The Fate of Sam McGee: Recognize When to Replace or Buy Another Policy

“There are strange thing done in the midnight sun by the men who moil for gold; The Arctic trails have their secret tales that would make your blood run cold; The Northern lights have seen queer sight, but the queerest they ever did see Was the night on the marge of Lake Lebarge I cremated Sam McGee.

This eccentric forward to the poem, The Cremation of Sam McGee, by Robert W. Service, makes me think of all the incomprehensible things we’ve seen and heard from people about buying a life insurance policy, replacing a policy, paying off a policy loan or adding another life insurance policy.  If seems that some people like to moil for a living, while others prefer churning.

• Churning is when a policyholder is convinced to replace a policy for the sake of an agent earning a new commission.

Not long ago a prospect approached our office about converting some term insurance which he had purchased several years previously. The agent who sold him the term policy was no longer working for the insurance company who had issued the policy and so had advised him to replace his current term policy with a new policy from the company she was currently representing.  Once the policy was replaced, the prospect said this agent recommended that he then convert the new term policy into a whole life insurance policy.  This is a classic example of churning and it takes advantage of the trust the public has placed in life insurance agents.

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 This “strange thing done” wasn’t done under the midnight sun but in bold daylight.  And it should make everyone’s blood run cold. To prevent such “strange things from happening” regulations are in place to help prevent churning, but as someone accurately stated, you can never certify the heart or intent of a person.  Nonetheless, these regulations require a valid reason to justify the replacement of one life insurance policy for another.  Here are a few of those valid reasons:

• The replacement policy must provide greater benefits to the policyholder and/or beneficiaries than the current policy.
• The guarantees of the replacement policy must be better than the current policy.
• The policyholder must stand to gain more than the agent selling the replacement policy.
• The type of insurance in the replacement policy must meet the needs of the policyholder better than the current policy.

Bottom line is, if the policyholder doesn’t benefit from at least one of these valid reasons, then the replacement is most likely not in the policyholder’s best interest.

Frequently, a policyholder will approach us to find out if they should keep their policy, replace it, or purchase another policy.  This question requires an analysis of the current policy.  In order to accomplish this analysis an inforce illustration is required.  This inforce illustration needs to be requested by the policyholder from the company that sold the policy.  Along with this inforce illustration, the policyholder should request the total cost basis, i.e., what has been paid for the policy from the initial premium to the current date.

With this information our office can determine how the current policy is performing and can show what would happen if the policyholder were to keep the current policy and what the results would be if the policyholder were to replace the current policy, or if in adding another policy the needs of the policyholder would be better met.  Once a policyholder sees the results of our analysis, it becomes obvious to them what options will be most profitable for them, whether it is:

1. Paying off an existing policy loan and keeping their current policy
2. Replacing their current policy with a better policy
3. Paying more premiums towards their existing policy
4. Keeping their current policy and purchasing an additional policy
5. Reducing their current death benefit and stopping premiums on their current policy
6. Starting a new policy, then canceling their current policy, or
7. A combination of any of these possibilities.

A common question we address is, “When should I purchase my next policy?”

This question is so common because of all the tall tales which have been boastfully told about owing multiple policies.  The truth is, if you can keep all the money you want to keep in one policy, that would be ideal. But there are reasons why this isn’t logical or even practical.

1. Cash flow, perhaps, is the most common reason. Most people simply do NOT have the cash flow to fund a policy with all the money they would like to keep in a policy over their lifetime.
2. The IRS has regulations as to how fast you can put money into a life insurance policy without the growth of the policy becoming a tax liability for the policyholder.
3. Once a policyholder begins to utilize the cash values of a policy to keep more of the money they make, the original policy may not be able to hold all the extra money the policyholder is able to keep.
4. Owing a policy(s) on other people can often be a better use of premium dollars than putting all those premium dollars into one policy.

The Northern Lights have their own strange sights, but they pale compared to the sights we’ve seen.  It seems that unscrupulous agents coveting a sale will say and do about anything. Some have even ended up in prison for their strange deeds.  Jesus told his followers, “I am sending you out like sheep among wolves.  Therefore, be shrewd as snakes and as harmless as doves.” This is a charge to be vigilant. Call us for help.  We can and will help you keep more of the money you make.

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.