Life Insurance Company Ratings

It’s amazing the dishonesty in the life insurance industry concerning life insurance company ratings. I remember, seventeen years ago when two financial planning agents were telling me that they were selling an insurance company (we’ll call company A) which was rated by A.M. Best (a rating company for the insurance industry) an A-. The grade of A- sounds pretty great to me, and sounded pretty great to all of their clients. Since, I am analytical, I asked a new company (called Weiss Ratings) to give me an un-biased rating of the insurance company. Weiss faxed backed to me a rating of D- (which seamed pretty horrible to me). I told the two planners the analysis from Wiess, and I advised the two planners they should stop selling this annuity product immediately (and send out a letter of concern to their clients).

The two planners became outraged that I would be giving them advice, since they have been financial planners for 25+ years, and told me that Weiss new nothing about financial planning or the industry as a whole. Well, a couple of days went by, and the insurance company went under…and so did these two planners.

The moral to the story is, always double check the ratings of an insurance company by an un-biased source…before you purchase an investment product from an insurance agent.

Each insurance company which transacts business in your State must follow certain guidelines concerning their ratings in relation to the amount of assets they must set aside in capital & surplus incase there is a run on the companies assets in case of failure. The better the rating of the insurance company, the more capital the insurance company must set aside in capital & surplus in case of failure. The better the rating of the company, the lower the yield on its products…since the insurance company must set aside higher quality grade bonds & other assets in its books to support those ratings.

What do insurance agents do? They sell products from insurance companies with lower ratings, which have higher yielding products. By selling products from insurance companies with lower ratings, the insurance agent is able to compete against higher yielding (taxable) products. But the caveat to this problem is…if the insurance company goes under, the investor will suffer (either by reduced payouts or a deferral of principal owed).

There have been over 29 insurance company bankruptcies since the year 2000. The companies that have failed, those insurance companies had between 35 million to 3.5 billion in assets. Out of these failures, most of these insurance companies had a “D or E” ratings (although there was a couple of failures in the C- rating).  This tells you to stay away from any companies that are rated less than B- and/or have less than 3.5 billion in assets.  

In addition, check for the following:

• Large Holdings of BBB Rated Bonds, Mortgages, and Significant Holdings of Junk Bonds to Capital. Or, A Negative Return on Equity or Negative Cash Flow.

If an insurance company fails, most State guaranty associations do not set aside funds in advance. But, contributions from other insurance companies are contributed after insolvency occurs. If an insurance company fails, all deferred annuity products are acquired by the new company taking over the failed company, and a 3 or 4 year hold on liquidations are put into place. So the deferred annuity owner will not lose money, since the annuity company will not allow the owner to liquidate the account until the insurance company recoups the original investment principal. On the other hand, the immediate annuity owner who is receiving money on a monthly basis will normally lose 25% of their payout amount…since the new company is buying the insolvent insurance company assets at a 25% discount.

The bottom line, be careful of all companies rated below a B- rating (by Weiss), or have less than 3.5 billion in assets. You’re investing to make certain you do not lose money…so take the added caution of analyzing the insurance company “true” un-biased ratings before investing, by going to: www.weissratings.com.  

Sincerely,

John Bagwell

The Truth About Financial Products.com

www.thetruthaboutfinancialproducts.com

Equity Index Life Insurance

I’ve seen a lot of “wish-washy” hustles in my career using life insurance, but this product implies that Equity Index Life is more of an investment than life insurance. As a planner, we know the truth…that this is just cash value life insurance with a twist.

For normal cash value life insurance, you have a guaranteed yield, and a non-guaranteed yield (which amounts to hogwash). But let’s just say your guaranteed yield is 3%, and after you deduct the “mortality & Expense” charges (M&E)…your internal rate of return is around 1.3% for your cash value. Looking from an analytical point of view I can get a better rate of return in a tax free money market!

With Equity Index Life, most policies base their non-guaranteed yield on a weighted average interest rate of the S&P 500 Index, Dow Jones Index, and the Nasdaq 100 Index. This sounds pretty sophisticated. But it’s not. Let’s say you have an investment percentage in the following indexes: 50% for the DJIA, 30% for the S&P 500, and 20% for the Nasdaq 100. Let’s take a closer:

Let’s say you invested $100,000 dollars. You have 50% in DJIA, 30% in the S&P 500, and 20% in the Nasdaq 100. Let’s say the average rate return for the indexes were the following: DJIA = 4.2%, S&P 500 = 3.81% and the NASDAQ 100 = 5%. So, here the calculation:

$50,000 (DJIA) x 4.2%   +   $30,000 (S&P 500) x 3.81%   +   $20,000 (NASDAQ 100) x 5% = 4.3% [Weighted Average Yield]

Unfortunately, the 4.3% is your gross return. Once you deduct the mortality & expense charges (M&E) for the policy (such as the cost of insurance), the internal rate of return for the policy could be as low as 2.6% (and I’m being kind). And unfortunately, the M&E gets larger each year you own the policy, since the cost of insurance costs rises each year you get older. Taking everything aside, as an investment, a tax free money market is looking much better!

There is another problem with Equity Index Life that most people are unaware of…and that’s the “ghost tax” implications if the owner of the policy borrowed against the cash value (tax free), then surrendered the policy, and now the IRS wants back taxes owed for borrowing against the policy and then surrendering the policy.

From a standpoint of an investment, Equity Index Life is not a good investment. If your focus is to insure against an untimely death…life insurance is a good bet (under most circumstances). That’s the bottom line.

Sincerely,

John Bagwell

The Truth About Financial Products.com

www.thetruthaboutfinancialproducts.com

No-Load Life Insurance vs. Loaded Life Insurance

All cash value life insurance policies are NOT created equal! If you have your choice between no-load life insurance policy (which is a policy bought directly through an insurance company – no agent involved) versus a loaded life insurance policy (a policy bought through a life insurance agent)…choose the no-load policy. You will save thousands in premiums by purchasing the no-load policy, and your “aggregate net cash value” in a no-load policy will be much larger than a loaded policy (purchased through a life insurance agent).

The biggest problem with loaded life insurance is the commission for a loaded policy must be paid somehow…and it’s paid directly out the policy owner’s cash value. These are very large commissions and someone’s going to pay for it…which is you (unless you purchase a no-load policy)!

Almost everyone needs life insurance. It’s a fatal mistake to not have life insurance, or drop your premium payments for a policy (years later). But what you don’t want to do is make a mistake buying a loaded policy.

First you need to understand the following charges, and how these charges are deducted annually from your policy cash value. These charges are called “mortality & expense” charges (M&E).  You have the following types of charges deducted from your principal & interest (cash value) each year:

a. Premium Taxes (annually)

b. Cost of Insurance (annually)

c. Administrative Charges (annually)

d. Any Misc. Rider Costs (annually)

e. Commissions (Initially charged in the first year, but most insurance companies may deduct commissions from a loaded policy…up to 19 years into the future.)

The policy will earn interest, and then the M&E will be deducted…which will then give you the “net surrender value.”

Example: Principal + Interest – M&E = The Net Surrender Value

In addition, if you take a loan out against the cash value in your policy, you have an additional expense before making withdrawals. This is called the “aggregate loan interest balance.” The interest owed to the insurance company on the “aggregate loan interest balance” (ALIB) must be computed and deducted after the M&E to arrive at the “new surrender value.”

Example: Principal + Interest – M&E – ALIB = The New Surrender Value (Before Withdrawals)

In a traditional no-load policy, the first year M&E is about 4.5%, while the first year M&E for a loaded policy is approximately 80%. So, if you invested a $100,000 in a “loaded policy,” in the first year your “net surrender value” would be approximately $20,000 (not counting interest earned). The “net surrender value” in the first year for a no-load policy would be $95,500 dollars (not counting interest earned). Which would you want?

It’s all about the return on your dollar. If I don’t have money in your account…then it’s very difficult to earn interest on it? So, if you’re going to purchase life insurance…then purchase a no-load policy! There are several companies to choose from, but a good company that I have been familiar with over the years is “Ameritas Life.” Just type in no-load life insurance on your computer and do the research between the cost of insuring yourself annually, and what the net surrender value is each every year (based on their guaranteed interest rate). And make certain the company is rated an “A or B” by Weiss. It’s that simple.

Sincerely,

John Bagwell

The Truth About Financial Products.com

www.thetruthaboutfinancialproducts.com