive or insulting to you.  And that means you will have made the best purchase you possibly could have made for you, your family and your future estate. And that is the purpose of what life insurance is for.

Dr. Tomas P. McFie

Most Americans depend on Social Security for retirement income. Even when people think they’re saving money, taxes, fees, investment losses and market volatility take most of their money away. Tom McFie is the founder of McFie Insurance which helps people keep more of the money they make, so they can have financial peace of mind. His latest book, A Biblical Guide to Personal Finance, can be purchased here.